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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-17620) UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 108
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 108
VANGUARD WORLD FUNDS
(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
HEIDI STAM, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE
ON DECEMBER 10, 2007 PURSUANT TO PARAGRAPH (B) OF RULE 485.
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Vanguard/(R)/ U.S. Growth Fund
> Prospectus
Investor Shares & Admiral/(TM)/Shares
December 10, 2007
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
Contents
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Fund Profile 1 Investing With Vanguard 21
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More on the Fund 5 Purchasing Shares 21
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The Fund and Vanguard 11 Converting Shares 24
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Investment Advisors 12 Redeeming Shares 25
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Dividends, Capital Gains, and 14 Exchanging Shares 28
Taxes
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Share Price 16 Frequent-Trading Limits 29
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Financial Highlights 17 Other Rules You Should Know 30
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Fund and Account Updates 35
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Contacting Vanguard 37
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Glossary of Investment Terms 39
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Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests mainly in large-capitalization stocks of U.S. companies
considered to have above-average earnings growth potential and reasonable
stock prices in comparison with expected earnings. The Fund uses multiple
investment advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Investment style risk, which is the chance that returns from
large-capitalization growth stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing better--or
worse--than the stock market in general. These periods have, in the past, lasted
for as long as several years.
. Asset concentration risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks. The
Fund tends to invest a high percentage of assets in its ten largest holdings.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the share classes
presented compare with those of relevant market indexes. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
1
Annual Total Returns--Investor Shares/1/
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[BAR CHART range:60% to -40%]
1997 25.93
1998 39.98
1999 22.28
2000 -20.17
2001 -31.70
2002 -35.80
2003 26.10
2004 7.03
2005 11.15
2006 1.77
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1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007 was 12.21%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 24.73% (quarter ended December 31, 1998), and the lowest return for
a quarter was -31.03% (quarter ended March 31, 2001).
Average Annual Total Returns for Periods Ended December 31, 2006
1 Year 5 Years 10 Years
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Vanguard U.S. Growth Fund Investor Shares
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Return Before Taxes 1.77 % -0.40 % 1.42%
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Return After Taxes on 1.69 -0.47 0.56
Distributions
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Return After Taxes on
Distributions and Sale 1.25 -0.36 1.16
of Fund Shares
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Vanguard U.S. Growth Fund Admiral Shares/1/
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Return Before Taxes 2.03% -0.19% --
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Comparative Indexes (reflect no deduction for fees, expenses, or taxes)
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Russell 1000 Growth Index 9.07% 2.69% 5.44%
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Standard & Poor's 500 Index 15.79 6.19 8.42
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1 From the inception date of the Fund's Admiral Shares on August 13, 2001,
through December 31, 2006, the average annual total returns were -0.59% for
the Admiral Shares, 1.96% for the Russell 1000 Growth Index, and 5.12% for the
Standard & Poor's 500 Index.
2
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns are shown only
for the Investor Shares and will differ among a fund's share classes only to the
extent that expense ratios differ. After-Tax returns are not relevant for a
shareholder who holds fund shares in a tax-deferred account, such as an
individual retirement account or a 401(k) plan. Also, figures captioned Return
After Taxes on Distributions and Sale of Fund Shares will be higher than other
figures for the same period if a capital loss occurs upon redemption and results
in an assumed tax deduction for the shareholder.
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. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in this prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
Investor Shares Admiral Shares
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Sales Charge (Load) Imposed on Purchases None None
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Purchase Fee None None
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Sales Charge (Load) Imposed on Reinvested Dividends None None
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Redemption Fee None None
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Account Service Fee (for fund account balances below $10,000) $20/Year/1/ --
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Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
Investor Shares Admiral Shares
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Management Expenses 0.48% 0.25%
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12b-1 Distribution Fee None None
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Other Expenses 0.02% 0.02%
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Total Annual Fund Operating Expenses 0.50% 0.27%
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1 If applicable, the account service fee will be assessed by redeeming fund shares in the amount of $20.
3
The following examples are 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. They illustrate the hypothetical expenses that you would incur
over various periods if you invest $10,000 in the Fund's shares. These examples
assume that the Shares provide 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 the given period.
1 Year 3 Years 5 Years 10 Years
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Investor Shares $51 $160 $280 $628
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Admiral Shares 28 87 152 343
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These examples 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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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 U.S. Growth Fund's expense ratios in fiscal year 2007
were as follows: for Investor Shares, 0.50%, or $5.00 per $1,000 of average
net assets; for Admiral Shares, 0.27%, or $2.70 per $1,000 of average net
assets. The average large-cap growth fund had expenses in 2006 of 1.43%, or
$14.30 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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Plain Talk About 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
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4
Additional Information
As of August 31, 2007
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Net Assets (all share classes) $5.6 billion
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Investment Advisors . AllianceBernstein L.P., New York City, N.Y.,
since June 2001
. William Blair & Company, L.L.C., Chicago, Ill.,
since April 2004
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Dividends and Capital Gains Distributed annually in December
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Suitable for IRAs Yes
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Investor Shares Admiral Shares
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Inception Date January 6, 1959 August 13, 2001
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Minimum Initial Investment $3,000 $100,000
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Conversion Features May be converted to May be converted to Investor
Admiral Shares if you meet Shares if you are no longer
eligibility requirements eligible for Admiral Shares
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Newspaper Abbreviation USGro USGroAdml
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Vanguard Fund Number 23 523
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CUSIP Number 921910105 921910600
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Ticker Symbol VWUSX VWUAX
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MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. The Fund's policy of
investing at least 80% of its assets in securities issued by U.S. companies may
be changed only upon 60 days' notice to shareholders.
5
Market Exposure
The Fund invests mainly in common stocks of companies that, in the advisors'
opinions, offer favorable prospects for capital appreciation. These stocks tend
to produce little current income. The Fund generally focuses on companies that
are considered large-cap by the Fund's investment advisors.
Stocks of publicly traded companies and funds that invest in stocks are often
classified according to market value, or market capitalization. These
classifications typically include small-cap, mid-cap, and large-cap. It's
important to understand that, for both companies and stock funds,
market-capitalization ranges change over time. Also, interpretations of size
vary, and there are no "official" definitions of small-, mid-, and large-cap,
even among Vanguard fund advisors. The asset-weighted median market
capitalization of the Fund as of August 31, 2007, was $41.2 billion.
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. 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 annual 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.
U.S. Stock Market Returns
(1926-2006)
1 Year 5 Years 10 Years 20 Years
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Best 54.2% 28.6% 19.9% 17.8%
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Worst -43.1 -12.4 -0.8 3.1
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Average 12.3 10.4 11.1 11.4
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2006. You can see, for example, that while the average return on common stocks
for all of the 5-year periods was 10.4%, average returns for individual 5-year
periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through
1999). These average returns reflect past performance of common stocks; you
should not regard them as an indication of future performance of either the
stock market as a whole or the Fund in particular.
6
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Plain Talk About Growth Funds and Value Funds
Growth investing and value investing are two styles employed by stock-fund
managers. Growth funds generally focus on stocks of companies believed to
have above-average potential for growth in revenue, earnings, cash flow, or
other similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Value funds typically emphasize stocks whose prices are below average in
relation to those measures; these stocks often have above-average dividend
yields. Growth and value stocks have historically produced similar long-term
returns, though each category has periods when it outperforms the other.
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[FLAG]
The Fund is subject to investment style risk, which is the chance that returns
from large-cap growth stocks will trail returns from the overall stock market.
Specific types of stocks tend to go through cycles of doing better--or
worse--than the stock market in general. These periods have, in the past,
lasted for as long as several years.
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects
and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that
securities are bought and sold according to the advisors' evaluations of
companies and their financial prospects, the prices of the securities, and the
stock market and the economy in general. Each advisor will sell a security when
it is no longer as attractive as an alternative investment.
Although each advisor uses a different process to select securities, under
normal circumstances, the Fund will invest at least 80% of its assets in
securities issued by U.S. companies.
AllianceBernstein L.P. (AllianceBernstein) advisor for approximately 68% of the
Fund's assets, invests mainly in stocks of large-capitalization U.S. companies
considered to have above-average earnings growth potential and reasonable stock
prices compared with expected earnings. AllianceBernstein's internal research
staff ranks companies based on fundamental measures such as earnings growth
and relative value. Using a disciplined process, the investment manager makes
his selections from these categories, focusing on companies that he believes
are well-managed, show above-average earnings growth potential, and have
reasonable valuations.
7
In managing its portion of the Fund's assets--approximately 29%--William Blair &
Company, L.L.C. (William Blair & Company), uses an investment process that
relies on thorough, in-depth fundamental analysis. William Blair & Company
invests in companies that it believes are high-quality and have sustainable,
above-average growth. In selecting stocks, the advisor considers some or all of
the following company criteria: leadership position within the markets served,
quality of the products or services provided, marketing capability, return on
equity, accounting policies/financial transparency, and quality/depth of the
management team.
The Vanguard Group (Vanguard), manages a small portion (approximately 3%) of the
Fund's assets to facilitate cash flows to and from the Fund's advisors. Vanguard
typically invests its portion of the Fund's assets in stock index futures and/or
shares of exchange-traded funds. For more details, see "Other Investment
Policies and Risks."
[FLAG]
Because the Fund tends to invest a high percentage of assets in its ten largest
holdings, the Fund is subject to asset concentration risk, which is the chance
that the Fund's performance may be hurt disproportionately by the poor
performance of relatively few stocks.
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Although the Fund typically does not make significant investments in foreign
securities, it reserves the right to invest up to 20% of its assets this way.
These securities may be traded on U.S. or foreign markets. To the extent that it
owns foreign securities, the Fund is subject to (1) country risk, which is the
chance that domestic events--such as political upheaval, financial troubles,
or natural disasters--will weaken a country's securities markets; and (2)
currency risk, which is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a
derivative is a financial contract whose value is based on the value of a
financial asset (such as a stock, bond, or currency), a physical asset (such as
gold), or a market index (such as the S&P 500 Index). Investments in derivatives
may subject the Fund to risks different from, and possibly greater than, those
of the underlying securities, assets, or market indexes. The Fund will not use
derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns.
8
The Fund may enter into forward foreign currency exchange contracts, which are
types of derivative contracts. A forward foreign currency exchange contract is
an agreement to buy or sell a country's currency at a specific price on a
specific date, usually 30, 60, or 90 days in the future. In other words, the
contract guarantees an exchange rate on a given date. Managers of funds that
invest in foreign securities use these contracts to guard against sudden,
unfavorable changes in the U.S. dollar/foreign currency exchange rates. These
contracts, however, will not prevent the Fund's securities from falling in value
during foreign market downswings.
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Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
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Vanguard typically invests a small portion of the Fund's assets in stock index
futures and/or shares of exchange-traded funds (ETFs), including ETF Shares
issued by Vanguard stock index funds. Stock index futures and ETFs provide
returns similar to those of common stocks. Vanguard may purchase futures or ETFs
when doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in ETF Shares of other Vanguard funds. Fund assets
invested in ETF Shares are excluded when allocating to the Fund its share of the
costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed
9
liquidity, as might be the case when the Fund is transitioning assets from
one advisor to another or receives large cash flows that it cannot prudently
invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing
With Vanguard section, an investor's purchases or exchanges into a fund account
for 60 calendar days after the investor has redeemed or exchanged out of that
fund account.
10
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-
value pricing may reduce or eliminate the profitability of certain frequent-
trading strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
The average turnover rate for large-cap growth funds was approximately 97%, as
reported by Morningstar, Inc., on August 31, 2007.
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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, which are not included in the
fund's expense ratio, 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 taxable income.
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THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
11
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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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
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INVESTMENT ADVISORS
The Fund uses a multimanager approach to invest its assets. Each advisor
independently manages its assigned portion of the Fund's assets, subject to the
supervision and oversight of Vanguard and the board of trustees. The Fund's
board of trustees designates the proportion of Fund assets to be managed by each
advisor and may change these proportions at any time.
. AllianceBernstein L.P., 1345 Avenue of the Americas, New York, NY 10105, is an
investment advisory firm founded in 1971. AllianceBernstein manages assets for
mutual funds, public and private employee benefits plans, public employee
retirement funds, foundations, endowments, banks, and insurance companies
worldwide. As of August 31, 2007, AllianceBernstein managed approximately $783
billion in assets.
. William Blair & Company, L.L.C., 222 West Adams Street, Chicago, IL 60606, is
an independently owned full-service investment management firm founded in 1935.
The firm manages assets for mutual funds, public and private employee benefits
plans, foundations, endowments, institutions, and separate accounts. As of
August 31, 2007, William Blair & Company managed approximately $47 billion
in assets.
The Fund pays its investment advisors on a quarterly basis. For each advisor,
the quarterly fee is based on certain annual percentage rates applied to the
average daily net assets managed by the advisor for each quarter. In addition,
the quarterly fees paid to each advisor may be increased or decreased based on
the advisor's performance in comparison with that of a benchmark index. For
these purposes, the cumulative total return of each advisor's portion of the
Fund over a trailing 36-month period (a 60-month period in the case of William
Blair & Company) is compared with that of the Russell 1000 Growth Index over the
same period.
12
For the fiscal year ended August 31, 2007, the advisory fees paid represented an
effective annual rate of 0.15% of the Fund's average net assets, before a
performance-based decrease of 0.01%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without
prior approval from shareholders, change the terms of an advisory agreement or
hire a new investment advisor--either as a replacement for an existing advisor
or as an additional advisor. Any significant change in the Fund's advisory
arrangements will be communicated to shareholders in writing. In addition, as
the Fund's sponsor and overall manager, The Vanguard Group may provide
investment advisory services to the Fund, on an at-cost basis, at any time.
Vanguard may also recommend to the board of trustees that an advisor be hired,
terminated, or replaced, or that the terms of an existing advisory agreement
be revised.
For a discussion of why the board of trustees approved the Fund's investment
advisory agreements, see the Fund's most recent semiannual report to
shareholders covering the Fund's most recent fiscal period, which ended February
28.
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Plain Talk About the Fund's Portfolio Managers
The managers primarily responsible for the day-to-day management of the Fund
are:
Alan Levi, Senior Vice President of AllianceBernstein and Disciplined
Growth Senior Portfolio Manager. He has worked in investment management
with AllianceBernstein since 1973; and has managed a portion of the Fund
since 2002. Education: B.A., Johns Hopkins University; M.B.A., University
of Chicago.
John F. Jostrand, CFA, Principal and Portfolio Manager of William Blair &
Company. He has worked in investment management since 1979; has been with
William Blair & Company since 1993; and has managed a portion of the Fund
since 2004. Education: B.A., University of Missouri; M.B.A., University
of Michigan.
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The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
13
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December. You
can receive distributions of income or capital gains in cash, or you can have
them automatically reinvested in more shares of the Fund.
--------------------------------------------------------------------------------
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
. 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.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes. If you are an
individual and meet certain holding-period requirements with respect to your
Fund shares, you may be eligible for reduced federal tax rates on "qualified
dividend income," if any, distributed by the Fund.
. 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.
. Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
14
. 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.
. 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.
. Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different funds is
a taxable event.
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." 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 advisor for detailed infor-
mation about a fund's tax consequences for you.
15
--------------------------------------------------------------------------------
Plain Talk About 'Buying a Dividend'
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should consider avoiding a purchase of fund shares shortly
before the fund 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 will 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.
--------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
to the extent that the Fund holds foreign securities that trade on foreign
markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news,
16
act of terrorism, interest rate change); or global. Intervening events include
price movements in U.S. markets that are deemed to affect the value of foreign
securities. Fair-value pricing may be used for domestic securities--for example,
if (1) trading in a security is halted and does not resume before the fund's
pricing time or if a security does not trade in the course of a day, and (2) the
fund holds enough of the security that its price could affect the fund's NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the Fund's financial performance for the periods shown, and certain information
reflects financial results for a single Fund share. The total returns in each
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
whose report--along with the Fund's financial statements--is included in the
Fund's most recent annual report to shareholders. To receive a free copy of the
latest annual or semiannual report, you may access a report online at
www.vanguard.com, or you may contact Vanguard by telephone or by mail.
17
--------------------------------------------------------------------------------
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Fund's Investor Shares as an example. The Investor
Shares began fiscal year 2007 with a net asset value (price) of $17.06 per
share. During the year, each Investor Share earned $0.113 from investment
income (interest and dividends) and $2.354 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $0.087 per share in the form of dividend distributions. A
portion of each year's distributions may come from the prior year's income or
capital gains.
The share price at the end of the year was $19.44, reflecting earnings of
$2.467 per share and distributions of $0.087 per share. This was an increase
of $2.38 per share (from $17.06 at the beginning of the year to $19.44 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 14.50% for the year.
As of August 31, 2007, the Investor Shares had approximately $4.3 billion in
net assets. For the year, the expense ratio was 0.50% ($5.00 per $1,000 of
net assets), and the net investment income amounted to 0.60% of average
net assets. The Fund sold and replaced securities valued at 51% of its
net assets.
--------------------------------------------------------------------------------
18
U.S. Growth Fund Investor Shares
Year Ended August 31,
--------------------------------------------------------------------------
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $17.06 $16.77 $14.39 $14.00 $12.92
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .113 .059 .040/1/ .028 .040
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 2.354 .266 2.385 .409 1.082
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.467 .325 2.425 .437 1.122
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.087) (.035) (.045) (.047) (.042)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.087) . (.035) (.045) (.047) (.042)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $19.44 $17.06 $16.77 $14.39 $14.00
===================================================================================================================================
Total Return/2/ 14.50% 1.93% 16.86% 3.11% 8.73%
===================================================================================================================================
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $4,308 $4,530 $4,848 $5,503 $5,892
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets/3/ 0.50% 0.58% 0.55% 0.53% 0.55%
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 0.60% 0.34% 0.30%/1/ 0.19% 0.32%
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 51% 48% 38% 71% 47%
===================================================================================================================================
1 Net Investment Income per share and the ratio of net investment income to average net assets include $0.017 and 0.11%,
respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
2 Total returns do not include the account service fee that may be applicable to certain accounts with balances below $10,000.
3 Includes performance-based investment advisory fee increases (decreases) of (0.01%),0.02%, (0.02%), (0.03%),and (0.02%).
19
U.S. Growth Fund Admiral Shares
Year Ended August 31,
---------------------------------------------------------------------------
2007 2006 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $44.24 $43.47 $37.29 $36.28 $33.46
----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .416 .271 .226/1/ .147 .164
----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 6.107 .677 6.163 1.052 2.811
on Investments
----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.523 .948 6.389 1.199 2.975
----------------------------------------------------------------------------------------------------------------------------------
Distributions
----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.343) (.178) (.209) (.189) (.155)
----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.343) (.178) (.209) (.189) (.155)
----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
==================================================================================================================================
Total Return 14.80% 2.16% 17.16% 3.29% 8.95%
==================================================================================================================================
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,325 $1,262 $1,012 $824 $1,071
----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets/2/ 0.27% 0.34% 0.32% 0.32% 0.37%
----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 0.83% 0.58% 0.53%/1/ 0.40% 0.50%
----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 51% 48% 38% 71% 47%
==================================================================================================================================
1 Net investment income per share and the ratio of net investment income to average net assets include $0.045 and 0.11%,
respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
2 Includes performance-based investment advisory fee increases (decreases) of (0.01%),0.02%, (0.02%), (0.03%),and (0.02%).
20
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Investor Shares
To open and maintain an account. $3,000.
To add to an existing account. $50 by Automatic Investment Plan; $100 by
check, exchange, wire, or electronic bank transfer (other than Automatic
Investment Plan).
Account Minimums for Admiral Shares
To open and maintain an account. $100,000 for new investors. Shareholders who
are registered on Vanguard.com, have held shares of the Fund for ten years, and
have $50,000 or more in the same Fund account are eligible to convert their
Investor Shares to Admiral Shares. See Converting Shares. Institutional clients
should contact Vanguard for information on special rules that may apply to them.
To add to an existing account. $50 by Automatic Investment Plan; $100 by
check, exchange, wire, or electronic bank transfer (other than Automatic
Investment Plan).
How to Purchase Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may open certain types of accounts, request an
electronic bank transfer, and make an exchange (the purchase of shares in an
open fund with the proceeds of a redemption from another fund) through our
website at www.vanguard.com.
By telephone. You may begin the account registration process or request that
the account-opening forms be sent to you. You may also call Vanguard to request
a purchase of shares by wire, by electronic bank transfer, or by an exchange.
See Contacting Vanguard.
21
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. The request must be in good
order. See How
to Make a Purchase Request: By check. For a list of Vanguard addresses, see
Contacting Vanguard.
How to Make a Purchase Request
By electronic bank transfer. To establish the electronic bank transfer option
on an account, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can purchase shares by
electronic bank transfer on a regular schedule (Automatic Investment Plan) or
whenever you wish. Your purchase request can be initiated online, by telephone,
or by mail if your request is in good order.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. You may
initiate your wire purchase by phone or online. See Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to
your fund account. Also see How to Purchase Shares: By mail. Make your check
payable to Vanguard and include the appropriate fund number (e.g., Vanguard-
-xx). For a list of Fund numbers (for share classes in this prospectus), see
Contacting Vanguard.
Trade Date
If the New York Stock Exchange (NYSE) is open for regular trading (a business
day) at the time a purchase, conversion, exchange, or redemption request is
received in good order, the trade date will generally be the same day. See
Other Rules You Should Know--Good Order for additional information on all
transaction requests.
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are purchased at that day's NAV. This is known as
your trade date.
For check purchases into all funds other than money market funds, and for
exchanges and wire purchases into all funds: For a purchase request received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the same day the purchase request was
received. For a purchase request received after the close of regular trading on
the NYSE, the trade date will be the first business day following the day the
purchase request was received.
22
For check purchases of money market funds only: For a purchase request received
by Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the first business day following the day
the purchase request was received. For a purchase request received after the
close of regular trading on the NYSE, the trade date will be the second business
day following the day the purchase request was received. Because money market
instruments must be purchased with federal funds and it takes a money market
mutual fund one business day to convert check proceeds into federal funds, the
trade date will be one business day later than for other funds.
For an electronic bank transfer by Automatic Investment Plan: If you have
established the Automatic Investment Option, your trade date generally will
be one business day before the date you designated for withdrawal from your
bank account.
For an electronic bank transfer (other than an Automatic Investment Plan
purchase): For a purchase request received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the following business day.
Your purchase request must be accurate and complete. See Other Rules You Should
Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Purchase Rules You Should Know
Admiral Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
23
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large,
dollar amount.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
CONVERTING SHARES
A conversion between share classes of the same fund is a nontaxable event.
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
For a conversion request (other than a request to convert to ETF Shares)
received in good order by Vanguard before the close of regular trading on the
NYSE (generally 4 p.m., Eastern time), the trade date will be the same day the
conversion request was received. For a conversion request received after the
close of regular trading on the NYSE, the trade date will be the first business
day following the day the conversion request was received. See Other Rules You
Should Know.
Pricing of Share Class Conversions
If you convert from one class of shares to another, the transaction will be
based on the respective net asset values of the separate classes on the trade
date for the conversion. At the time of conversion, the total dollar value of
your "old" shares will equal the total dollar value of your "new" shares.
However, subsequent share price fluctuations may decrease or increase the total
dollar value of each class of shares.
Conversions From Investor Shares to Admiral Shares
Self-directed conversions. If your account balance in the Fund is at least
$100,000, you may convert Investor Shares to Admiral Shares at any time.
Registered users of Vanguard.com may request a conversion to Admiral Shares
online, or you may contact Vanguard by telephone or by mail to request this
transaction. See Contacting Vanguard.
24
Tenure conversions. You are eligible for a tenure conversion from Investor
Shares to Admiral Shares if you have had an account in the Fund for ten
years, that account balance is at least $50,000, and you are registered with
Vanguard.com. Registered users of Vanguard.com may request a tenure
conversion online, or you may contact Vanguard by telephone or by mail to
request this transaction.
Automatic conversions. The Fund conducts periodic reviews of account balances
and may convert an eligible account's Investor Shares to Admiral Shares. The
Fund will notify the investor in writing before any automatic conversion to
Admiral Shares. If you do not wish to convert to the lower-cost Admiral Shares,
you may choose not to convert to them. Accounts that qualify for Admiral Shares
on the basis of tenure alone will not be automatically converted.
Mandatory Conversions to Investor Shares
If an account no longer meets the balance requirements for a share class, the
Fund may automatically convert the shares in the account to Investor shares. A
decline in the account balance because of market movement may result in such a
conversion. The Fund will notify the investor in writing before any mandatory
conversion occurs.
REDEEMING SHARES
How to Redeem Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may redeem shares, request an electronic bank
transfer, and make an exchange (the purchase of shares with the proceeds of a
redemption from another fund) through our website at www.vanguard.com.
By telephone. You may call Vanguard to request a redemption of shares by
wire, by electronic bank transfer, by check, or by an exchange. See
Contacting Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. The request must be in good order. See
Contacting Vanguard.
How to Receive Redemption Proceeds
By electronic bank transfer. To establish the electronic bank transfer option,
you must designate a bank account online, complete a special form, or fill out
the appropriate section of your account registration form. You can then redeem
shares by electronic bank transfer on a regular schedule (Automatic Withdrawal
Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be
initiated online, by telephone, or by mail if your request is in good order.
25
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are redeemed at that day's NAV. This is known as your
trade date.
For check redemptions and exchanges from all funds: For a redemption request
received by Vanguard before the close of regular trading on the NYSE (generally
4 p.m., Eastern time), the trade date will be the same day the redemption
request was received. For a redemption request received after the close of
regular trading on the NYSE, the trade date will be the first business day
following the day the redemption request was received.
For money market fund redemptions by wire: For telephone requests received by
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund), on a day that the NYSE has regular trading hours, the
redemption proceeds will leave Vanguard by the close of business the day the
redemption request was received. For other money market wire redemption requests
received before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the redemption proceeds will leave Vanguard by the close of
business on the first business day following the day the redemption request
was received.
For bond fund redemptions by wire: For a redemption request received by Vanguard
before the close of regular trading on the NYSE (generally 4 p.m., Eastern
time), the redemption proceeds will leave Vanguard by the close of business on
the first business day following the day the redemption request was received.
26
For an electronic bank transfer by Automatic Withdrawal Plan: Your trade date
generally will be the date you designated for withdrawal of funds (redemption of
shares) from your Vanguard account. Proceeds of redeemed shares generally will
be transferred from Vanguard to your designated bank account two business days
after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
For an electronic bank transfer (other than an Automatic Withdrawal Plan
redemption): For a redemption request received by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the redemption request was received. For a redemption
request received after the close of regular trading on the NYSE, the trade
date will be the first business day following the day the redemption request
was received.
Your redemption request must be accurate and complete. See Other Rules You
Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, 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 a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in frequent
trading. Under these circumstances, Vanguard also reserves the right to delay
payment of the redemption proceeds for up to seven calendar days. By calling us
before you attempt to redeem a large dollar amount, you may avoid in-kind or
delayed payment of your redemption. Please see Frequent-Trading Limits for
information about Vanguard's policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may 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
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
27
Share certificates. If share certificates were issued for your fund account,
those shares cannot be redeemed, exchanged, or converted until you return the
certificates (unsigned) to Vanguard by registered mail. For the correct address,
see Contacting Vanguard.
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, 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 and may require a signature guarantee. You can obtain a signature
guarantee from most commercial and savings banks, credit unions, trust
companies, or member firms of a U.S. stock exchange. A notary public cannot
provide a signature guarantee.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
EXCHANGING SHARES
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
An exchange occurs when the assets redeemed from one Vanguard fund are used to
purchase shares in an open Vanguard fund. You can make exchange requests online
(if you are a registered user of Vanguard.com), by telephone, or by mail. See
Purchasing Shares and Redeeming Shares.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
28
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
. Transfers and re-registrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to
the policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
29
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares.
. Conversions of shares from one share class to another in the same fund.
Accounts Held by Institutions (Other Than Defined Contribution Plans)
Vanguard will systematically monitor for frequent trading in institutional
clients' accounts. If we detect suspicious trading activity, we will investigate
and take appropriate action, which may include applying to a client's accounts
the 60-day
policy previously described, prohibiting a client's purchases of fund shares,
and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
OTHER RULES YOU SHOULD KNOW
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings
by sending just one prospectus and/or report when two or more shareholders have
the same last name and address. You may request individual prospectuses and
reports by contacting our Client Services Department in writing, by telephone,
or by e-mail.
30
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under "My
Profile." You can revoke your electronic consent at any time, and we will begin
to send paper copies of these documents within 30 days of receiving your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN 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 requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
. Authorization to act on the account (as the account owner or by legal
documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Subject to revision. For any or all shareholders, we reserve the right, at any
time
and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
31
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption,
or exchange transaction for a future date. All such requests will receive
trade dates as previously described in Purchasing Shares, Converting Shares,
and Redeeming Shares. Vanguard reserves the right to return future-dated
purchase checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business 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
statements that we provide to you. It is important that 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.
32
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.
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
Account Service Fee
For most shareholders, Vanguard deducts a $20 account service fee from all fund
accounts that have a balance below $10,000 for any reason, including market
fluctuation. The account service fee applies to both retirement and
nonretirement fund accounts. The fee will be assessed on fund accounts in all
Vanguard funds, regardless of a fund's minimum investment amount. The account
service fee, which will be assessed by redeeming fund shares in the amount of
$20, will be deducted from a fund account only once per calendar year.
If you register on Vanguard.com and elect to receive electronic delivery of
statements, reports, and other materials for all of your fund accounts, the
account service fee for balances below $10,000 will not be charged, so long as
that election remains in effect.
The account service fee also does not apply to the following:
. Money market sweep accounts held through Vanguard Brokerage Services/(R)/.
. Accounts held through intermediaries.
. Accounts held by Voyager, Voyager Select, and Flagship clients. Membership is
based on total household assets held at Vanguard, with a minimum of $100,000 to
qualify for Vanguard Voyager Services/TM/, $500,000 for Vanguard Voyager Select
Services/TM/, and $1 million for Vanguard Flagship Services/TM/. Vanguard
determines membership by aggregating assets of all eligible accounts held by the
investor and immediate family members who reside at the same address. Aggregate
assets include investments in Vanguard mutual funds, Vanguard ETFs/TM/,
annuities through Vanguard, the Vanguard 529 Plan, certain small-business
accounts, and employer-sponsored retirement plans for which Vanguard provides
recordkeeping services.
33
. Participant accounts in employer-sponsored defined contribution plans (other
than those served by the Vanguard Small Business Services Department, which are
subject to various fee structures). Please consult your enrollment materials for
the rules that apply to your account.
. Section 529 college savings plans.
Low-Balance Accounts
The Fund reserves the right, without prior notice, to liquidate any
investment-only retirement-plan fund account or any nonretirement fund account
whose balance falls below the minimum initial investment for any reason,
including market fluctuation. Shares redeemed in accordance with this policy
will be subject to applicable redemption fees.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon Vanguard's initial notification of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at the sole discretion of Vanguard
management, we reasonably believe they are deemed to be in the best interest of
a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
34
FUND AND ACCOUNT UPDATES
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that
we provide to you by mail or online. It is important that you contact
Vanguard immediately with any questions you may have about any transaction
reflected on a confirmation statement, or Vanguard will consider the transaction
properly processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you 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 and
other retirement plans. These statements can be viewed online.
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
35
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard U.S. Growth Fund twice a year, in April and October. These
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Reports from the advisors.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
36
CONTACTING VANGUARD
Web
---------------------------------------------------------------------------------------
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
----------------------------------------------------------------------------------------
Phone
----------------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R) / For exchange transactions (subject to limitations)
800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
----------------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
----------------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
----------------------------------------------------------------------------------------
Admiral Service Center For Admiral account information
888-237-9949 For most Admiral transactions
Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
----------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional
888-809-8102 investors
Business hours only
: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
----------------------------------------------------------------------------------------
Intermediary Sales For information and services for financial intermediaries
Support including broker-dealers, trust institutions, insurance
800-997-2798 companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to 7 p.m.,
Eastern time
----------------------------------------------------------------------------------------
37
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) 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
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
Fund Numbers
Please use the specific fund number when contacting us:
Investor Shares Admiral Shares
---------------------------------------------------------------------
Vanguard U.S. Growth Fund 23 523
---------------------------------------------------------------------
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Vanguard
Tele-Account, Tele-Account, Vanguard ETF, Vanguard ETFs, Vanguard Small Business
Online, Vanguard Brokerage Services, Vanguard Voyager Services, Voyager,
Vanguard Voyager Select Services, Voyager Select, Vanguard Flagship Services,
Flagship, and the ship logo are trademarks of The Vanguard Group, Inc. All other
marks are the exclusive property of their respective owners.
38
GLOSSARY OF INVESTMENT TERMS
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.
Cash Investments. Cash deposits, short-term bank deposits, and money
market instruments that include U.S. Treasury bills and notes, bank
certificates of deposit (CDs), repurchase agreements, commercial paper, and
banker's acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting,
accounting, legal, and other administrative expenses--and any 12b-1
distribution fees. It does not include the transaction costs of buying and
selling portfolio securities.
Growth Fund. A mutual fund that emphasizes stocks of companies believed to have
above-average potential for growth in revenue, earnings, cash flow, or other
similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
39
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and
capital gains.
Value Fund. A mutual fund that emphasizes stocks whose prices typically are
below average in relation to such measures as earnings and book value. These
stocks often have above-average dividend yields.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
40
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[VANGUARD SHIP LOGO]
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard U.S. Growth Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Fund.
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 Fund or other Vanguard funds,
please visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or
by writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P023 122007
Vanguard/(R)/ U.S. Growth Fund
> Prospectus
Investor Shares for Participants
December 10, 2007
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
Contents
-------------------------------------------------------------------------------
Fund Profile 1 Financial Highlights 15
-------------------------------------------------------------------------------
More on the Fund 5 Investing With Vanguard 18
-------------------------------------------------------------------------------
The Fund and Vanguard 11 Accessing Fund Information by Computer 21
-------------------------------------------------------------------------------
Investment Advisors 12 Glossary of Investment Terms 22
-------------------------------------------------------------------------------
Dividends, Capital 13
Gains, and Taxes
-------------------------------------------------------------------------------
Share Price 14
-------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
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--
canbe obtained by calling Vanguard at 800-662-7447.
Fund Profile
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests mainly in large-capitalization stocks of U.S. companies
considered to have above-average earnings growth potential and reasonable stock
prices in comparison with expected earnings. The Fund uses multiple investment
advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Investment style risk, which is the chance that returns from
large-capitalization growth stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing better--or
worse--than the stock market in general. These periods have, in the past, lasted
for as long as several years.
. Asset concentration risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks. The
Fund tends to invest a high percentage of assets in its ten largest holdings.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of relevant market indexes. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
1
Annual Total Return--Investor Shares/1/
-------------------------------------------------------------------------------
[BAR CHART range:60% to -40%]
1997 25.93
1998 39.98
1999 22.28
2000 -20.17
2001 -31.70
2002 -35.80
2003 26.10
2004 7.03
2005 11.15
2006 1.77
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007 was 12.21%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 24.73% (quarter ended December 31, 1998), and the lowest return for
a quarter was -31.03% (quarter ended March 31, 2001).
Average Annual Total Returns for Periods Ended December 31, 2006
1 Year 5 Years 10 Years
---------------------------------------------------------------------------------
Vanguard U.S. Growth Fund Investor Shares 1.77% -0.40% 1.42%
---------------------------------------------------------------------------------
Comparative Indexes
(reflect no deduction for fees or expenses)
---------------------------------------------------------------------------------
Russell 1000 Growth Index 9.07% 2.69% 5.44%
---------------------------------------------------------------------------------
Standard & Poor's 500 Index 15.79 6.19 8.42
---------------------------------------------------------------------------------
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
2
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.48%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.02%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.50%
-------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing in
the Fund's Investor 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$51 $160 $280 $628
--------------------------------------------------------
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.
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 U.S. Growth Fund Investor Shares' expense ratio in
fiscal year 2007 was 0.50%, or $5.00 per $1,000 of average net assets. The
average large-cap growth fund had expenses in 2006 of 1.43%, or $14.30 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Plain Talk About 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
Additional Information
As of August 31, 2007
--------------------------------------------------------------------------------------------
Net Assets (all share classes) $5.6 billion
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Investment Advisors . AllianceBernstein L.P., New York City, N.Y.,
since June 2001
. William Blair & Company, L.L.C., Chicago, Ill.,
since April 2004
--------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
--------------------------------------------------------------------------------------------
Suitable for IRAs Yes
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Investor Shares
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Inception Date January 6, 1959
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Minimum Initial Investment $3,000
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Conversion Features May be converted to
Admiral Shares if you meet
eligibility requirements
--------------------------------------------------------------------------------------------
Newspaper Abbreviation USGro
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Vanguard Fund Number 23
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CUSIP Number 921910105
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Ticker Symbol VWUSX
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4
More on the Fund
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [Flag] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. The Fund's policy of
investing at least 80% of its assets in securities issued by U.S. companies may
be changed only upon 60 days' notice to shareholders.
Market Exposure
The Fund invests mainly in common stocks of companies that, in the advisors'
opinions, offer favorable prospects for capital appreciation. These stocks tend
to produce little current income. The Fund generally focuses on companies that
are considered large-cap by the Fund's investment advisors.
Stocks of publicly traded companies and funds that invest in stocks are often
classified according to market value, or market capitalization. These
classifications typically include small-cap, mid-cap, and large-cap. It's
important to understand that, for both companies and stock funds,
market-capitalization ranges change over time. Also, interpretations of size
vary, and there are no "official" definitions of small-, mid-, and large-cap,
even among Vanguard fund advisors. The asset-weighted median market
capitalization of the Fund as of August 31, 2007, was $41.2 billion.
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. 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 annual 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.
5
U.S. Stock Market Returns
(1926-2006)
1 Year 5 Years 10 Years 20 Years
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
----------------------------------------------------------
Worst -43.1 -12.4 -0.8 3.1
----------------------------------------------------------
Average 12.3 10.4 11.1 11.4
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2006. You can see, for example, that while the average return on common stocks
for all of the 5-year periods was 10.4%, average returns for individual 5-year
periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through
1999). These average returns reflect past performance of common stocks; you
should not regard them as an indication of future performance of either the
stock market as a whole or the Fund in particular.
--------------------------------------------------------------------------------
Plain Talk About Growth Funds and Value Funds
Growth investing and value investing are two styles employed by stock-fund
managers. Growth funds generally focus on stocks of companies believed to
have above-average potential for growth in revenue, earnings, cash flow, or
other similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Value funds typically emphasize stocks whose prices are below average in
relation to those measures; these stocks often have above-average dividend
yields. Growth and value stocks have historically produced similar long-term
returns, though each category has periods when it outperforms the other.
--------------------------------------------------------------------------------
[FLAG]
The Fund is subject to investment style risk, which is the chance that returns
from large-cap growth stocks will trail returns from the overall stock market.
Specific types of stocks tend to go through cycles of doing better--or
worse--than the stock market in general. These periods have, in the past,
lasted for as long as several years.
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects
and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that
securities are bought and sold according to the advisors' evaluations of
companies and their financial prospects, the prices of the securities, and the
stock market and
6
the economy in general. Each advisor will sell a security when it is no longer
as attractive as an alternative investment.
Although each advisor uses a different process to select securities, under
normal circumstances, the Fund will invest at least 80% of its assets in
securities issued by U.S. companies.
AllianceBernstein L.P. (AllianceBernstein) advisor for approximately 68% of the
Fund's assets, invests mainly in stocks of large-capitalization U.S. companies
considered to have above-average earnings growth potential and reasonable stock
prices compared with expected earnings. AllianceBernstein's internal research
staff ranks companies based on fundamental measures such as earnings growth and
relative value. Using a disciplined process, the investment manager makes his
selections from these categories, focusing on companies that he believes are
well-managed, show above-average earnings growth potential, and have reasonable
valuations.
In managing its portion of the Fund's assets--approximately 29%--William Blair &
Company, L.L.C. (William Blair & Company), uses an investment process that
relies on thorough, in-depth fundamental analysis. William Blair & Company
invests in companies that it believes are high-quality and have sustainable,
above-average growth. In selecting stocks, the advisor considers some or all of
the following company criteria: leadership position within the markets served,
quality of the products or services provided, marketing capability, return on
equity, accounting policies/financial transparency, and quality/depth of the
management team.
The Vanguard Group (Vanguard), manages a small portion (approximately 3%) of the
Fund's assets to facilitate cash flows to and from the Fund's advisors. Vanguard
typically invests its portion of the Fund's assets in stock index futures and/or
shares of exchange-traded funds. For more details, see "Other Investment
Policies and Risks."
[FLAG]
Because the Fund tends to invest a high percentage of assets in its ten largest
holdings, the Fund is subject to asset concentration risk, which is the chance
that the Fund's performance may be hurt disproportionately by the poor
performance of relatively few stocks.
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
7
Other Investment Policies and Risks
Although the Fund typically does not make significant investments in foreign
securities, it reserves the right to invest up to 20% of its assets this way.
Foreign securities may be traded on U.S. or foreign markets. To the extent that
it owns foreign securities, the Fund is subject to (1) country risk, which is
the chance that domestic events--such as political upheaval, financial troubles,
or natural disasters--will weaken a country's securities markets; and (2)
currency risk, which is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a
derivative is a financial contract whose value is based on the value of a
financial asset (such as a stock, bond, or currency), a physical asset (such as
gold), or a market index (such as the S&P 500 Index). Investments in derivatives
may subject the Fund to risks different from, and possibly greater than, those
of the underlying securities, assets, or market indexes. The Fund will not use
derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are
types of derivative contracts. A forward foreign currency exchange contract is
an agreement to buy or sell a country's currency at a specific price on a
specific date, usually 30, 60, or 90 days in the future. In other words, the
contract guarantees an exchange rate on a given date. Managers of funds that
invest in foreign securities use these contracts to guard against sudden,
unfavorable changes in the U.S. dollar/foreign currency exchange rates. These
contracts, however, will not prevent the Fund's securities from falling in value
during foreign market downswings.
--------------------------------------------------------------------------------
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
--------------------------------------------------------------------------------
Vanguard typically invests a small portion of the Fund's assets in stock index
futures and/or shares of exchange-traded funds (ETFs), including ETF Shares
issued by Vanguard stock index funds. Stock index futures and ETFs provide
returns similar to those of common stocks. Vanguard may purchase futures or ETFs
when doing so will reduce the Fund's transaction costs or add value because the
instruments are
8
favorably priced. Vanguard receives no additional revenue from investing Fund
assets in ETF Shares of other Vanguard funds. Fund assets invested in ETF Shares
are excluded when allocating to the Fund its share of the costs of Vanguard
operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
9
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
The average turnover rate for large-cap growth funds was approximately 97%, as
reported by Morningstar, Inc., on August 31, 2007.
10
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
--------------------------------------------------------------------------------
The Fund and Vanguard
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the 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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
11
Investment Advisors
The Fund uses a multimanager approach to invest its assets. Each advisor
independently manages its assigned portion of the Fund's assets, subject to the
supervision and oversight of Vanguard and the board of trustees. The Fund's
board of trustees designates the proportion of Fund assets to be managed by each
advisor and may change these proportions at any time.
. AllianceBernstein L.P., 1345 Avenue of the Americas, New York, NY 10105, is an
investment advisory firm founded in 1971. AllianceBernstein manages assets for
mutual funds, public and private employee benefits plans, public employee
retirement funds, foundations, endowments, banks, and insurance companies
worldwide. As of August 31, 2007, AllianceBernstein managed approximately $783
billion in assets.
. William Blair & Company, L.L.C., 222 West Adams Street, Chicago, IL 60606, is
an independently owned full-service investment management firm founded in 1935.
The firm manages assets for mutual funds, public and private employee benefits
plans, foundations, endowments, institutions, and separate accounts. As of
August 31, 2007, William Blair & Company managed approximately $47 billion in
assets.
The Fund pays its investment advisors on a quarterly basis. For each advisor,
the quarterly fee is based on certain annual percentage rates applied to the
average daily net assets managed by the advisor for each quarter. In addition,
the quarterly fees paid to each advisor may be increased or decreased based on
the advisor's performance in comparison with that of a benchmark index. For
these purposes, the cumulative total return of each advisor's portion of the
Fund over a trailing 36-month period (a 60-month period in the case of William
Blair & Company) is compared with that of the Russell 1000 Growth Index over the
same period.
For the fiscal year ended August 31, 2007, the advisory fees paid represented an
effective annual rate of 0.15% of the Fund's average net assets, before a
performance-based decrease of 0.01%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without
prior approval from shareholders, change the terms of an advisory agreement or
hire a new investment advisor--either as a replacement for an existing advisor
or as an additional advisor. Any significant change in the Fund's advisory
arrangements will be communicated to shareholders in writing. In addition, as
the Fund's sponsor and overall manager, The Vanguard Group may provide
investment advisory services to the Fund, on an at-cost basis, at any time.
Vanguard may also recommend to the board of trustees that an advisor be hired,
terminated, or replaced, or that the terms of an existing advisory agreement be
revised.
12
For a discussion of why the board of trustees approved the Fund's investment
advisory agreements, see the semiannual report to shareholders covering the
Fund's most recent fiscal period, which ended February 28.
--------------------------------------------------------------------------------
Plain Talk About the Fund's Portfolio Managers
The managers primarily responsible for the day-to-day management of the Fund
are:
Alan Levi, Senior Vice President of AllianceBernstein and Disciplined Growth
Senior Portfolio Manager. He has worked in investment management with
AllianceBernstein since 1973; and has managed a portion of the Fund since
2002. Education: B.A., Johns Hopkins University; M.B.A., University of
Chicago.
John F. Jostrand, CFA, Principal and Portfolio Manager of William Blair &
Company. He has worked in investment management since 1979; has been with
William Blair & Company since 1993; and has managed a portion of the Fund
since 2004. Education: B.A., University of Missouri; M.B.A., University of
Michigan.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December.
Your 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 advisor about the tax
consequences of plan withdrawals.
13
--------------------------------------------------------------------------------
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
Share Price
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
to the extent that the Fund holds foreign securities that trade on foreign
markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities.
14
Fair-value pricing may be used for domestic securities--for example, if (1)
trading in a security is halted and does not resume before the fund's pricing
time or if a security does not trade in the course of a day, and (2) the fund
holds enough of the security that its price could affect the fund's NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
Financial Highlights
The following financial highlights table is intended to help you understand the
Investor Share's financial performance for the periods shown, and certain
information reflects financial results for a single Investor Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Investor Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
15
--------------------------------------------------------------------------------
Plain Talk About How to Read the Financial Highlights Table
The Investor Shares began fiscal year 2007 with a net asset value (price) of
$17.06 per share. During the year, each Investor Share earned $0.113 from
investment income (interest and dividends) and $2.354 from investments that
had appreciated in value or that were sold for higher prices than the Fund
paid for them.
Shareholders received $0.087 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $19.44, reflecting earnings of
$2.467 per share and distributions of $0.087 per share. This was an increase
of $2.38 per share (from $17.06 at the beginning of the year to $19.44 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 14.50% for the year.
As of August 31, 2007, the Investor Shares had approximately $4.3 billion in
net assets. For the year, the expense ratio was 0.50% ($5.00 per $1,000 of
net assets), and the net investment income amounted to 0.60% of average net
assets. The Fund sold and replaced securities valued at 51% of its net
assets.
--------------------------------------------------------------------------------
16
U.S. Growth Fund Investor Shares
Year Ended August 31,
--------------------------------------------------------------------------
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $17.06 $16.77 $14.39 $14.00 $12.92
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .113 .059 .040/1/ .028 .040
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 2.354 .266 2.385 .409 1.082
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.467 .325 2.425 .437 1.122
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.087) (.035) (.045) (.047) (.042)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.087) . (.035) (.045) (.047) (.042)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $19.44 $17.06 $16.77 $14.39 $14.00
===================================================================================================================================
Total Return 14.50% 1.93% 16.86% 3.11% 8.73%
===================================================================================================================================
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $4,308 $4,530 $4,848 $5,503 $5,892
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets/2/ 0.50% 0.58% 0.55% 0.53% 0.55%
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 0.60% 0.34% 0.30%/1/ 0.19% 0.32%
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 51% 48% 38% 71% 47%
===================================================================================================================================
1 Net Investment Income per share and the ratio of net investment income to average net assets include $0.017 and 0.11%,
respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
2 Includes performance-based investment advisory fee increases (decreases) of (0.01%),0.02%, (0.02%), (0.03%),and (0.02%).
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.
. 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 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
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
Contribution, exchange, or redemption requests must be 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 NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV 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 NAV. This is known as your trade date.
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 disrupt the management of the Vanguard funds and increase their transaction
costs, Vanguard places certain limits on the exchange privilege.
18
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider
the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
19
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
20
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; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Vanguard ETF, and the ship logo are
trademarks of The Vanguard Group, Inc. All other marks are the exclusive
property of their respective owners.
21
Glossary of Investment Terms
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.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Growth Fund. A mutual fund that emphasizes stocks of companies believed to have
above-average potential for growth in revenue, earnings, cash flow, or other
similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
22
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and
capital gains.
Value Fund. A mutual fund that emphasizes stocks whose prices typically are
below average in relation to such measures as earnings and book value. These
stocks often have above-average dividend yields.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
23
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[VANGUARD SHIP LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard U.S. Growth Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I023 122007
Vanguard/(R)/ U.S. Growth Fund
> Prospectus
Admiral/(TM)/ Shares for Participants
December 10, 2007
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
Contents
-------------------------------------------------------------------------------
Fund Profile 1 Financial Highlights 15
-------------------------------------------------------------------------------
More on the Fund 5 Investing With Vanguard 18
-------------------------------------------------------------------------------
The Fund and Vanguard 11 Accessing Fund Information by Computer 21
-------------------------------------------------------------------------------
Investment Advisors 12 Glossary of Investment Terms 22
-------------------------------------------------------------------------------
Dividends, Capital 13
Gains, and Taxes
-------------------------------------------------------------------------------
Share Price 14
-------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Fund's Admiral 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 800-662-7447.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests mainly in large-capitalization stocks of U.S. companies
considered to have above-average earnings growth potential and reasonable stock
prices in comparison with expected earnings. The Fund uses multiple investment
advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Investment style risk, which is the chance that returns from
large-capitalization growth stocks will trail returns from the overall stock
market. Specific types of stocks tend to go through cycles of doing better--or
worse--than the stock market in general. These periods have, in the past, lasted
for as long as several years.
. Asset concentration risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks. The
Fund tends to invest a high percentage of assets in its ten largest holdings.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of relevant market indexes. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
1
Annual Total Return--Admiral Shares/1/
-------------------------------------------------------------------------------
[BAR CHART range:60% to -40%]
2002 -35.67
2003 26.31
2004 7.29
2005 11.38
2006 2.03
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007 was 12.38%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 10.69% (quarter ended June 30, 2003), and the lowest return for a
quarter was
-20.71% (quarter ended June 30, 2002).
Average Annual Total Returns for Periods Ended December 31, 2006
1 Year 5 Years Since Inception/1/
-------------------------------------------------------------------------------------------------
Vanguard U.S. Growth Fund Admiral Shares 2.03% -0.19% -0.59%
--------------------------------------------------------------------------------------------------
Comparative Indexes(reflect no deduction on fees or expenses)
--------------------------------------------------------------------------------------------------
Russell 1000 Growth Index 9.07% 2.69% 1.96%
--------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index 15.79 6.19 5.12
--------------------------------------------------------------------------------------------------
1 Since inception returns are from August 13, 2001--the inception date of the Admiralb Shares--
through December 31, 2006.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
2
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.25%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.02%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.27%
-------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$28 $87 $152 $343
--------------------------------------------------------
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.
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 U.S. Growth Fund Admiral Shares' expense ratio in
fiscal year 2007 was 0.27%, or $2.70 per $1,000 of average net assets. The
average large-cap growth fund had expenses in 2006 of 1.43%, or $14.30 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Plain Talk About 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
Additional Information
As of August 31, 2007
------------------------------------------------------------------------------------------
Net Assets (all share classes) $5.6 billion
------------------------------------------------------------------------------------------
Investment Advisors .AllianceBernstein L.P., New York, N.Y.,
since June 2001
.William Blair & Company, L.L.C., Chicago, Ill.,
since April 2004
------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
------------------------------------------------------------------------------------------
Inception Date Investor Shares--January 6, 1959
Admiral Shares--August 13, 2001
------------------------------------------------------------------------------------------
Newspaper Abbreviation USGroAdml
------------------------------------------------------------------------------------------
Vanguard Fund Number 523
------------------------------------------------------------------------------------------
CUSIP Number 921910600
------------------------------------------------------------------------------------------
Ticker Symbol VWUAX
------------------------------------------------------------------------------------------
4
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. The Fund's policy of
investing at least 80% of its
assets in securities issued by U.S. companies may be changed only upon
60 days' notice to shareholders.
Market Exposure
The Fund invests mainly in common stocks of companies that, in the advisors'
opinions, offer favorable prospects for capital appreciation. These stocks tend
to produce little current income. The Fund generally focuses on companies that
are considered large-cap by the Fund's investment advisors.
Stocks of publicly traded companies and funds that invest in stocks are often
classified according to market value, or market capitalization. These
classifications typically include small-cap, mid-cap, and large-cap. It's
important to understand that, for both companies and stock funds,
market-capitalization ranges change over time. Also, interpretations of size
vary, and there are no "official" definitions of small-, mid-, and large-cap,
even among Vanguard fund advisors. The asset-weighted median market
capitalization of the Fund as of August 31, 2007, was $41.2 billion.
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. 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 annual 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.
5
U.S. Stock Market Returns
(1926-2006)
1 Year 5 Years 10 Years 20 Years
----------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
----------------------------------------------------------
Worst -43.1 -12.4 -0.8 3.1
----------------------------------------------------------
Average 12.3 10.4 11.1 11.4
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2006. You can see, for example, that while the average return on common stocks
for all of the 5-year periods was 10.4%, average returns for individual 5-year
periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through
1999). These average returns reflect past performance of common stocks; you
should not regard them as an indication of future performance of either the
stock market as a whole or the Fund in particular.
--------------------------------------------------------------------------------
Plain Talk About Growth Funds and Value Funds
Growth investing and value investing are two styles employed by stock-fund
managers. Growth funds generally focus on stocks of companies believed to
have above-average potential for growth in revenue, earnings, cash flow, or
other similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Value funds typically emphasize stocks whose prices are below average in
relation to those measures; these stocks often have above-average dividend
yields. Growth and value stocks have historically produced similar long-term
returns, though each category has periods when it outperforms the other.
--------------------------------------------------------------------------------
[FLAG]
The Fund is subject to investment style risk, which is the chance that returns
from large-cap growth stocks will trail returns from the overall stock market.
Specific types of stocks tend to go through cycles of doing better--or
worse--than the stock market in general. These periods have, in the past,
lasted for as long as several years.
6
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects
and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that
securities are bought and sold according to the advisors' evaluations of
companies and their financial prospects, the prices of the securities, and the
stock market and the economy in general. Each advisor will sell a security when
it is no longer as attractive as an alternative investment.
Although each advisor uses a different process to select securities, under
normal circumstances, the Fund will invest at least 80% of its assets in
securities issued by U.S. companies.
AllianceBernstein L.P. (AllianceBernstein) advisor for approximately 68%of the
Fund's assets, invests mainly in stocks of large-capitalization U.S. companies
considered to have above-average earnings growth potential and reasonable stock
prices compared with expected earnings. AllianceBernstein's internal research
staff ranks companies based on fundamental measures such as earnings growth and
relative value. Using a disciplined process, the investment manager makes his
selections from these categories, focusing on companies that he believes are
well-managed, show above-average earnings growth potential, and have reasonable
valuations.
In managing its portion of the Fund's assets--approximately 29%--William Blair &
Company, L.L.C. (William Blair & Company), uses an investment process that
relies on thorough, in-depth fundamental analysis. William Blair & Company
invests in companies that it believes are high-quality and have sustainable,
above-average growth. In selecting stocks, the advisor considers some or all of
the following company criteria: leadership position within the markets served,
quality of the products or services provided, marketing capability, return on
equity, accounting policies/financial transparency, and quality/depth of the
management team.
The Vanguard Group (Vanguard), manages a small portion (approximately 3%) of the
Fund's assets to facilitate cash flows to and from the Fund's advisors. Vanguard
typically invests its portion of the Fund's assets in stock index futures and/or
shares of exchange-traded funds. For more details, see "Other Investment
Policies and Risks."
[FLAG]
Because the Fund tends to invest a high percentage of assets in its ten largest
holdings, the Fund is subject to asset concentration risk, which is the chance
that the Fund's performance may be hurt disproportionately by the poor
performance of relatively few stocks.
7
[FLAG]
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Although the Fund typically does not make significant investments in foreign
securities, it reserves the right to invest up to 20% of its assets this way.
Foreign securities may be traded on U.S. or foreign markets. To the extent that
it owns foreign securities, the Fund is subject to (1) country risk, which is
the chance that domestic events--such as political upheaval, financial troubles,
or natural disasters--will weaken a country's securities markets; and (2)
currency risk, which is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a
derivative is a financial contract whose value is based on the value of a
financial asset (such as a stock, bond, or currency), a physical asset (such as
gold), or a market index (such as the S&P 500 Index). Investments in derivatives
may subject the Fund to risks different from, and possibly greater than, those
of the underlying securities, assets, or market indexes. The Fund will not use
derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are
types of derivative contracts. A forward foreign currency exchange contract is
an agreement to buy or sell a country's currency at a specific price on a
specific date, usually 30, 60, or 90 days in the future. In other words, the
contract guarantees an exchange rate on a given date. Managers of funds that
invest in foreign securities use these contracts to guard against sudden,
unfavorable changes in the U.S. dollar/foreign currency exchange rates. These
contracts, however, will not prevent the Fund's securities from falling in value
during foreign market downswings.
--------------------------------------------------------------------------------
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements), on the other hand, tend to be more
specialized or complex, and may be harder to value.
--------------------------------------------------------------------------------
8
Vanguard typically invests a small portion of the Fund's assets in stock index
futures and/or shares of exchange-traded funds (ETFs), including ETF Shares
issued by Vanguard stock index funds. Stock index futures and ETFs provide
returns similar to those of common stocks. Vanguard may purchase futures or ETFs
when doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in ETF Shares of other Vanguard funds. Fund assets
invested in ETF Shares are excluded when allocating to the Fund its share of the
costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the
9
long-term investors who do not generate the costs. In addition, frequent trading
may interfere with an advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
The average turnover rate for large growth funds was approximately 97%, as
reported by Morningstar, Inc., on August 31, 2007.
10
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 commission 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 taxable income.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the 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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
11
INVESTMENT ADVISORS
The Fund uses a multimanager approach to invest its assets. Each advisor
independently manages its assigned portion of the Fund's assets, subject to the
supervision and oversight of Vanguard and the board of trustees. The Fund's
board of trustees designates the proportion of Fund assets to be managed by each
advisor and may change these proportions at any time.
. AllianceBernstein L.P., 1345 Avenue of the Americas, New York, NY 10105, is an
investment advisory firm founded in 1971. AllianceBernstein manages assets for
mutual funds, public and private employee benefits plans, public employee
retirement funds, foundations, endowments, banks, and insurance companies
worldwide. As of August 31, 2007, AllianceBernstein managed approximately $783
billion in assets.
. William Blair & Company, L.L.C., 222 West Adams Street, Chicago, IL 60606, is
an independently owned full-service investment management firm founded in 1935.
The firm manages assets for mutual funds, public and private employee benefits
plans, foundations, endowments, institutions, and separate accounts. As of
August 31, 2007, William Blair & Company managed approximately $47 billion in
assets.
The Fund pays its investment advisors on a quarterly basis. For each advisor,
the quarterly fee is based on certain annual percentage rates applied to the
average daily net assets managed by the advisor for each quarter. In addition,
the quarterly fees paid to each advisor may be increased or decreased based on
the advisor's performance in comparison with that of a benchmark index. For
these purposes, the cumulative total return of each advisor's portion of the
Fund over a trailing 36-month period (a 60-month period in the case of William
Blair & Company) is compared with that of the Russell 1000 Growth Index over the
same period.
For the fiscal year ended August 31, 2007, the advisory fees paid represented an
effective annual rate of 0.15% of the Fund's average net assets, before a
performance-based decrease of 0.01%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without
prior approval from shareholders, change the terms of an advisory agreement or
hire a new investment advisor--either as a replacement for an existing advisor
or as an additional advisor. Any significant change in the Fund's advisory
arrangements will be communicated to shareholders in writing. In addition, as
the Fund's sponsor and overall manager, The Vanguard Group may provide
investment advisory services to the Fund, on an at-cost basis, at any time.
Vanguard may also recommend to the board of trustees that an advisor be hired,
terminated, or replaced, or that the terms of an existing advisory agreement be
revised.
12
For a discussion of why the board of trustees approved the Fund's investment
advisory agreements, see the semiannual report to shareholders covering the
Fund's most recent fiscal period, which ended February 28.
--------------------------------------------------------------------------------
Plain Talk About the Fund's Portfolio Managers
The managers primarily responsible for the day-to-day management of the Fund
are:
Alan Levi, Senior Vice President of AllianceBernstein and Disciplined Growth
Senior Portfolio Manager. He has worked in investment management with
AllianceBernstein since 1973; and has managed a portion of the Fund since
2002. Education: B.A., Johns Hopkins University; M.B.A., University of
Chicago.
John F. Jostrand, CFA, Principal and Portfolio Manager of William Blair &
Company. He has worked in investment management since 1979; has been with
William Blair & Company since 1993; and has managed a portion of the Fund
since 2004. Education: B.A., University of Missouri; M.B.A., University of
Michigan.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December.
Your 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 advisor about the tax
consequences of plan withdrawals.
13
--------------------------------------------------------------------------------
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
to the extent that the Fund holds foreign securities that trade on foreign
markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities.
14
Fair-value pricing may be used for domestic securities--for example, if (1)
trading in a security is halted and does not resume before the fund's pricing
time or if a security does not trade in the course of a day, and (2) the fund
holds enough of the security that its price could affect the fund's NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Admiral Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Admiral Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Admiral Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
15
--------------------------------------------------------------------------------
Plain Talk About How to Read the Financial Highlights Table
The Admiral Shares began fiscal year 2007 with a net asset value (price) of
$44.24 per share. During the year, each Admiral Share earned $0.416 from
investment income (interest and dividends) and $6.107 from investments that
had appreciated in value or that were sold for higher prices than the Fund
paid for them.
Shareholders received $0.343 per share in the form of dividend distributions. A
portion of each year's distributions may come from the prior year's income or
capital gains.
The share price at the end of the year was $50.42, reflecting earnings of
$6.523 per share and distributions of $0.343 per share. This was an increase
of $6.18 per share (from $44.24 at the beginning of the year to $50.42 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 14.80% for the year.
As of August 31, 2007, the Admiral Shares had approximately $1.3 billion in
net assets. For the year, the expense ratio was 0.27% ($2.70 per $1,000 of
net assets), and the net investment income amounted to 0.83% of average net
assets. The Fund sold and replaced securities valued at 51% of its net assets.
--------------------------------------------------------------------------------
16
U.S. Growth Fund Admiral Shares
Year Ended August 31,
---------------------------------------------------------------------------
2007 2006 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $44.24 $43.47 $37.29 $36.28 $33.46
----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .416 .271 .226/1/ .147 .164
----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 6.107 .677 6.163 1.052 2.811
on Investments
----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 6.523 .948 6.389 1.199 2.975
----------------------------------------------------------------------------------------------------------------------------------
Distributions
----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.343) (.178) (.209) (.189) (.155)
----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.343) (.178) (.209) (.189) (.155)
----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period
==================================================================================================================================
Total Return 14.80% 2.16% 17.16% 3.29% 8.95%
==================================================================================================================================
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $1,325 $1,262 $1,012 $824 $1,071
----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets/2/ 0.27% 0.34% 0.32% 0.32% 0.37%
----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 0.83% 0.58% 0.53%/1/ 0.40% 0.50%
----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 51% 48% 38% 71% 47%
==================================================================================================================================
1 Net investment income per share and the ratio of net investment income to average net assets include $0.045 and 0.11%,
respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
2 Includes performance-based investment advisory fee increases (decreases) of (0.01%),0.02%, (0.02%), (0.03%),and (0.02%).
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.
. 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 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
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
Contribution, exchange, or redemption requests must be 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 NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV 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 NAV. This is known as your trade date.
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 disrupt the management of the Vanguard funds and increase their transaction
costs, Vanguard places certain limits on the exchange privilege.
18
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider
the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
19
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
20
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; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Admiral, Vanguard ETF, and the ship
logo are trademarks of The Vanguard Group, Inc. All other marks are the
exclusive property of their respective owners.
21
GLOSSARY OF INVESTMENT TERMS
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.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Growth Fund. A mutual fund that emphasizes stocks of companies believed to have
above-average potential for growth in revenue, earnings, cash flow, or other
similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
22
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and
capital gains.
Value Fund. A mutual fund that emphasizes stocks whose prices typically are
below average in relation to such measures as earnings and book value. These
stocks often have above-average dividend yields.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
23
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[VANGUARD SHIP LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard U.S. Growth Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I523 122007
Vanguard/(R)/ International Growth Fund
> Prospectus
Investor Shares & Admiral(TM) Shares
December 10, 2007
[SHIP LOGO VANGUARD /(R)/]
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
CONTENTS
-------------------------------------------------------------------------------
Fund Profile 1 Investing With Vanguard 23
-------------------------------------------------------------------------------
More on the Fund 6 Purchasing 23
Shares
-------------------------------------------------------------------------------
The Fund and Vanguard 13 Converting Shares 26
-------------------------------------------------------------------------------
Investment Advisors 14 Redeeming Shares 27
-------------------------------------------------------------------------------
Dividends, Capital Gains, and 16 Exchanging Shares 31
Taxes
-------------------------------------------------------------------------------
Share Price 19 Frequent-Trading Limits 32
-------------------------------------------------------------------------------
Financial Highlights 20 Other Rules You Should Know 34
-------------------------------------------------------------------------------
Fund and Account Updates 38
-------------------------------------------------------------------------------
Contacting Vanguard 40
-------------------------------------------------------------------------------
Glossary of Investment Terms 42
-------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests predominantly in the stocks of companies located outside the
United States. In selecting stocks, the Fund's advisors evaluate foreign markets
around the world and choose companies considered to have above-average growth
potential. The Fund uses multiple investment advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Investment style risk, which is the chance that returns from non-U.S. growth
stocks and, to the extent that the Fund is invested in them, small- and mid-cap
stocks, will trail returns from the overall domestic stock market. Historically,
small- and mid-cap stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. In addition, investments in foreign stock markets can be
riskier than U.S. stock investments. The prices of foreign stocks and the prices
of U.S. stocks have, at times, moved in opposite directions.
. Country/regional risk, which is the chance that domestic events--such as
political upheaval, financial troubles, or natural disasters--will weaken a
country's or region's securities markets. Because the Fund may invest a large
portion of its assets in securities of companies located in any one country or
region, its performance may be hurt disproportionately by the poor performance
of its investments in that area.
. Currency risk, which is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the share classes
presented compare with those of a relevant market index. Keep in mind that the
Fund's past
1
performance (before and after taxes) does not indicate how the Fund will perform
in the future.
Annual Total Return--Investor Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
1997 4.12%
1998 16.93
1999 26.34
2000 -8.60
2001 -18.92
2002 -17.79
2003 34.45
2004 18.95
2005 15.00
2006 25.92
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 16.47%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 21.86% (quarter ended December 31, 1999), and the lowest return for
a quarter was -20.80% (quarter ended September 30, 2002).
Average Annual Total Returns for Periods Ended December 31, 2006
1 Year 5 Years 10 Years
-------------------------------------------------------------------------------
Vanguard International
Growth Fund Investor
Shares
-------------------------------------------------------------------------------
Return Before Taxes 25.92% 13.75% 8.06%
-------------------------------------------------------------------------------
Return After Taxes on
Distributions 23.47 12.94 7.08
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale 18.68 11.77 6.63
of Fund Shares
-------------------------------------------------------------------------------
Vanguard International
Growth Fund Admiral
Shares/1/
-------------------------------------------------------------------------------
Return Before Taxes 26.17% 13.95% --
-------------------------------------------------------------------------------
MSCI EAFE Index/2/
(reflects no deduction 26.34% 14.98% 7.71%
for fees or expenses)
-------------------------------------------------------------------------------
1 From the inception date of the Fund's Admiral Shares on August 13, 2001,
through December 31, 2006, the average annual total returns were 12.34% for
the Admiral Shares and 12.69% for the MSCI EAFE Index.
2 Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE)
Index returns are adjusted for withholding taxes applicable to Luxembourg
holding companies.
NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon
2
redemption. State and local income taxes are not reflected in the calculations.
Please note that after-tax returns are shown only for the Investor Shares and
will differ among a fund's share classes only to the extent that expense ratios
differ. After-tax returns are not relevant for a shareholder who holds fund
shares in a tax-deferred account, such as an individual retirement account or a
401(k) plan. Also, figures captioned Return After Taxes on Distributions and
Sale of Fund Shares will be higher than other figures for the same period if a
capital loss occurs upon redemption and results in an assumed tax deduction for
the shareholder.
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. As is the case with all
mutual funds, transaction costs incurred by the Fund for buying and selling
securities are not reflected in the table. However, these costs are reflected in
the investment performance figures included in this prospectus. The expenses
shown under Annual Fund Operating Expenses are based on those incurred in the
fiscal year ended August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
Investor Admiral
Shares Shares
------------------------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None None
------------------------------------------------------------------------------------------------------------------------------
Purchase Fee None None
------------------------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None None
------------------------------------------------------------------------------------------------------------------------------
Redemption Fee 2%/1/ 2%/1/
------------------------------------------------------------------------------------------------------------------------------
Account Service Fee (for fund account balances below $10,000) $20/Year/2/ --
------------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
Investor Admiral
Shares Shares
------------------------------------------------------------------------------------------------------------------------------
Management Expenses 0.46% 0.26%
------------------------------------------------------------------------------------------------------------------------------
12b-1 Distribution Fee None None
------------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.05% 0.05%
------------------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.51% 0.31
------------------------------------------------------------------------------------------------------------------------------
1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the minimum initial investment for any reason,
including market fluctuation. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two
months or more are not subject to the 2% fee.
2 If applicable, the account service fee will be assessed by redeeming fund shares in the amount of $20.
3
The following examples are 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. They illustrate the hypothetical expenses that you would incur
over various periods if you invest $10,000 in the Fund's shares. These examples
assume that the Shares provide 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 the given period.
1 Year 3 Years 5 Years 10 Years
----------------------------------------------------------
Investor Shares $52 $164 $285 $640
----------------------------------------------------------
Admiral Shares 32 100 174 393
----------------------------------------------------------
These examples 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.
-------------------------------------------------------------------------------
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 International Growth Fund's expense ratios in fiscal
year 2007 were as follows: for Investor Shares, 0.51%, or $5.10 per $1,000 of
average net assets; for Admiral Shares, 0.31%, or $3.10 per $1,000 of average
net assets. The average international equity fund had expenses in 2006 of
1.57%, or $15.70 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.
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
4
Additional Information
As of August 31, 2007
------------------------------------------------------------------------------------------------
Net Assets (all share classes) $18.3 billion
------------------------------------------------------------------------------------------------
Investment Advisors .Schroder Investment Management North America Inc., New York,
NY, since inception
. Baillie Gifford Overseas Ltd., Edinburgh, Scotland,
since 2003
------------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
------------------------------------------------------------------------------------------------
Suitable for IRAs Yes
------------------------------------------------------------------------------------------------
Investor Shares Admiral Shares
------------------------------------------------------------------------------------------------
Inception Date September 30, 1981 August 13, 2001
------------------------------------------------------------------------------------------------
Minimum Initial Investment $3,000 $100,000
------------------------------------------------------------------------------------------------
Conversion Features May be converted to Admiral May be converted to Investor
Shares if you meet Shares if you are no longer
eligibility eligible for Admiral Shares
requirements
------------------------------------------------------------------------------------------------
Newspaper Abbreviation IntlGr IntlGrAdml
------------------------------------------------------------------------------------------------
Vanguard Fund Number 81 581
------------------------------------------------------------------------------------------------
CUSIP Number 921910204 921910501
------------------------------------------------------------------------------------------------
Ticker Symbol VWIGX VWILX
------------------------------------------------------------------------------------------------
5
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this FLAG LOGO symbol throughout the prospectus. It is used
to mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Market Exposure
The Fund invests mainly in common stocks of non-U.S. companies that are
considered to have above-average potential for growth. The asset-weighted median
market capitalization of the Fund as of August 31, 2007, was $38.4 billion.
FLAG LOGO
The Fund is subject to investment style risk, which is the chance that returns
from non-U.S. growth stocks and, to the extent that the Fund is invested in
them, small- and mid-cap stocks, will trail returns from the overall domestic
stock market. Historically, small- and mid-cap stocks have been more volatile
in price than the large-cap stocks that dominate the overall market, and they
perform quite differently.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock-fund
managers. Growth funds generally focus on stocks of companies believed to
have above-average potential for growth in revenue, earnings, cash flow, or
other similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Value funds typically emphasize stocks whose prices are below average in
relation to those measures; these stocks often have above-average dividend
yields. Growth and value stocks have historically produced similar long-term
returns, though each category has periods when it outperforms the other.
--------------------------------------------------------------------------------
6
FLAG LOGO
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. Stock markets tend to move in cycles, with periods of
rising prices and periods of falling prices. In addition, investments in
foreign stock markets can be riskier than U.S. stock investments. The prices of
foreign stocks and the prices of U.S. stocks have, at times, moved in opposite
directions.
To illustrate the volatility of international stock prices, the following table
shows the best, worst, and average annual total returns for foreign stock
markets over various periods as measured by the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used
barometer of international 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.
International Stock Market Returns
(1970-2006)
1 Year 5 Years 10 Years 20 Years
-----------------------------------------------------------------------------
Best 69.4% 36.1% 22.0% 15.5%
-----------------------------------------------------------------------------
Worst -23.4 -2.9 4.0 8.1
-----------------------------------------------------------------------------
Average 12.9 10.8 11.7 12.6
-----------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through
2006. These average returns reflect past performance of international stocks;
you should not regard them as an indication of future performance of either
foreign markets as a whole or the Fund in particular.
Note that the MSCI EAFE Index does not take into account returns for emerging
markets, which can be substantially more volatile, and substantially less
liquid, than the more developed markets included in the Index. In addition,
because the MSCI EAFE Index tracks the European and Pacific developed markets
collectively, the returns in the preceding table do not reflect the variability
of returns for these markets individually. To illustrate this variability, the
following table shows returns for different international markets--as well as
for the U.S. market for comparison--from 1997 through 2006, as measured by their
respective indexes.
7
Returns for Various Stock Markets/1/
European Pacific Emerging U.S.
Market/2/ Market/2/ Markets/2/ Market
-----------------------------------------------------------------------------------------------------------------------------
1997 23.80% -25.87% -11.59% 33.36%
-----------------------------------------------------------------------------------------------------------------------------
1998 28.53 2.72 -25.34 28.58
-----------------------------------------------------------------------------------------------------------------------------
1999 15.89 56.65 66.41 21.04
-----------------------------------------------------------------------------------------------------------------------------
2000 -8.39 -25.78 -30.61 -9.10
-----------------------------------------------------------------------------------------------------------------------------
2001 -19.90 -25.40 -2.62 -11.89
-----------------------------------------------------------------------------------------------------------------------------
2002 -18.38 -9.29 -6.17 -22.10
-----------------------------------------------------------------------------------------------------------------------------
2003 38.54 38.48 55.82 28.68
-----------------------------------------------------------------------------------------------------------------------------
2004 20.88 18.98 25.55 10.88
-----------------------------------------------------------------------------------------------------------------------------
2005 9.42 22.64 34.00 4.91
-----------------------------------------------------------------------------------------------------------------------------
2006 33.72 12.20 32.17 15.79
-----------------------------------------------------------------------------------------------------------------------------
1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific
Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by
the Standard & Poor's 500 Index.
2 Index returns are adjusted for withholding taxes applicable to Luxembourg holding companies.
Keep in mind that these returns reflect past performance of the various indexes;
you should not consider them as an indication of future performance of the
indexes, or of the Fund in particular.
FLAG LOGO
The Fund is subject to country/regional risk and currency risk.
Country/regional risk is the chance that domestic events--such as political
upheaval, financial troubles, or natural disasters--will weaken a country's or
region's securities markets. Because the Fund may invest a large portion of its
assets in securities of companies located in any one country or region, its
performance may be hurt disproportionately by the poor performance of its
investments in that area. Country/regional risk is especially high in emerging
markets. Currency risk is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
8
--------------------------------------------------------------------------------
PLAIN TALK ABOUT INTERNATIONAL INVESTING
U.S. investors who invest abroad will encounter risks not typically
associated with U.S. companies, because foreign stock and bond markets
operate differently from the U.S. markets. For instance, foreign companies
are not subject to the same accounting, auditing, and financial-reporting
standards and practices as U.S. companies, and their stocks may not be as
liquid as those of similar U.S. firms. In addition, foreign stock exchanges,
brokers, and companies generally have less government supervision and
regulation than their counterparts in the United States. These factors, among
others, could negatively affect the returns U.S. investors receive from
foreign investments.
--------------------------------------------------------------------------------
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects
and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that
securities are bought and sold according to the advisors' evaluations of
companies and their financial prospects, the prices of the securities, and the
stock market and the economy in general. Each advisor will sell a security when
it is no longer as attractive as an alternative investment.
Schroder Investment Management North America Inc. (Schroders), believes that the
two most important factors in managing the investments of an international stock
fund are country selection and stock selection. Schroders continually evaluates
financial markets around the world and identifies those countries with, in the
advisor's opinion, the most favorable business climates.
Once an attractive market has been identified, Schroders analyzes the companies
there and ranks them according to their potential for price appreciation based
on measures relating to earnings, returns on capital, and cash flows. Schroders
generally considers meetings with management an important part of the security
selection process. The companies chosen by Schroders reflect a wide variety of
countries and industries.
Baillie Gifford Overseas Ltd. (Baillie Gifford), which began managing the Fund
in 2003, follows an investment approach based on making long-term investments in
well-researched and well-managed businesses that the advisor believes enjoy
sustainable competitive advantages in their marketplaces. Baillie Gifford uses a
fundamental approach to identify quality growth companies. The firm considers
sustainable earnings and free cash-flow growth to be critical factors in
evaluating a company's prospects.
Companies are screened first for quality and then for value. Baillie Gifford
looks for companies with attractive industry backgrounds, strong competitive
positions within
9
those industries, high-quality earnings, and a positive approach toward
shareholders. The main fundamental factors considered in this bottom-up analysis
are: earnings growth, cash-flow growth, profitability, debt and interest
coverage, and valuation.
To determine how to allocate its portion of the Fund's assets geographically,
Baillie Gifford constantly evaluates economic, market, and political trends
worldwide. Among the factors considered are currency exchange rates, growth
potential of economies and securities markets, technological developments, and
political and social conditions.
The Vanguard Group (Vanguard), manages a small portion (approximately 3%) of the
Fund's assets to facilitate cash flows to and from the Fund's advisors. Vanguard
typically invests its portion of the Fund's assets in stock index futures and/or
shares of exchange-traded funds. For more details, see "Other Investment
Policies and Risks."
FLAG LOGO
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in stocks of foreign companies, the Fund may make other kinds
of investments to achieve its objective.
The Fund may invest in foreign issuers through American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs),
or similar investment vehicles. The Fund may also invest in convertible
securities.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a
derivative is a financial contract whose value is based on the value of a
financial asset (such as a stock, bond, or currency), a physical asset (such as
gold), or a market index (such as the S&P 500 Index). Investments in derivatives
may subject the Fund to risks different from, and possibly greater than, those
of the underlying securities, assets, or market indexes. The Fund will not use
derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are
types of derivative contracts. A forward foreign currency exchange contract is
an agreement to buy or sell a country's currency at a specific price on a
specific date, usually 30, 60, or 90 days in the future. In other words, the
contract guarantees an exchange rate on a given date. Managers of funds that
invest in foreign securities use these contracts to guard against sudden,
unfavorable changes in the U.S. dollar/foreign currency exchange rates. These
contracts, however, will not prevent the Fund's securities from falling in value
during foreign market downswings.
10
--------------------------------------------------------------------------------
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements and forward currency contracts), on the
other hand, tend to be more specialized or complex, and may be harder to
value.
--------------------------------------------------------------------------------
Vanguard typically invests a small portion of the Fund's assets in stock index
futures and/or shares of exchange-traded funds (ETFs), including ETF Shares
issued by Vanguard stock index funds. Stock index futures and ETFs provide
returns similar to those of common stocks. Vanguard may purchase futures or ETFs
when doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in ETF Shares of other Vanguard funds. Fund assets
invested in ETF Shares are excluded when allocating to the Fund its share of the
costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
11
Redemption and Account Service Fees
The Fund charges a 2% fee on shares that are redeemed before they have been held
for two months. The fee applies when shares are redeemed by selling or by
exchanging to another Vanguard fund, or when Vanguard applies the low-balance
account-closure policy. Shares you have held the longest will be redeemed first.
Unlike a sales charge or a load paid to a broker or a fund management company,
the redemption fee is paid directly to the Fund to offset the costs of buying
and selling securities. The fee is designed to ensure that short-term investors
pay their share of the Fund's transaction costs and that long-term investors do
not subsidize the activities of short-term traders.
An account service fee of $20 per year applies to certain fund accounts whose
balances are less than $10,000.
See the Fund Profile and Investing With Vanguard for more information about
fees.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
12
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
The average turnover rate for international stock funds was approximately 72%,
as reported by Morningstar, Inc., on August 31, 2007.
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and business operations, such as personnel, office
space, equipment, and advertising.
13
Vanguard also provides marketing services to the funds. Although shareholders do
not pay sales commissions or 12b-1 distribution fees, each fund (or in the case
of a fund with multiple share classes, each share class of the 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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
INVESTMENT ADVISORS
The Fund uses a multimanager approach. Each advisor independently manages its
assigned portion of the Fund's assets, subject to the supervision and oversight
of Vanguard and the board of trustees. The Fund's board of trustees designates
the proportion of the Fund assets to be managed by each advisor and may change
these proportions at any time.
. Schroder Investment Management North America Inc., 875 Third Avenue, 22nd
Floor, New York, NY 10022-6225, is an investment advisory firm founded in 1979.
Schroders is part of a worldwide group of financial services companies known as
The Schroder Group. As of August 31, 2007, The Schroder Group managed
approximately $40.1 billion in assets. Since April 1, 2003, Schroder Investment
Management North America Ltd., 31 Gresham Street, London, EC2V 7QA, England, has
served as the sub-advisor for the Schroders portion of the Fund.
. Baillie Gifford Overseas Ltd., Calton Square, 1 Greenside Row, Edinburgh, EH1
3AN, Scotland advisory firm founded in 1983. Baillie Gifford Overseas Ltd. is
wholly owned by a Scottish investment company, Baillie Gifford & Co. Founded in
1908, Baillie Gifford & Co., one of the largest independently owned investment
management firms in the United Kingdom, manages money primarily for
institutional clients. Baillie Gifford began advising the Fund in 2003. Baillie
Gifford & Co. had assets under management that totaled approximately $110
billion as of August 31, 2007.
The Fund pays each of its investment advisors on a quarterly basis. For each
advisor, the quarterly fee is based on certain annual percentage rates applied
to the average net assets managed by the advisor for each quarter. In addition,
the quarterly fees paid
14
to each advisor are increased or decreased based on the advisor's performance
compared with that of a benchmark index. For these purposes, the cumulative
total return of each advisor's portion of the Fund over a trailing 36-month
period is compared with that of the MSCI EAFE Index over the same period.
Schroder Investment Management North America Inc. pays 50% of its advisory
fee to Schroder Investment Management North America Ltd. for providing
sub-advisory services.
For the fiscal year ended August 31, 2007, the advisory fee represented an
effective annual rate of 0.13% of the Fund's average net assets before a
performance-based increase of 0.01%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without
prior approval from shareholders, change the terms of an advisory agreement or
hire a new investment advisor--either as a replacement for an existing advisor
or as an additional advisor. Any significant change in the Fund's advisory
arrangements will be communicated to shareholders in writing. In addition, as
the Fund's sponsor and overall manager, The Vanguard Group may provide
investment advisory services to the Fund, on an at-cost basis, at any time.
Vanguard may also recommend to the board of trustees that an advisor be hired,
terminated, or replaced, or that the terms of an existing advisory agreement be
revised.
For a discussion of why the board of trustees approved the Fund's investment
advisory agreements, see the semiannual report to shareholders covering the
Fund's most recent fiscal period, which ended on February 28.
15
--------------------------------------------------------------------------------
Plain Talk About the Fund's Portfolio Managers
The managers primarily responsible for the day-to-day management of the Fund
are:
Virginie Maisonneuve, CFA, Portfolio Manager, Head of Europe, Australia, Far
East (EAFE) Equities and a Director of Schroder Investment Management North
America Limited. She has worked in investment management since 1987; has
managed assets since 1987; has managed assets for Schroders since 2004; and
has jointly managed the Fund with Mr. Dobbs since 2005. Education: a degree
from the People's University in Beijing, China, and a Diplome de Grande Ecole
de Commerce (equivalent to an M.B.A.) from the ESLSCA in Paris, France.
Matthew Dobbs, Portfolio Manager on the EAFE Team. He has been with Schroders
since 1981; has advised the Fund since 1999; and has jointly managed the Fund
with Ms. Maisonneuve since 2005. Education: B.A., Worcester College,
University of Oxford.
James K. Anderson, CIO (Chief Investment Officer), Partner of Baillie Gifford
& Co., and Head of Global Equities. He has managed assets with Baillie
Gifford since 1985 and began managing the Fund in 2003. Education: B.A.,
University College, Oxford; Diploma, Bologna Center of Johns Hopkins
University; M.A., Carleton Ottawa University.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December. You
can receive distributions of income or capital gains in cash, or you can have
them automatically reinvested in more shares of the Fund.
16
--------------------------------------------------------------------------------
PLAIN TALK ABOUT DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
. 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.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes. If you are an
individual and meet certain holding-period requirements with respect to your
Fund shares, you may be eligible for reduced federal tax rates on "qualified
dividend income," if any, distributed by the Fund.
. 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.
. Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
. 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.
. 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.
. The Fund may be subject to foreign taxes or foreign tax withholding on
dividends, interest, and some capital gains that the Fund receives on foreign
securities. You may qualify for an offsetting credit or deduction under U.S. tax
laws for any amount
17
designated as your portion of the Fund's foreign tax obligations, provided that
you meet certain requirements. See your tax advisor or IRS publications for more
information.
. Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different funds is
a taxable event.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT 'BUYING A DIVIDEND'
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should consider avoiding a purchase of fund shares shortly
before the fund 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 will 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.
--------------------------------------------------------------------------------
General Information
BACKUP WITHHOLDING. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." 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 advisor for detailed information about
a fund's tax consequences for you.
18
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
because the Fund holds foreign securities that trade on foreign markets that are
open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
19
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
the Fund's financial performance for the periods shown, and certain information
reflects financial results for a single Fund share. The total returns in each
table represent the rate that an investor would have earned or lost each period
on an investment in the Fund (assuming reinvestment of all distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
whose report--along with the Fund's financial statements--is included in the
Fund's most recent annual report to shareholders. To receive a free copy of the
latest annual or semiannual report, you may access a report online at
www.vanguard.com, or you may contact Vanguard by telephone or by mail.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the Fund's Investor Shares as an example. The Investor
Shares began fiscal year 2007 with a net asset value (price) of $23.97 per
share. During the year, each Investor Share earned $0.594 from investment
income (interest and dividends) and $4.132 from investments that had
appreciated in value or that were sold for higher prices than the Fund paid
for them.
Shareholders received $2.566 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The share price at the end of the year was $26.13, reflecting earnings of
$4.726 per share and distributions of $2.566 per share. This was an increase
of $2.16 per share (from $23.97 at the beginning of the year to $26.13 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 20.87% for the year.
As of August 31, 2007, the Investor Shares had approximately $13.2 billion in
net assets. For the year, the expense ratio was 0.51% ($5.10 per $1,000 of
net assets), and the net investment income amounted to 2.47% of average net
assets. The Fund sold and replaced securities valued at 41% of its net
assets.
--------------------------------------------------------------------------------
20
International Growth Fund Investor Shares
Year Ended August 31,
-----------------------------------------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $23.97 $19.83 $16.33 $14.01 $12.97
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .594 .541 .341 .27 .19
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 4.132 4.284 3.474 2.26 1.03
on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 4.726 4.825 3.815 2.53 1.22
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.530) (.370) (.315) (.21) (.18)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains (2.036) (.315) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.566) (.685) (.315) (.21) (.18)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $26.13 $23.97 $19.83 $16.33 $14.01
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/1/ 20.87% 24.79% 23.54% 18.14% 9.62%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $13,219 $10,466 $8,182 $6,797 $5,458
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net 0.51% 0.55% 0.60% 0.63% 0.69%
Assets/2/
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to 2.47% 2.52% 1.89% 1.69% 1.57%
Average Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 41% 45% 48% 45% 59%
-----------------------------------------------------------------------------------------------------------------------------------
1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for
less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.
2 Includes performance-based investment advisory fee increases (decreases) of 0.01%, (0.01%), (0.01%), 0.00%, and 0.01%.
21
International Growth Fund Admiral Shares
Year Ended August 31,
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $76.36 $63.15 $51.96 $44.57 $41.27
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 2.051 1.861 1.222 .93 .681
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 13.159 13.639 11.063 7.21 3.264
on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 15.210 15.500 12.285 8.14 3.945
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (1.832) (1.288) (1.095) (.75) (.645)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains (6.478) (1.002) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (8.310) (2.290) (1.095) (.75) (.645)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $83.26 $76.36 $63.15 $51.96 $44.57
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/1/ 21.11% 25.03% 23.84% 18.36% 9.80%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $5,060 $3,506 $2,181 $1,262 $1,044
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net 0.31% 0.35% 0.40% 0.45% 0.51%
Assets/2/
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average 2.67% 2.72% 2.07% 1.86% 1.76%
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 41% 45% 48% 45% 59%
-----------------------------------------------------------------------------------------------------------------------------------
1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for
less than two months.
2 Includes performance based investment advisory fee increases (decreases) of 0.01%, (0.01%), (0.01%), 0.00%, and 0.01%.
22
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Investor Shares
To open and maintain an account. $3,000.
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
Account Minimums for Admiral Shares
To open and maintain an account. $100,000 for new investors. Shareholders who
are registered on Vanguard.com, have held shares of the Fund for ten years, and
have $50,000 or more in the same Fund account are eligible to convert their
Investor Shares to Admiral Shares. See Converting Shares. Institutional clients
should contact Vanguard for information on special rules that may apply to them.
To add to an existing account. $50 by Automatic Investment Plan; $100 by
check, exchange, wire, or electronic bank transfer (other than Automatic
Investment Plan).
How to Purchase Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may open certain types of accounts, request an
electronic bank transfer, and make an exchange (the purchase of shares in an
open fund with the proceeds of a redemption from another fund) through our
website at www.vanguard.com.
By telephone. You may begin the account registration process or request that
the account-opening forms be sent to you. You may also call Vanguard to request
a purchase of shares by wire, by electronic bank transfer, or by an exchange.
See Contacting Vanguard.
23
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. The request must be in good
order. See How to Make a Purchase Request: By check. For a list of Vanguard
addresses, see Contacting Vanguard.
How to Make a Purchase Request
By electronic bank transfer. To establish the electronic bank transfer option
on an account, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can purchase shares by
electronic bank transfer on a regular schedule (Automatic Investment Plan) or
whenever you wish. Your purchase request can be initiated online, by telephone,
or by mail if your request is in good order.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. You may
initiate your wire purchase by phone or online. See Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your
fund account. Also see How to Purchase Shares: By mail. Make your check payable
to Vanguard and include the appropriate fund number (e.g., Vanguard--xx). For a
list of Fund numbers (for share classes in this prospectus), see Contacting
Vanguard.
Trade Date
If the New York Stock Exchange (NYSE) is open for regular trading (a business
day) at the time a purchase, conversion, exchange, or redemption request is
received in good order, the trade date will generally be the same day. See Other
Rules You Should Know--Good Order for additional information on all transaction
requests.
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are purchased at that day's NAV. This is known as
your trade date.
For check purchases into all funds other than money market funds, and for
exchanges and wire purchases into all funds: For a purchase request received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the same day the purchase request was
received. For a purchase request received after the close of regular trading on
the NYSE, the trade date will be the first business day following the day the
purchase request was received.
24
For check purchases of money market funds only: For a purchase request received
by Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the first business day following the day
the purchase request was received. For a purchase request received after the
close of regular trading on the NYSE, the trade date will be the second business
day following the day the purchase request was received. Because money market
instruments must be purchased with federal funds and it takes a money market
mutual fund one business day to convert check proceeds into federal funds, the
trade date will be one business day later than for other funds.
For an electronic bank transfer by Automatic Investment Plan: If you have
established the Automatic Investment Option, your trade date generally will be
one business day before the date you designated for withdrawal from your bank
account.
For an electronic bank transfer (other than an Automatic Investment Plan
purchase): For a purchase request received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the following business day.
Your purchase request must be accurate and complete. See Other Rules You Should
Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Purchase Rules You Should Know
Admiral Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
25
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large
dollar amount.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
CONVERTING SHARES
A conversion between share classes of the same fund is a nontaxable event.
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
For a conversion request received in good order by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the conversion request was received. For a conversion
request received after the close of regular trading on the NYSE, the trade date
will be the first business day following the day the conversion request was
received. See Other Rules You Should Know.
Pricing of Share Class Conversions
If you convert from one class of shares to another, the transaction will be
based on the respective net asset values of the separate classes on the trade
date for the conversion. At the time of conversion, the total dollar value of
your "old" shares will equal the total dollar value of your "new" shares.
However, subsequent share price fluctuations may decrease or increase the total
dollar value of each class of shares.
Conversions From Investor Shares to Admiral Shares
Self-directed conversions. If your account balance in the Fund is at least
$100,000, you may convert Investor Shares to Admiral Shares at any time.
Registered users of Vanguard.com may request a conversion to Admiral Shares
online, or you may contact Vanguard by telephone or by mail to request this
transaction. See Contacting Vanguard.
26
Tenure conversions. You are eligible for a tenure conversion from Investor
Shares to Admiral Shares if you have had an account in the Fund for ten years,
that account balance is at least $50,000, and you are registered with
Vanguard.com. Registered users of Vanguard.com may request a tenure conversion
online, or you may contact Vanguard by telephone or by mail to request this
transaction.
Automatic conversions. The Fund conducts periodic reviews of account balances
and may convert an eligible account's Investor Shares to Admiral Shares. The
Fund will notify the investor in writing before any automatic conversion to
Admiral Shares. If you do not wish to convert to the lower-cost Admiral Shares,
you may choose not to convert to them. Accounts that qualify for Admiral Shares
on the basis of tenure alone will not be automatically converted.
REDEEMING SHARES
How to Redeem Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may redeem shares, request an electronic bank
transfer, and make an exchange (the purchase of shares with the proceeds of a
redemption from another fund) through our website at www.vanguard.com.
By telephone. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. The request must be in good order. See
Contacting Vanguard.
How to Receive Redemption Proceeds
By electronic bank transfer. To establish the electronic bank transfer option,
you must designate a bank account online, complete a special form, or fill out
the appropriate section of your account registration form. You can then redeem
shares by electronic bank transfer on a regular schedule (Automatic Withdrawal
Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be
initiated online, by telephone, or by mail if your request is in good order.
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate
27
section of your account registration form. Vanguard charges a $5 fee for wire
redemptions under $5,000.
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are redeemed at that day's NAV. This is known as your
trade date.
For check redemptions and exchanges from all funds: For a redemption request
received by Vanguard before the close of regular trading on the NYSE (generally
4 p.m., Eastern time), the trade date will be the same day the redemption
request was received. For a redemption request received after the close of
regular trading on the NYSE, the trade date will be the first business day
following the day the redemption request was received.
For money market fund redemptions by wire: For telephone requests received by
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund), on a day that the NYSE has regular trading hours, the
redemption proceeds will leave Vanguard by the close of business the day the
redemption request was received. For other money market wire redemption requests
received before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the redemption proceeds will leave Vanguard by the close of
business on the first business day following the day the redemption request was
received.
For bond fund redemptions by wire: For a redemption request received by Vanguard
before the close of regular trading on the NYSE (generally 4 p.m., Eastern
time), the redemption proceeds will leave Vanguard by the close of business on
the first business day following the day the redemption request was received.
For an electronic bank transfer by Automatic Withdrawal Plan: Your trade date
generally will be the date you designated for withdrawal of funds (redemption of
shares) from your Vanguard account. Proceeds of redeemed shares generally will
be transferred from Vanguard to your designated bank account two business days
after
28
your trade date. If the date you designated for withdrawal falls on a weekend,
holiday,or other nonbusiness day, your trade date will be the previous
business day; however, if the trade date would then fall in the year preceding
the date the proceeds of redeemed shares would be transferred from Vanguard, the
trade date will actually be the first business day of the new year (the year
proceeds of redeemed shares would be transferred from Vanguard to your bank
account).
For an electronic bank transfer (other than an Automatic Withdrawal Plan
redemption): For a redemption request received by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the redemption request was received. For a redemption
request received after the close of regular trading on the NYSE, the trade date
will be the first business day following the day the redemption request was
received.
Your redemption request must be accurate and complete. See Other Rules You
Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Redemption Fees
The Fund charges a 2% fee on shares redeemed within two months of purchase by
selling or by exchanging to another fund, or when Vanguard applies the
low-balance account-closure policy.
The fee is withheld from redemption proceeds and is paid directly to the Fund.
Shares held for two months or more are not subject to the 2% fee.
After redeeming shares that are exempt from redemption fees, shares you have
held the longest will be redeemed first.
For Vanguard fund accounts (including participants in employer-sponsored defined
contribution plans that are served by Vanguard Small Business Services),
redemption fees will not apply to the following:
. Redemptions of shares purchased with reinvested dividend and capital
gains distributions.
. Share transfers, rollovers, or re-registrations within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Redemptions of shares to pay fund or account fees.
. Section 529 college savings plans.
. For a one-year period, shares rolled over to an IRA held at Vanguard from a
retirement plan for which Vanguard serves as recordkeeper (except for Vanguard
Small Business Services retirement plans).
29
. Distributions by shareholders age 701/2 or older from the following:
. Traditional IRAs.
. Inherited IRAs (traditional and Roth).
. Rollover IRAs.
. SEP-IRAs.
. SIMPLE IRAs.
. Section 403(b)(7) plans served by the Vanguard Small Business
Services Department.
. Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company
serves as trustee.
For participants in employer-sponsored defined contribution plans (other than
those served by the Vanguard Small Business Services Department), in addition to
the exclusions previously listed, redemption fees will not apply to the
following:
. Exchanges of shares purchased with participant payroll or employer
contributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions or transfers of shares as part of a plan termination or at the
direction of the plan.
. Direct rollovers into IRAs.
Redemption fees will apply to shares exchanged out of a fund within the fund's
redemption-fee period into which fund the shares had previously been exchanged,
rolled over, or transferred by a participant.
If Vanguard does not serve as recordkeeper for your plan, redemption fees may be
applied differently. Please read your recordkeeper's plan materials carefully to
learn of any other rules or fees that may apply. Also see Frequent-Trading
Limits--Accounts Held by Intermediaries for information about the assessment of
redemption fees by intermediaries.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, 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 a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in frequent
trading. Under these circumstances, Vanguard also reserves the right to delay
payment of the redemption proceeds for up to
30
seven calendar days. By calling us before you attempt to redeem a large dollar
amount, you may avoid in-kind or delayed payment of your redemption. Please see
Frequent-Trading Limits for information about Vanguard's policies to limit
frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may 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
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
Share certificates. If share certificates were issued for your fund account,
those shares cannot be redeemed, exchanged, or converted until you return the
certificates (unsigned) to Vanguard by registered mail. For the correct address,
see Contacting Vanguard.
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, 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 and may require a signature guarantee. You can obtain a signature
guarantee from most commercial and savings banks, credit unions, trust
companies, or member firms of a U.S. stock exchange. A notary public cannot
provide a signature guarantee.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
EXCHANGING SHARES
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
31
An exchange occurs when the assets redeemed from one Vanguard fund are used to
purchase shares in an open Vanguard fund. You can make exchange requests online
(if you are a registered user of Vanguard.com), by telephone, or by mail. See
Purchasing Shares and Redeeming Shares.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
. Transfers and re-registrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
32
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares.
. Conversions of shares from one share class to another in the same fund.
Accounts Held by Institutions (Other Than Defined Contribution Plans)
Vanguard will systematically monitor for frequent trading in institutional
clients' accounts. If we detect suspicious trading activity, we will investigate
and take appropriate action, which may include applying to a client's accounts
the 60-day policy previously described, prohibiting a client's purchases of fund
shares,and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
33
OTHER RULES YOU SHOULD KNOW
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under "My
Profile." You can revoke your electronic consent at any time, and we will begin
to send paper copies of these documents within 30 days of receiving your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN 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 requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
. Authorization to act on the account (as the account owner or by legal
documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
34
Subject to revision. For any or all shareholders, we reserve the right, at any
time and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business 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
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
35
Uncashed Checks
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
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.
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
Account Service Fee
For most shareholders, Vanguard deducts a $20 account service fee from all fund
accounts that have a balance below $10,000 for any reason, including market
fluctuation. The account service fee applies to both retirement and
nonretirement fund accounts. The fee will be assessed on fund accounts in all
Vanguard funds, regardless of a fund's minimum investment amount. The account
service fee, which will be assessed by redeeming fund shares in the amount of
$20, will be deducted from a fund account only once per calendar year.
If you register on Vanguard.com and elect to receive electronic delivery of
statements, reports, and other materials for all of your fund accounts, the
account service fee for balances below $10,000 will not be charged, so long as
that election remains in effect.
The account service fee also does not apply to the following:
. Money market sweep accounts held through Vanguard Brokerage Services/(R)/.
. Accounts held through intermediaries.
. Accounts held by Voyager, Voyager Select, and Flagship clients. Membership is
based on total household assets held at Vanguard, with a minimum of $100,000 to
qualify for Vanguard Voyager Services/TM/, $500,000 for Vanguard Voyager Select
Services/TM/, and $1 million for Vanguard Flagship Services/TM/. Vanguard
determines membership by aggregating assets of all eligible accounts held by the
investor and immediate family members who reside at the same address. Aggregate
assets include investments in
36
Vanguard mutual funds, Vanguard ETFs/TM/, annuities through Vanguard, the
Vanguard 529 Plan, certain small-business accounts, and employer-sponsored
retirement plans for which Vanguard provides recordkeeping services.
. Participant accounts in employer-sponsored defined contribution plans (other
than those served by the Vanguard Small Business Services Department, which are
subject to various fee structures. Please consult your enrollment materials for
the rules that apply to your account).
. Section 529 college savings plans.
Low-Balance Accounts
All Vanguard funds reserve the right, without prior notice, to liquidate any
investment-only retirement-plan fund account or any nonretirement fund account
whose balance falls below the minimum initial investment for any reason,
including market fluctuation. Shares redeemed in accordance with this policy
will be subject to applicable redemption fees.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon Vanguard's initial notification of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at the sole discretion of Vanguard
management, we reasonably believe they are deemed to be in the best interest of
a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
37
FUND AND ACCOUNT UPDATES
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you 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 and
other retirement plans. These statements can be viewed online.
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard International Growth Fund twice a year, in April and October. These
38
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Reports from the advisors.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
39
CONTACTING VANGUARD
Web
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
-------------------------------------------------------------------------------
Phone
-------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R)/ For exchange transactions (subject to limitations)
800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
-------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
-------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
-------------------------------------------------------------------------------
Admiral Service Center For Admiral account information
888-237-9949 For most Admiral transactions
Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
-------------------------------------------------------------------------------
Institutional Division For information and services for large institutional
888-809-8102 investors
Business hours only:
Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
-------------------------------------------------------------------------------
Intermediary Sales For information and services for financial
Support intermediaries including broker-dealers, trust
800-997-2798 institutions, insurance companies, and financial
advisors Business hours only: Monday-Friday, 8:30 a.m.
to 7 p.m., Eastern time
-------------------------------------------------------------------------------
40
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) 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
-------------------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
-------------------------------------------------------------------------------
Fund Numbers
Please use the specific fund number when contacting us:
Investor Shares Admiral Shares
Vanguard International Growth Fund 81 581
-------------------------------------------------------------------------------
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Vanguard
Tele-Account, Tele-Account, Vanguard ETF, Vanguard ETFs,Vanguard Small Business
Online, Vanguard Brokerage Services, Vanguard Voyager Services, Voyager,
Vanguard Voyager Select Services, Voyager Select, Vanguard Flagship Services,
Flagship, and the ship logo are trademarks of The Vanguard Group, Inc. The
funds or securities referred to herein are not sponsored, endorsed, or promoted
by MSCI, and MSCI bears no liability with respect to any such funds or
securities. For any such funds or securities, the Satement of Additional
Information contains a more detailed description of the limited relationship
MSCI has with The Vanguard Group and any related funds. All other marks are the
exclusive property of their respective owners.
41
GLOSSARY OF INVESTMENT TERMS
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.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Country/Regional Risk. The chance that domestic events--such as political
upheaval, financial troubles, or natural disasters--will weaken a country's or
region's securities markets. Because a fund may invest a large portion of its
assets in securities of companies located in any one country or region, its
performance may be hurt disproportionately by the poor performance of its
investments in that area. Country/ regional risk is especially high in emerging
markets.
Currency Risk. The chance that the value of a foreign investment, measured in
U.S. dollars, will decrease because of unfavorable changes in currency exchange
rates.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Growth Fund. A mutual fund that emphasizes stocks of companies believed to have
above-average potential for growth in revenue, earnings, cash flow, or other
similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
International Stock Fund. A mutual fund that invests in the stocks of companies
located outside the United States.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
42
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Value Fund. A mutual fund that emphasizes stocks whose prices typically are
below average in relation to such measures as earnings and book value. These
stocks often have above-average dividend yields.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
43
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[SHIP LOGO VANGUARD /(R)/]
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard International Growth Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P081 122007
Vanguard/(R)/ International Growth Fund
> Prospectus
Admiral(TM) Shares for Participants
December 10, 2007
[SHIP LOGO VANGUARD /(R)/]
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
CONTENTS
Fund Profile 1 Financial Highlights 18
-------------------------------------------------------------------------------
More on the Fund 5 Investing With Vanguard 20
-------------------------------------------------------------------------------
The Fund and Vanguard 12 Accessing Fund Information by Computer 23
-------------------------------------------------------------------------------
Investment Advisors 13 Glossary of Investment Terms 24
-------------------------------------------------------------------------------
Dividends, Capital 15
Gains, and Taxes
-------------------------------------------------------------------------------
Share Price 16
-------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus offers the Fund's Admiral 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 800-662-7447.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests predominantly in the stocks of companies located outside the
United States. In selecting stocks, the Fund's advisors evaluate foreign markets
around the world and choose companies considered to have above-average growth
potential. The Fund uses multiple investment advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Investment style risk, which is the chance that returns from non-U.S. growth
stocks and, to the extent that the Fund is invested in them, small- and mid-cap
stocks, will trail returns from the overall domestic stock market. Historically,
small- and mid-cap stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. In addition, investments in foreign stock markets can be
riskier than U.S. stock investments. The prices of foreign stocks and the prices
of U.S. stocks have, at times, moved in opposite directions.
. Country/regional risk, which is the chance that domestic events--such as
political upheaval, financial troubles, or natural disasters--will weaken a
country's or region's securities markets. Because the Fund may invest a large
portion of its assets in securities of companies located in any one country or
region, its performance may be hurt disproportionately by the poor performance
of its investments in that area.
. Currency risk, which is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of a relevant market index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
1
Annual Total Return--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2002 -17.63
2003 34.66
2004 19.16
2005 15.21
2006 26.17
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 16.68%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 17.90% (quarter ended June 30, 2003), and the lowest return for a
quarter was -20.80% (quarter ended September 30, 2002).
Average Annual Total Returns for Periods Ended December 31, 2006
Since Inception/1/
1 Year 5 Year
Vanguard International 26.17% 13.95% 12.34%
Growth Fund Admiral
Shares
-------------------------------------------------------------------------------------------
MSCI EAFE Index/2/
(reflects no deduction 26.34 14.98 12.69
for fees or expenses)
-------------------------------------------------------------------------------------------
1 Since-inception returns are from August 13, 2001--the inception date of the Admiral
Shares--through December 31, 2006.
2 Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index
returns are adjusted for withholding taxes applicable to Luxembourg holding companies.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
2
Shareholder Fees
(Fees paid directly from your investment)
-----------------------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-----------------------------------------------------------------------------------------------------------------------------
Purchase Fee None
-----------------------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-----------------------------------------------------------------------------------------------------------------------------
Redemption Fee 2%/1/
-----------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-----------------------------------------------------------------------------------------------------------------------------
Management Expenses 0.26%
-----------------------------------------------------------------------------------------------------------------------------
12b-1 Distribution Fee None
-----------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.05%
-----------------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.31%
-----------------------------------------------------------------------------------------------------------------------------
1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee
is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the
2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------
$32 $100 $174 $393
-------------------------------------------------------------------------------
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.
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 International Growth Fund Admiral Shares' expense ratio
in fiscal year 2007 was 0.31%, or $3.10 per $1,000 of average net assets. The
average international equity fund had expenses in 2006 of 1.57%, or $15.70
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.
-------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
Additional Information
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share $18.3 billion
classes)
-------------------------------------------------------------------------------
Investment Advisors .Schroder Investment Management North America Inc.,
New York, NY, since inception
.Baillie Gifford Overseas Ltd., Edinburgh, Scotland,
since 2003
-------------------------------------------------------------------------------
Dividends and Capital Distributed annually in December
Gains
-------------------------------------------------------------------------------
Inception Date Investor Shares: September 30, 1981
Admiral Shares: August 13, 2001
-------------------------------------------------------------------------------
Newspaper Abbreviation IntlGrAdml
-------------------------------------------------------------------------------
Vanguard Fund Number 581
-------------------------------------------------------------------------------
CUSIP Number 921910501
-------------------------------------------------------------------------------
Ticker Symbol VWILX
-------------------------------------------------------------------------------
4
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this FLAG LOGO symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Market Exposure
The Fund invests mainly in common stocks of non-U.S. companies that are
considered to have above-average potential for growth. The asset-weighted median
market capitalization of the Fund as of August 31, 2007, was $38.4 billion.
FLAG LOGO
The Fund is subject to investment style risk, which is the chance that returns
from non-U.S. growth stocks and, to the extent that the Fund is invested in
them, small- and mid-cap stocks, will trail returns from the overall domestic
stock market. Historically, small- and mid-cap stocks have been more volatile
in price than the large-cap stocks that dominate the overall market, and they
perform quite differently.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock-fund
managers. Growth funds generally focus on stocks of companies believed to
have above-average potential for growth in revenue, earnings, cash flow, or
other similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Value funds typically emphasize stocks whose prices are below average in
relation to those measures; these stocks often have above-average dividend
yields. Growth and value stocks have historically produced similar long-term
returns, though each category has periods when it outperforms the other.
--------------------------------------------------------------------------------
5
FLAG LOGO
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. Stock markets tend to move in cycles, with periods of
rising prices and periods of falling prices. In addition, investments in
foreign stock markets can be riskier than U.S. stock investments. The prices of
foreign stocks and the prices of U.S. stocks have, at times, moved in opposite
directions.
To illustrate the volatility of international stock prices, the following table
shows the best, worst, and average annual total returns for foreign stock
markets over various periods as measured by the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used
barometer of international 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.
International Stock Market Returns
(1970-2006)
1 Year 5 Years 10 Years 20 Years
-------------------------------------------------------------------------------
Best 69.4% 36.1% 22.0% 15.5%
-------------------------------------------------------------------------------
Worst -23.4 -2.9 4.0 8.1
-------------------------------------------------------------------------------
Average 12.9 10.8 11.7 12.6
-------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through
2006. These average returns reflect past performance of international stocks;
you should not regard them as an indication of future performance of either
foreign markets as a whole or the Fund in particular.
Note that the MSCI EAFE Index does not take into account returns for emerging
markets, which can be substantially more volatile, and substantially less
liquid, than the more developed markets included in the Index. In addition,
because the MSCI EAFE Index tracks the European and Pacific developed markets
collectively, the returns in the preceding table do not reflect the variability
of returns for these markets individually. To illustrate this variability, the
following table shows returns for different international markets--as well as
for the U.S. market for comparison--from 1997 through 2006, as measured by their
respective indexes.
6
Returns for Various Stock Markets/1/
European Pacific Emerging U.S.
Market/2/ Market/2/ Markets/2/ Market
-----------------------------------------------------------------------------------------------------------------------------
1997 23.80% -25.87% -11.59% 33.36%
-----------------------------------------------------------------------------------------------------------------------------
1998 28.53 2.72 -25.34 28.58
-----------------------------------------------------------------------------------------------------------------------------
1999 15.89 56.65 66.41 21.04
-----------------------------------------------------------------------------------------------------------------------------
2000 -8.39 -25.78 -30.61 -9.10
-----------------------------------------------------------------------------------------------------------------------------
2001 -19.90 -25.40 -2.62 -11.89
-----------------------------------------------------------------------------------------------------------------------------
2002 -18.38 -9.29 -6.17 -22.10
-----------------------------------------------------------------------------------------------------------------------------
2003 38.54 38.48 55.82 28.68
-----------------------------------------------------------------------------------------------------------------------------
2004 20.88 18.98 25.55 10.88
-----------------------------------------------------------------------------------------------------------------------------
2005 9.42 22.64 34.00 4.91
-----------------------------------------------------------------------------------------------------------------------------
2006 33.72 12.20 32.17 15.79
-----------------------------------------------------------------------------------------------------------------------------
1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific
Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by
the Standard & Poor's 500 Index.
2 Index returns are adjusted for withholding taxes applicable to Luxembourg holding companies.
Keep in mind that these returns reflect past performance of the various indexes;
you should not consider them as an indication of future performance of the
indexes, or of the Fund in particular.
FLAG LOGO
The Fund is subject to country/regional risk and currency risk.
Country/regional risk is the chance that domestic events--such as political
upheaval, financial troubles, or natural disasters--will weaken a country's or
region's securities markets. Because the Fund may invest a large portion of its
assets in securities of companies located in any one country or region, its
performance may be hurt disproportionately by the poor performance of its
investments in that area. Country/regional risk is especially high in emerging
markets. Currency risk is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
7
-------------------------------------------------------------------------------
PLAIN TALK ABOUT INTERNATIONAL INVESTING
U.S. investors who invest abroad will encounter risks not typically
associated with U.S. companies, because foreign stock and bond markets
operate differently from the U.S. markets. For instance, foreign companies
are not subject to the same accounting, auditing, and financial-reporting
standards and practices as U.S. companies, and their stocks may not be as
liquid as those of similar U.S. firms. In addition, foreign stock exchanges,
brokers, and companies generally have less government supervision and
regulation than their counterparts in the United States. These factors, among
others, could negatively affect the returns U.S. investors receive from
foreign investments.
-------------------------------------------------------------------------------
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects
and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that
securities are bought and sold according to the advisors' evaluations of
companies and their financial prospects, the prices of the securities, and the
stock market and the economy in general. Each advisor will sell a security when
it is no longer as attractive as an alternative investment.
Schroder Investment Management North America Inc. (Schroders), believes that the
two most important factors in managing the investments of an international stock
fund are country selection and stock selection. Schroders continually evaluates
financial markets around the world and identifies those countries with, in the
advisor's opinion, the most favorable business climates.
Once an attractive market has been identified, Schroders analyzes the companies
there and ranks them according to their potential for price appreciation based
on measures relating to earnings, returns on capital, and cash flows. Schroders
generally considers meetings with management an important part of the security
selection process. The companies chosen by Schroders reflect a wide variety of
countries and industries.
Baillie Gifford Overseas Ltd. (Baillie Gifford), which began managing the Fund
in 2003, follows an investment approach based on making long-term investments in
well-researched and well-managed businesses that the advisor believes enjoy
sustainable competitive advantages in their marketplaces. Baillie Gifford uses a
fundamental approach to identify quality growth companies. The firm considers
sustainable earnings and free cash-flow growth to be critical factors in
evaluating a company's prospects.
Companies are screened first for quality and then for value. Baillie Gifford
looks for companies with attractive industry backgrounds, strong competitive
positions within
8
those industries, high-quality earnings, and a positive approach toward
shareholders. The main fundamental factors considered in this bottom-up analysis
are: earnings growth, cash-flow growth, profitability, debt and interest
coverage, and valuation.
To determine how to allocate its portion of the Fund's assets geographically,
Baillie Gifford constantly evaluates economic, market, and political trends
worldwide. Among the factors considered are currency exchange rates, growth
potential of economies and securities markets, technological developments, and
political and social conditions.
The Vanguard Group (Vanguard), manages a small portion (approximately 3%) of the
Fund's assets to facilitate cash flows to and from the Fund's advisors. Vanguard
typically invests its portion of the Fund's assets in stock index futures and/or
shares of exchange-traded funds. For more details, see "Other Investment
Policies and Risks."
FLAG LOGO
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in stocks of foreign companies, the Fund may make other kinds
of investments to achieve its objective.
The Fund may invest in foreign issuers through American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs),
or similar investment vehicles. The Fund may also invest in convertible
securities.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a
derivative is a financial contract whose value is based on the value of a
financial asset (such as a stock, bond, or currency), a physical asset (such as
gold), or a market index (such as the S&P 500 Index). Investments in derivatives
may subject the Fund to risks different from, and possibly greater than, those
of the underlying securities, assets, or market indexes. The Fund will not use
derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are
types of derivative contracts. A forward foreign currency exchange contract is
an agreement to buy or sell a country's currency at a specific price on a
specific date, usually 30, 60, or 90 days in the future. In other words, the
contract guarantees an exchange rate on a given date. Managers of funds that
invest in foreign securities use these contracts to guard against sudden,
unfavorable changes in the U.S. dollar/foreign currency exchange rates. These
contracts, however, will not prevent the Fund's securities from falling in value
during foreign market downswings.
9
-------------------------------------------------------------------------------
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements and forward currency contracts), on the
other hand, tend to be more specialized or complex, and may be harder to
value.
-------------------------------------------------------------------------------
Vanguard typically invests a small portion of the Fund's assets in stock index
futures and/or shares of exchange-traded funds (ETFs), including ETF Shares
issued by Vanguard stock index funds. Stock index futures and ETFs provide
returns similar to those of common stocks. Vanguard may purchase futures or ETFs
when doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in ETF Shares of other Vanguard funds. Fund assets
invested in ETF Shares are excluded when allocating to the Fund its share of the
costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
10
Redemption Fee
The Fund charges a redemption fee. Participants who exchange shares into a fund
that charges a redemption fee will be subject to the redemption fee if they
subsequently exchange those shares out of the fund within the fund's
redemption-fee period.
When shares are exchanged out of the Fund, Vanguard first exchanges shares that
are exempt from redemption fees (such as shares purchased with reinvested
dividend or capital gains distributions and shares purchased with plan
participant payroll or employer contributions). Shares a participant has held
the longest will be redeemed next.
Unlike a sales charge or a load paid to a broker or a fund management company,
the redemption fee is paid directly to the Fund to offset the costs of buying
and selling securities. The fee is designed to ensure that short-term investors
pay their share of the Fund's transaction costs and that long-term investors do
not subsidize the activities of short-term traders.
See the Fund Profile and Investing With Vanguard for more information about
fees.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such
11
purchase may negatively affect a fund's operation or performance or because of a
history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
The average turnover rate for international stock funds was approximately 72%,
as reported by Morningstar, Inc., on August 31, 2007.
-------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
-------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with
12
administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the 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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
-------------------------------------------------------------------------------
INVESTMENT ADVISORS
The Fund uses a multimanager approach. Each advisor independently manages its
assigned portion of the Fund's assets, subject to the supervision and oversight
of Vanguard and the board of trustees. The Fund's board of trustees designates
the proportion of the Fund assets to be managed by each advisor and may change
these proportions at any time.
. Schroder Investment Management North America Inc., 875 Third Avenue, 22nd
Floor, New York, NY 10022-6225, is an investment advisory firm founded in 1979.
Schroders is part of a worldwide group of financial services companies known as
The Schroder Group. As of August 31, 2007, The Schroder Group managed
approximately $40.1 billion in assets. Since April 1, 2003, Schroder Investment
Management North America Ltd., 31 Gresham Street, London, EC2V 7QA, England, has
served as the sub-advisor for the Schroders portion of the Fund.
. Baillie Gifford Overseas Ltd., Calton Square, 1 Greenside Row, Edinburgh, EH1
3AN, Scotland, is an investment advisory firm founded in 1983. Baillie Gifford
Overseas Ltd. is wholly owned by a Scottish investment company, Baillie Gifford
& Co. Founded in 1908, Baillie Gifford & Co., one of the largest independently
owned investment management firms in the United Kingdom, manages money
primarily for institutional clients. Baillie Gifford began advising the Fund in
2003. Baillie Gifford & Co. had assets under management that totaled
approximately $110 billion as of August 31, 2007.
13
The Fund pays each of its investment advisors on a quarterly basis. For each
advisor, the quarterly fee is based on certain annual percentage rates applied
to the average net assets managed by the advisor for each quarter. In addition,
the quarterly fees paid to each advisor are increased or decreased based on the
advisor's performance compared with that of a benchmark index. For these
purposes, the cumulative total return of each advisor's portion of the Fund over
a trailing 36-month period is compared with that of the MSCI EAFE Index over the
same period.
Schroder Investment Management North America Inc. pays 50% of its advisory
fee to Schroder Investment Management North America Ltd. for providing
sub-advisory services.
For the fiscal year ended August 31, 2007, the advisory fee represented an
effective annual rate of 0.13% of the Fund's average net assets before a
performance-based increase of 0.01%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without
prior approval from shareholders, change the terms of an advisory agreement or
hire a new investment advisor--either as a replacement for an existing advisor
or as an additional advisor. Any significant change in the Fund's advisory
arrangements will be communicated to shareholders in writing. In addition, as
the Fund's sponsor and overall manager, The Vanguard Group may provide
investment advisory services to the Fund, on an at-cost basis, at any time.
Vanguard may also recommend to the board of trustees that an advisor be hired,
terminated, or replaced, or that the terms of an existing advisory agreement be
revised.
For a discussion of why the board of trustees approved the Fund's investment
advisory agreements, see the semiannual report to shareholders covering the
Fund's most recent fiscal period, which ended February 28.
14
-------------------------------------------------------------------------------
PLAIN TALK ABOUT THE FUND'S PORTFOLIO MANAGERS
The managers primarily responsible for the day-to-day management of the Fund
are:
Virginie Maisonneuve, CFA, Portfolio Manager, Head of Europe, Australia, Far
East (EAFE) Equities and a Director of Schroder Investment Management North
America Limited. She has worked in investment management since 1987; has
managed assets since 1987; has managed assets for Schroders since 2004; and
has jointly managed the Fund with Mr. Dobbs since 2005. Education: a degree
from the People's University in Beijing, China, and a Diplome de Grande Ecole
de Commerce (equivalent to an M.B.A.) from the ESLSCA in Paris, France.
Matthew Dobbs, Portfolio Manager on the EAFE Team. He has been with Schroders
since 1981; has advised the Fund since 1999; and has jointly managed the Fund
with Ms. Maisonneuve since 2005. Education: B.A., Worcester College,
University of Oxford.
James K. Anderson, CIO (Chief Investment Officer), Partner of Baillie Gifford
& Co., and Head of Global Equities. He has managed assets with Baillie
Gifford since 1985 and began managing the Fund in 2003. Education: B.A.,
University College, Oxford; Diploma, Bologna Center of Johns Hopkins
University; M.A., Carleton Ottawa University.
-------------------------------------------------------------------------------
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December.
Your 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 advisor about the tax
consequences of plan withdrawals.
15
-------------------------------------------------------------------------------
PLAIN TALK ABOUT DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
-------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
because the Fund holds foreign securities that trade on foreign markets that are
open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities.
16
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
17
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Admiral Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Admiral Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Admiral Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
-------------------------------------------------------------------------------
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Admiral Shares began fiscal year 2007 with a net asset value (price) of
$76.36 per share. During the year, each Admiral Share earned $2.051 from
investment income (interest and dividends) and $13.159 from investments that
had appreciated in value or that were sold for higher prices than the Fund
paid for them.
Shareholders received $8.310 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The share price at the end of the year was $83.26, reflecting earnings of
$15.210 per share and distributions of $8.310 per share. This was an increase
of $6.90 per share (from $76.36 at the beginning of the year to $83.26 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 21.11% for the year.
As of August 31, 2007, the Admiral Shares had approximately $5.1 billion in
net assets. For the year, the expense ratio was 0.31% ($3.10 per $1,000 of
net assets), and the net investment income amounted to 2.67% of average net
assets. The Fund sold and replaced securities valued at 41% of its net
assets.
-------------------------------------------------------------------------------
18
International Growth Fund Admiral Shares
Year Ended August 31,
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $76.36 $63.15 $51.96 $44.57 $41.27
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 2.051 1.861 1.222 .93 .681
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 13.159 13.639 11.063 7.21 3.264
on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 15.210 15.500 12.285 8.14 3.945
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (1.832) (1.288) (1.095) (.75) (.645)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains (6.478) (1.002) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (8.310) (2.290) (1.095) (.75) (.645)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $83.26 $76.36 $63.15 $51.96 $44.57
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/1/ 21.11% 25.03% 23.84% 18.36% 9.80%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $5,060 $3,506 $2,181 $1,262 $1,044
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net 0.31% 0.35% 0.40% 0.45% 0.51%
Assets/2/
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average 2.67% 2.72% 2.07% 1.86% 1.76%
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 41% 45% 48% 45% 59%
-----------------------------------------------------------------------------------------------------------------------------------
1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for
less than two months.
2 Includes performance based investment advisory fee increases (decreases) of 0.01%, (0.01%), (0.01%), 0.00%, and 0.01%.
19
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.
. 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 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
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
Contribution, exchange, or redemption requests must be 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 NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV 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 NAV. This is known as your trade date.
Redemption Fees
Redemption fees apply to shares exchanged out of a fund into which they were
exchanged, rolled over, or transferred by the participant within the fund's
redemption-fee period. The fee is withheld from redemption proceeds and is
retained by the fund. Shares held longer than the redemption-fee holding period
are not subject to the fee.
After exchanging shares that are exempt from redemption fees, shares you have
held the longest will be exchanged first.
For retirement plan participants, redemption fees do not apply to the following:
20
. Exchanges of shares purchased with participant payroll or employer
contributions.
. Exchanges of shares purchased with reinvested dividend and capital
gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions or transfers of shares as part of a plan termination or at the
direction of the plan.
. Direct rollovers into IRAs.
. Conversions of shares from one share class to another in the same fund.
. Redemptions of shares to pay fund or account fees.
. Re-registrations of shares in the same fund.
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 disrupt the management of the Vanguard funds and increase their transaction
costs, Vanguard places certain limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
21
Before making an exchange to or from another fund available in your plan,
consider the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
22
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; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Admiral, Vanguard ETF, and the ship
logo are trademarks of The Vanguard Group, Inc. The funds or securities referred
to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no
liability with respect to any such funds or securities. For any such funds or
securities, the Statement of Additional Information contains a more detailed
description of the limited relationship MSCI has with The Vanguard Group and any
related funds. All other marks are the exclusive property of their respective
owners.
23
GLOSSARY OF INVESTMENT TERMS
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.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Country/Regional Risk. The chance that domestic events--such as political
upheaval, financial troubles, or natural disasters--will weaken a country's or
region's securities markets. Because a fund may invest a large portion of its
assets in securities of companies located in any one country or region, its
performance may be hurt disproportionately by the poor performance of its
investments in that area. Country/ regional risk is especially high in emerging
markets.
Currency Risk. The chance that the value of a foreign investment, measured in
U.S. dollars, will decrease because of unfavorable changes in currency exchange
rates.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Growth Fund. A mutual fund that emphasizes stocks of companies believed to have
above-average potential for growth in revenue, earnings, cash flow, or other
similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
International Stock Fund. A mutual fund that invests in the stocks of companies
located outside the United States.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
24
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Value Fund. A mutual fund that emphasizes stocks whose prices typically are
below average in relation to such measures as earnings and book value. These
stocks often have above-average dividend yields.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
[SHIP LOGO VANGUARD /R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard International Growth Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us
as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I581 122007
Vanguard/(R)/ International Growth Fund
> Prospectus
Investor Shares for Participants
December 10, 2007
[SHIP LOGO VANGUARD /R/]
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
CONTENTS
-------------------------------------------------------------------------------
Fund Profile 1 Financial Highlights 18
-------------------------------------------------------------------------------
More on the Fund 5 Investing With Vanguard 20
-------------------------------------------------------------------------------
The Fund and Vanguard 12 Accessing Fund Information by Computer 23
-------------------------------------------------------------------------------
Investment Advisors 13 Glossary of Investment Terms 24
-------------------------------------------------------------------------------
Dividends, Capital 15
Gains, and Taxes
-------------------------------------------------------------------------------
Share Price 16
-------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
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 800-662-7447.
FUND PROFILE
Investment Objective
The Fund seeks to provide long-term capital appreciation.
Primary Investment Strategies
The Fund invests predominantly in the stocks of companies located outside the
United States. In selecting stocks, the Fund's advisors evaluate foreign markets
around the world and choose companies considered to have above-average growth
potential. The Fund uses multiple investment advisors.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Investment style risk, which is the chance that returns from non-U.S. growth
stocks and, to the extent that the Fund is invested in them, small- and mid-cap
stocks, will trail returns from the overall domestic stock market. Historically,
small- and mid-cap stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. In addition, investments in foreign stock markets can be
riskier than U.S. stock investments. The prices of foreign stocks and the prices
of U.S. stocks have, at times, moved in opposite directions.
. Country/regional risk, which is the chance that domestic events--such as
political upheaval, financial troubles, or natural disasters--will weaken a
country's or region's securities markets. Because the Fund may invest a large
portion of its assets in securities of companies located in any one country or
region, its performance may be hurt disproportionately by the poor performance
of its investments in that area.
. Currency risk, which is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
. Manager risk, which is the chance that poor security selection will cause the
Fund to underperform relevant benchmarks or other funds with a similar
investment objective.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of a relevant market index. Keep in mind that the Fund's past performance does
not indicate how the Fund will perform in the future.
1
Annual Total Return--Investor Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% to 60%
1997 4.12%
1998 16.93
1999 26.34
2000 -8.60
2001 -18.92
2002 -17.79
2003 34.45
2004 18.95
2005 15.00
2006 25.92
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 16.47%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 21.86% (quarter ended December 31, 1999), and the lowest return for
a quarter was -20.80% (quarter ended September 30, 2002).
Average Annual Total Returns for Periods Ended December 31, 2006
1 Year 5 Years 10 Years
Vanguard International 25.92% 13.75% 8.06%
Growth Fund
---------------------------------------------------------------------------------------------
MSCI EAFE Index/1/
(reflects no deduction 26.34 14.98 7.71
for fees or expenses)
---------------------------------------------------------------------------------------------
1 Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index
returns are adjusted for withholding taxes applicable to Luxembourg holding companies.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
2
Shareholder Fees
(Fees paid directly from your investment)
-----------------------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-----------------------------------------------------------------------------------------------------------------------------
Purchase Fee None
------------------------------------------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-----------------------------------------------------------------------------------------------------------------------------
Redemption Fee 2%/1/
-----------------------------------------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-----------------------------------------------------------------------------------------------------------------------------
Management Expenses 0.46%
-----------------------------------------------------------------------------------------------------------------------------
12b-1 Distribution Fee None
-----------------------------------------------------------------------------------------------------------------------------
Other Expenses 0.05%
-----------------------------------------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.51%
-----------------------------------------------------------------------------------------------------------------------------
1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee
is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the
2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's Investor 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$52 $164 $285 $640
--------------------------------------------------------
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.
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 International Growth Fund Investor Shares' expense
ratio in fiscal year 2007 was 0.51%, or $5.10 per $1,000 of average net
assets. The average international equity fund had expenses in 2006 of 1.57%,
or $15.70 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.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PLAIN TALK ABOUT 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
-------------------------------------------------------------------------------
Additional Information
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share $18.3 billion
classes)
-------------------------------------------------------------------------------
Investment Advisors .Schroder Investment Management North America Inc.,
New York, NY, since inception
.Baillie Gifford Overseas Ltd., Edinburgh, Scotland,
since 2003
-------------------------------------------------------------------------------
Dividends and Capital Distributed annually in December
Gains
-------------------------------------------------------------------------------
Inception Date September 30, 1981
-------------------------------------------------------------------------------
Newspaper Abbreviation IntlGr
-------------------------------------------------------------------------------
Vanguard Fund Number 81
-------------------------------------------------------------------------------
CUSIP Number 921910204
-------------------------------------------------------------------------------
Ticker Symbol VWIGX
-------------------------------------------------------------------------------
4
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this FLAG LOGO symbol throughout the prospectus. It is used to
mark detailed information aboutthe more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental.
Market Exposure
The Fund invests mainly in common stocks of non-U.S. companies that are
considered to have above-average potential for growth. The asset-weighted median
market capitalization of the Fund as of August 31, 2007, was $38.4 billion.
FLAG LOGO
The Fund is subject to investment style risk, which is the chance that returns
from non-U.S. growth stocks and, to the extent that the Fund is invested in
them, small- and mid-cap stocks, will trail returns from the overall domestic
stock market. Historically, small- and mid-cap stocks have been more volatile
in price than the large-cap stocks that dominate the overall market, and they
perform quite differently.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock-fund
managers. Growth funds generally focus on stocks of companies believed to
have above-average potential for growth in revenue, earnings, cash flow, or
other similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Value funds typically emphasize stocks whose prices are below average in
relation to those measures; these stocks often have above-average dividend
yields. Growth and value stocks have historically produced similar long-term
returns, though each category has periods when it outperforms the other.
--------------------------------------------------------------------------------
5
FLAG LOGO
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. Stock markets tend to move in cycles, with periods of
rising prices and periods of falling prices. In addition, investments in
foreign stock markets can be riskier than U.S. stock investments. The prices of
foreign stocks and the prices of U.S. stocks have, at times, moved in opposite
directions.
To illustrate the volatility of international stock prices, the following table
shows the best, worst, and average annual total returns for foreign stock
markets over various periods as measured by the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used
barometer of international 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.
International Stock Market Returns
(1970-2006)
1 Year 5 Years 10 Years 20 Years
-------------------------------------------------------------------------------
Best 69.4% 36.1% 22.0% 15.5%
-------------------------------------------------------------------------------
Worst -23.4 -2.9 4.0 8.1
-------------------------------------------------------------------------------
Average 12.9 10.8 11.7 12.6
-------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through
2006. These average returns reflect past performance of international stocks;
you should not regard them as an indication of future performance of either
foreign markets as a whole or the Fund in particular.
Note that the MSCI EAFE Index does not take into account returns for emerging
markets, which can be substantially more volatile, and substantially less
liquid, than the more developed markets included in the Index. In addition,
because the MSCI EAFE Index tracks the European and Pacific developed markets
collectively, the returns in the preceding table do not reflect the variability
of returns for these markets individually. To illustrate this variability, the
following table shows returns for different international markets--as well as
for the U.S. market for comparison--from 1997 through 2006, as measured by their
respective indexes.
6
Returns for Various Stock Markets/1/
European Pacific Emerging U.S.
Market/2/ Market/2/ Markets/2/ Market
-----------------------------------------------------------------------------------------------------------------------------
1997 23.80% -25.87% -11.59% 33.36%
-----------------------------------------------------------------------------------------------------------------------------
1998 28.53 2.72 -25.34 28.58
-----------------------------------------------------------------------------------------------------------------------------
1999 15.89 56.65 66.41 21.04
-----------------------------------------------------------------------------------------------------------------------------
2000 -8.39 -25.78 -30.61 -9.10
-----------------------------------------------------------------------------------------------------------------------------
2001 -19.90 -25.40 -2.62 -11.89
-----------------------------------------------------------------------------------------------------------------------------
2002 -18.38 -9.29 -6.17 -22.10
-----------------------------------------------------------------------------------------------------------------------------
2003 38.54 38.48 55.82 28.68
-----------------------------------------------------------------------------------------------------------------------------
2004 20.88 18.98 25.55 10.88
-----------------------------------------------------------------------------------------------------------------------------
2005 9.42 22.64 34.00 4.91
-----------------------------------------------------------------------------------------------------------------------------
2006 33.72 12.20 32.17 15.79
-----------------------------------------------------------------------------------------------------------------------------
1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific
Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by
the Standard & Poor's 500 Index.
2 Index returns are adjusted for withholding taxes applicable to Luxembourg holding companies.
Keep in mind that these returns reflect past performance of the various indexes;
you should not consider them as an indication of future performance of the
indexes, or of the Fund in particular.
FLAG LOGO
The Fund is subject to country/regional risk and currency risk.
Country/regional risk is the chance that domestic events--such as political
upheaval, financial troubles, or natural disasters--will weaken a country's or
region's securities markets. Because the Fund may invest a large portion of its
assets in securities of companies located in any one country or region, its
performance may be hurt disproportionately by the poor performance of its
investments in that area. Country/regional risk is especially high in emerging
markets. Currency risk is the chance that the value of a foreign investment,
measured in U.S. dollars, will decrease because of unfavorable changes in
currency exchange rates.
7
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PLAIN TALK ABOUT INTERNATIONAL INVESTING
U.S. investors who invest abroad will encounter risks not typically
associated with U.S. companies, because foreign stock and bond markets
operate differently from the U.S. markets. For instance, foreign companies
are not subject to the same accounting, auditing, and financial-reporting
standards and practices as U.S. companies, and their stocks may not be as
liquid as those of similar U.S. firms. In addition, foreign stock exchanges,
brokers, and companies generally have less government supervision and
regulation than their counterparts in the United States. These factors, among
others, could negatively affect the returns U.S. investors receive from
foreign investments.
--------------------------------------------------------------------------------
Security Selection
The Fund uses multiple investment advisors. Each advisor independently selects
and maintains a portfolio of common stocks for the Fund.
These advisors employ active investment management methods, which means that
securities are bought and sold according to the advisors' evaluations of
companies and their financial prospects, the prices of the securities, and the
stock market and the economy in general. Each advisor will sell a security when
it is no longer as attractive as an alternative investment.
Schroder Investment Management North America Inc. (Schroders), believes that the
two most important factors in managing the investments of an international stock
fund are country selection and stock selection. Schroders continually evaluates
financial markets around the world and identifies those countries with, in the
advisor's opinion, the most favorable business climates.
Once an attractive market has been identified, Schroders analyzes the companies
there and ranks them according to their potential for price appreciation based
on measures relating to earnings, returns on capital, and cash flows. Schroders
generally considers meetings with management an important part of the security
selection process. The companies chosen by Schroders reflect a wide variety of
countries and industries.
Baillie Gifford Overseas Ltd. (Baillie Gifford), which began managing the Fund
in 2003, follows an investment approach based on making long-term investments in
well-researched and well-managed businesses that the advisor believes enjoy
sustainable competitive advantages in their marketplaces. Baillie Gifford uses a
fundamental approach to identify quality growth companies. The firm considers
sustainable earnings and free cash-flow growth to be critical factors in
evaluating a company's prospects.
Companies are screened first for quality and then for value. Baillie Gifford
looks for companies with attractive industry backgrounds, strong competitive
positions within
8
those industries, high-quality earnings, and a positive approach toward
shareholders. The main fundamental factors considered in this bottom-up analysis
are: earnings growth, cash-flow growth, profitability, debt and interest
coverage, and valuation.
To determine how to allocate its portion of the Fund's assets geographically,
Baillie Gifford constantly evaluates economic, market, and political trends
worldwide. Among the factors considered are currency exchange rates, growth
potential of economies and securities markets, technological developments, and
political and social conditions.
The Vanguard Group (Vanguard), manages a small portion (approximately 3%) of the
Fund's assets to facilitate cash flows to and from the Fund's advisors. Vanguard
typically invests its portion of the Fund's assets in stock index futures and/or
shares of exchange-traded funds. For more details, see "Other Investment
Policies and Risks."
FLAG LOGO
The Fund is subject to manager risk, which is the chance that poor security
selection will cause the Fund to underperform relevant benchmarks or other
funds with a similar investment objective.
The Fund is generally managed without regard to tax ramifications.
Other Investment Policies and Risks
Besides investing in stocks of foreign companies, the Fund may make other kinds
of investments to achieve its objective.
The Fund may invest in foreign issuers through American Depositary Receipts
(ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts (GDRs),
or similar investment vehicles. The Fund may also invest in convertible
securities.
The Fund may invest, to a limited extent, in derivatives. Generally speaking, a
derivative is a financial contract whose value is based on the value of a
financial asset (such as a stock, bond, or currency), a physical asset (such as
gold), or a market index (such as the S&P 500 Index). Investments in derivatives
may subject the Fund to risks different from, and possibly greater than, those
of the underlying securities, assets, or market indexes. The Fund will not use
derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns.
The Fund may enter into forward foreign currency exchange contracts, which are
types of derivative contracts. A forward foreign currency exchange contract is
an agreement to buy or sell a country's currency at a specific price on a
specific date, usually 30, 60, or 90 days in the future. In other words, the
contract guarantees an exchange rate on a given date. Managers of funds that
invest in foreign securities use these contracts to guard against sudden,
unfavorable changes in the U.S. dollar/foreign currency exchange rates. These
contracts, however, will not prevent the Fund's securities from falling in value
during foreign market downswings.
9
--------------------------------------------------------------------------------
PLAIN TALK ABOUT DERIVATIVES
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements and forward currency contracts), on the
other hand, tend to be more specialized or complex, and may be harder to
value.
--------------------------------------------------------------------------------
Vanguard typically invests a small portion of the Fund's assets in stock index
futures and/or shares of exchange-traded funds (ETFs), including ETF Shares
issued by Vanguard stock index funds. Stock index futures and ETFs provide
returns similar to those of common stocks. Vanguard may purchase futures or ETFs
when doing so will reduce the Fund's transaction costs or add value because the
instruments are favorably priced. Vanguard receives no additional revenue from
investing Fund assets in ETF Shares of other Vanguard funds. Fund assets
invested in ETF Shares are excluded when allocating to the Fund its share of the
costs of Vanguard operations.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
is transitioning assets from one advisor to another or receives large cash flows
that it cannot prudently invest immediately.
In addition, the Fund may take temporary defensive positions that are
inconsistent with its normal investment policies and strategies--for instance,
by allocating substantial assets to cash, commercial paper, or other less
volatile instruments--in response to adverse or unusual market, economic,
political, or other conditions. In doing so, the Fund may succeed in avoiding
losses but may otherwise fail to achieve its investment objective.
10
Redemption Fee
The Fund charges a redemption fee. Participants who exchange shares into a fund
that charges a redemption fee will be subject to the redemption fee if they
subsequently exchange those shares out of the fund within the fund's
redemption-fee period.
When shares are exchanged out of the Fund, Vanguard first exchanges shares that
are exempt from redemption fees (such as shares purchased with reinvested
dividend or capital gains distributions and shares purchased with plan
participant payroll or employer contributions). Shares a participant has held
the longest will be redeemed next.
Unlike a sales charge or a load paid to a broker or a fund management company,
the redemption fee is paid directly to the Fund to offset the costs of buying
and selling securities. The fee is designed to ensure that short-term investors
pay their share of the Fund's transaction costs and that long-term investors do
not subsidize the activities of short-term traders.
See the Fund Profile and Investing With Vanguard for more information about
fees.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such
11
purchase may negatively affect a fund's operation or performance or because of a
history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The Financial Highlights
section of this prospectus shows historical turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
The average turnover rate for international stock funds was approximately 72%,
as reported by Morningstar, Inc., on August 31, 2007.
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 150 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with
12
administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the 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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
INVESTMENT ADVISORS
The Fund uses a multimanager approach. Each advisor independently manages its
assigned portion of the Fund's assets, subject to the supervision and oversight
of Vanguard and the board of trustees. The Fund's board of trustees designates
the proportion of the Fund assets to be managed by each advisor and may change
these proportions at any time.
. Schroder Investment Management North America Inc., 875 Third Avenue, 22nd
Floor, New York, NY 10022-6225, is an investment advisory firm founded in 1979.
Schroders is part of a worldwide group of financial services companies known as
The Schroder Group. As of August 31, 2007, The Schroder Group managed
approximately $40.1 billion in assets. Since April 1, 2003, Schroder Investment
Management North America Ltd., 31 Gresham Street, London, EC2V 7QA, England, has
served as the sub-advisor for the Schroders portion of the Fund.
. Baillie Gifford Overseas Ltd., Calton Square, 1 Greenside Row, Edinburgh, EH1
3AN, Scotland, is an investment advisory firm founded in 1983. Baillie Gifford
Overseas Ltd. is wholly owned by a Scottish investment company, Baillie Gifford
& Co. Founded in 1908, Baillie Gifford & Co., one of the largest independently
owned investment management firms in the United Kingdom, manages money primarily
for institutional clients. Baillie Gifford began advising the Fund in 2003.
Baillie Gifford & Co. had assets under management that totaled approximately
$110 billion as of August 31, 2007.
13
The Fund pays each of its investment advisors on a quarterly basis. For each
advisor, the quarterly fee is based on certain annual percentage rates applied
to the average net assets managed by the advisor for each quarter. In addition,
the quarterly fees paid to each advisor are increased or decreased based on the
advisor's performance compared with that of a benchmark index. For these
purposes, the cumulative total return of each advisor's portion of the Fund over
a trailing 36-month period is compared with that of the MSCI EAFE Index over the
same period.
Schroder Investment Management North America Inc. pays 50% of its advisory
fee to Schroder Investment Management North America Ltd. for providing
sub-advisory services.
For the fiscal year ended August 31, 2007, the advisory fee represented an
effective annual rate of 0.13% of the Fund's average net assets before a
performance-based increase of 0.01%.
Under the terms of an SEC exemption, the Fund's board of trustees may, without
prior approval from shareholders, change the terms of an advisory agreement or
hire a new investment advisor--either as a replacement for an existing advisor
or as an additional advisor. Any significant change in the Fund's advisory
arrangements will be communicated to shareholders in writing. In addition, as
the Fund's sponsor and overall manager, The Vanguard Group may provide
investment advisory services to the Fund, on an at-cost basis, at any time.
Vanguard may also recommend to the board of trustees that an advisor be hired,
terminated, or replaced, or that the terms of an existing advisory agreement be
revised.
For a discussion of why the board of trustees approved the Fund's investment
advisory agreements, see the semiannual report to shareholders covering the
Fund's most recent fiscal period, which ended on February 28.
14
--------------------------------------------------------------------------------
Plain Talk About the Fund's Portfolio Managers
The managers primarily responsible for the day-to-day management of the Fund
are:
Virginie Maisonneuve, CFA, Portfolio Manager, Head of Europe, Australia, Far
East (EAFE) Equities and a Director of Schroder Investment Management North
America Limited. She has worked in investment management since 1987; has
managed assets since 1987; has managed assets for Schroders since 2004; and
has jointly managed the Fund with Mr. Dobbs since 2005. Education: a degree
from the People's University in Beijing, China, and a Diplome de Grande Ecole
de Commerce (equivalent to an M.B.A.) from the ESLSCA in Paris, France.
Matthew Dobbs, Portfolio Manager on the EAFE Team. He has been with Schroders
since 1981; has advised the Fund since 1999; and has jointly managed the Fund
with Ms. Maisonneuve since 2005. Education: B.A., Worcester College,
University of Oxford.
James K. Anderson, CIO (Chief Investment Officer), Partner of Baillie Gifford
& Co., and Head of Global Equities. He has managed assets with Baillie
Gifford since 1985 and began managing the Fund in 2003. Education: B.A.,
University College, Oxford; Diploma, Bologna Center of Johns Hopkins
University; M.A., Carleton Ottawa University.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December.
Your 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 advisor about the tax
consequences of plan withdrawals.
15
--------------------------------------------------------------------------------
PLAIN TALK ABOUT DISTRIBUTIONS
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
because the Fund holds foreign securities that trade on foreign markets that are
open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities.
16
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
17
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Investor Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Investor Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Investor Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Investor Shares began fiscal year 2007 with a net asset value (price) of
$23.97 per share. During the year, each Investor Share earned $0.594 from
investment income (interest and dividends) and $4.132 from investments that
had appreciated in value or that were sold for higher prices than the Fund
paid for them.
Shareholders received $2.566 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The share price at the end of the year was $26.13, reflecting earnings of
$4.726 per share and distributions of $2.566 per share. This was an increase
of $2.16 per share (from $23.97 at the beginning of the year to $26.13 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 20.87% for the year.
As of August 31, 2007, the Investor Shares had approximately $13.2 billion in
net assets. For the year, the expense ratio was 0.51% ($5.10 per $1,000 of
net assets), and the net investment income amounted to 2.47% of average net
assets. The Fund sold and replaced securities valued at 41% of its net
assets.
--------------------------------------------------------------------------------
18
International Growth Fund Investor Shares
Year Ended August 31,
-----------------------------------------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $23.97 $19.83 $16.33 $14.01 $12.97
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .594 .541 .341 .27 .19
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 4.132 4.284 3.474 2.26 1.03
on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 4.726 4.825 3.815 2.53 1.22
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.530) (.370) (.315) (.21) (.18)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains (2.036) (.315) -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (2.566) (.685) (.315) (.21) (.18)
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $26.13 $23.97 $19.83 $16.33 $14.01
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/1/ 20.87% 24.79% 23.54% 18.14% 9.62%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $13,219 $10,466 $8,182 $6,797 $5,458
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average 0.51% 0.55% 0.60% 0.63% 0.69%
Net Assets/2/
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average 2.47% 2.52% 1.89% 1.69% 1.57%
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate 41% 45% 48% 45% 59%
-----------------------------------------------------------------------------------------------------------------------------------
1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for
less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.
2 Includes performance-based investment advisory fee increases (decreases) of 0.01%, (0.01%), (0.01%), 0.00%, and 0.01%.
19
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.
. 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 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
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
Contribution, exchange, or redemption requests must be 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 NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV 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 NAV. This is known as your trade date.
Redemption Fees
Redemption fees apply to shares exchanged out of a fund into which they were
exchanged, rolled over, or transferred by the participant within the fund's
redemption-fee period. The fee is withheld from redemption proceeds and is
retained by the fund. Shares held longer than the redemption-fee holding period
are not subject to the fee.
After exchanging shares that are exempt from redemption fees, shares you have
held the longest will be exchanged first.
For retirement plan participants, redemption fees do not apply to the following:
20
. Exchanges of shares purchased with participant payroll or employer
contributions.
. Exchanges of shares purchased with reinvested dividend and capital
gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions or transfers of shares as part of a plan termination or at the
direction of the plan.
. Direct rollovers into IRAs.
. Conversions of shares from one share class to another in the same fund.
. Redemptions of shares to pay fund or account fees.
. Re-registrations of shares in the same fund.
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 disrupt the management of the Vanguard funds and increase their transaction
costs, Vanguard places certain limits on the exchange privilege.
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
21
Before making an exchange to or from another fund available in your plan,
consider the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase and redemption fees or administer frequent-trading policies. If
a firm other than Vanguard serves as recordkeeper for your plan, please read
that firm's materials carefully to learn of any other rules or fees that may
apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
22
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; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, Plain Talk, Vanguard ETF, and the ship logo are
trademarks of The Vanguard Group, Inc. The funds or securities referred to
herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no
liability with respect to any such funds or securities. For any such funds or
securities, the Statement of Additional Information contains a more detailed
description of the limited relationship MSCI has with The Vanguard Group and any
related funds. All other marks are the exclusive property of their respective
owners.
23
GLOSSARY OF INVESTMENT TERMS
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.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Country/Regional Risk. The chance that domestic events--such as political
upheaval, financial troubles, or natural disasters--will weaken a country's or
region's securities markets. Because a fund may invest a large portion of its
assets in securities of companies located in any one country or region, its
performance may be hurt disproportionately by the poor performance of its
investments in that area. Country/ regional risk is especially high in emerging
markets.
Currency Risk. The chance that the value of a foreign investment, measured in
U.S. dollars, will decrease because of unfavorable changes in currency exchange
rates.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Growth Fund. A mutual fund that emphasizes stocks of companies believed to have
above-average potential for growth in revenue, earnings, cash flow, or other
similar criteria. These stocks typically have low dividend yields and
above-average prices in relation to such measures as earnings and book value.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
International Stock Fund. A mutual fund that invests in the stocks of companies
located outside the United States.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
24
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
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 also called its share value or share price.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming the reinvestment of all distributions of
dividends and capital gains.
Value Fund. A mutual fund that emphasizes stocks whose prices typically are
below average in relation to such measures as earnings and book value. These
stocks often have above-average dividend yields.
Volatility. The fluctuations in value of a mutual fund or other security. The
greater a fund's volatility, the wider the fluctuations in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
SHIP LOGO VANGUARD /R/]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard International Growth Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I081 122007
--------------------------------------------------------------------------------
VANGUARD/(R)/ FTSE SOCIAL INDEX FUND
> Prospectus
Investor Shares
December 10, 2007
--------------------------------------------------------------------------------
[VANGUARD SHIP LOGO]
--------------------------------------------------------------------------------
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
--------------------------------------------------------------------------------
Contents
--------------------------------------------------------------------------------
FUND PROFILE 1 INVESTING WITH VANGUARD 20
-------------------------------------------------------------------------------
INVESTING IN INDEX FUNDS 6 PURCHASING SHARES 20
-------------------------------------------------------------------------------
MORE ON THE FUND 7 CONVERTING SHARES 23
-------------------------------------------------------------------------------
THE FUND AND VANGUARD 11 REDEEMING SHARES 24
-------------------------------------------------------------------------------
INVESTMENT ADVISOR 12 EXCHANGING SHARES 27
-------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND 13 FREQUENT-TRADING LIMITS 27
TAXES
-------------------------------------------------------------------------------
SHARE PRICE 15 OTHER RULES YOU SHOULD KNOW 29
-------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 17 FUND AND ACCOUNT UPDATES 33
-------------------------------------------------------------------------------
CONTACTING VANGUARD 35
-------------------------------------------------------------------------------
GLOSSARY OF INVESTMENT TERMS 37
-------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
This prospectus offers the Fund's Investor Shares. A separate prospectus offers
the Fund's Institutional Shares, which are for investors who generally do not
require special employee benefit plan services and who invest a minimum of $5
million.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ.
FUND PROFILE
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of large- and mid-capitalization stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the FTSE4Good US Select Index. The Index is
composed primarily of large- and mid-cap stocks that have been screened for
certain social and environmental criteria by the Index sponsor, which is
independent of Vanguard. The Fund attempts to replicate the Index by investing
all, or substantially all, of its assets in the stocks that make up the Index.
For more information, please see More on the Fund.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Investment style risk, which is the chance that the stocks selected for the
FTSE4Good US Select Index will, in the aggregate, trail returns from other
mutual funds screened with similar criteria, from other asset classes, or from
the overall stock market. Historically, mid-cap stocks, like those included in
the Index, have been more volatile in price than the large-cap stocks that
dominate the overall market, and they often perform quite differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Investor
Shares compare with those of the Fund's target index and other comparative
indexes. Keep in mind that the Fund's past performance (before and after taxes)
does not indicate how the Fund will perform in the future.
1
Annual Total Return--Investor Shares/1/
-------------------------------------------------------------------------------
[Bar Chart Range: 60% to -40%]
2001 -14.08
2002 -24.24
2003 30.45
2004 8.27
2005 4.10
2006 13.09
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 3.80%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 16.23% (quarter ended June 30, 2003), and the lowest return for a
quarter was -17.62% (quarter ended September 30, 2002).
Average Annual Total Returns For Periods Ended December 31, 2006
Since
1 Year 5 Years Inception/1/
----------------------------------------------------------------------------------------------------
Vanguard FTSE Social Index Fund Investor Shares
----------------------------------------------------------------------------------------------------
Return Before Taxes 13.09% 4.73% -0.23%
----------------------------------------------------------------------------------------------------
Return After Taxes on Distributions 12.87 4.49 -0.46
----------------------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 8.80 4.00 -0.29
----------------------------------------------------------------------------------------------------
Comparative Indexes
(reflect no deduction for fees, expenses, or taxes)
----------------------------------------------------------------------------------------------------
Spliced Social Index/2/ 13.38% 4.97% -0.07%
----------------------------------------------------------------------------------------------------
FTSE4Good US Select Index 13.38% -- --
----------------------------------------------------------------------------------------------------
Dow Jones Wilshire 5000 Composite Index 15.87 7.65 2.90
----------------------------------------------------------------------------------------------------
1 Subscription period for the Fund was May 8, 2000, to May 31, 2000, during
which time all assets were held in money market instruments. Since-inception
returns are from May 31, 2000, through December 31, 2006.
2 Reflects performance of the Calvert Social Index through December 16, 2005,
and performance of the FTSE4Good US Select Index thereafter.
2
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------------------------
Account Service Fee (for fund account balances below $10,000) $20/year/1/
-------------------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------------------
Management Expenses 0.19%
-------------------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------------------
Other Expenses 0.05%
-------------------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.24%
-------------------------------------------------------------------------------------------
1 If applicable, the account service fee will be assessed by redeeming fund
shares in the amount of $20.
3
The following example is intended to help you compare the cost of investing in
the Fund's Investor 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$25 $77 $135 $306
--------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 FTSE Social Index Fund Investor Shares' expense ratio
in fiscal year 2007 was 0.24%, or $2.40 per $1,000 of average net assets. The
average large-cap growth fund had expenses in 2006 of 1.43%, or $14.30 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Plain Talk About 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
4
Additional Information
As of August 31, 2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes) $651 million
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge Pa., since inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
----------------------------------------------------------------------------------------------
Suitable for IRAs Yes
----------------------------------------------------------------------------------------------
Inception Date May 31, 2000
----------------------------------------------------------------------------------------------
Minimum Initial Investment $3,000
----------------------------------------------------------------------------------------------
Newspaper Abbreviation FTSESoc
----------------------------------------------------------------------------------------------
Vanguard Fund Number 213
----------------------------------------------------------------------------------------------
CUSIP Number 921910303
----------------------------------------------------------------------------------------------
Ticker Symbol VFTSX
----------------------------------------------------------------------------------------------
5
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." 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. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror what the target index does,
for better or worse. However, an index fund does not always perform exactly like
its target index. For example, like all mutual funds, index funds have operating
expenses and transaction costs. Market indexes do not, and therefore will
usually have a slight performance advantage over funds that track them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run, compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus brokerage commissions and other transaction costs--to a
minimum.
6
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. The Fund's policy of
investing all, or substantially all, of its assets in the stocks that make up
the FTSE4Good US Select Index may be changed only upon 60 days' notice to
shareholders.
Market Exposure
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. 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 annual 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.
U.S. Stock Market Returns
(1926-2006)
1 Year 5 Years 10 Years 20 Years
-----------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
-----------------------------------------------------
Worst -43.1 -12.4 -0.8 3.1
-----------------------------------------------------
Average 12.3 10.4 11.1 1.4
-----------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2006. You can see, for example, that although the average return on common
stocks for all of the 5-year periods was 10.4%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance of common stocks;
you should not regard
7
them as an indication of future performance of either the stock market as a
whole or the Fund in particular.
Stocks of publicly traded companies and funds that invest in stocks are often
classified according to market value, or market capitalization. These
classifications typically include small-cap, mid-cap, and large-cap. It's
important to understand that, for both companies and stock funds,
market-capitalization ranges change over time. Also, interpretations of size
vary, and there are no "official" definitions of small-, mid-, and large-cap,
even among Vanguard fund advisors. The market-capitalization range of the
FTSE4Good US Select Index as of August 31, 2007, was $1.1 billion to $223.8
billion. The asset-weighted median market capitalization of the Fund as of
August 31, 2007, was $28.9 billion.
[FLAG]
The Fund is subject to investment style risk, which is the chance that the
stocks selected for the FTSE4Good US Select Index will, in the aggregate, trail
returns from other mutual funds screened with similar criteria, from other
asset classes, or from the overall stock market. Historically, mid-cap stocks,
like those included in the Index, have been more volatile in price than the
large-cap stocks that dominate the overall market, and they often perform quite
differently.
Security Selection
Index Replication Strategy. The Fund uses the replication method of indexing.
This means that the Fund holds each security found in the FTSE4Good US Select
Index in approximately the same proportion as represented in the Index itself.
For example, if 5% of the Index were made up of the stock of a specific company,
the Fund would invest about 5% of its assets in that company.
The Fund seeks to provide investment results that correspond to those of the
FTSE4Good US Select Index. The correlation between the performance of the Fund
and that of the Index is expected to be at least 95% (100% would indicate
perfect correlation). Keep in mind that the social screening policies employed
by the Index may result in economic sector weightings that are significantly
different from those of the overall market.
The FTSE4Good US Select Index. The FTSE4Good US Select Index is maintained by
FTSE Group (FTSE), a widely known global index provider that currently
calculates over 60,000 indexes daily. In the United States, FTSE has retained
Institutional Shareholder Services (ISS), a respected and established source of
high-quality, impartial information on corporate governance and social
responsibility issues, as the advisory committee determining which stocks are
eligible for inclusion in the Index. FTSE selects stocks from approximately 700
of the largest public companies in the United States by evaluating each
company's performance in the following categories: environmental sustainability,
upholding and supporting universal human rights, and
8
developing positive relations with stakeholders. The Index includes companies
considered to have: (1) superior environmental policies; (2) a strong hiring and
promotion record for minorities and women; and (3) a safe and healthy workplace.
Excluded from the Index are companies that are involved with: (1) tobacco; (2)
alcohol; (3) adult entertainment; (4) firearms; (5) gambling; (6) nuclear power;
or (7) those that violate fair labor practices and equal opportunity standards.
For further information about the FTSE4Good US Select Index's selection
criteria, please visit the FTSE4Good website at www.ftse4good.com.
Other Investment Policies and Risks
The Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund is generally managed without regard to tax ramifications.
The Fund may invest in foreign securities to the extent necessary to carry out
its
investment strategy of holding all, or substantially all, of the stocks that
make up the index it tracks.
To track its target index as closely as possible, the Fund attempts to remain
fully invested in stocks. To help stay fully invested and to reduce transaction
costs, the Fund may invest, to a limited extent, in derivatives. Generally
speaking, a derivative is a financial contract whose value is based on the value
of a financial asset (such as a stock, bond, or currency), a physical asset
(such as gold), or a market index (such as the S&P 500 Index). The Fund will not
use derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns. Derivatives will not be screened based on social or
environmental criteria.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest
9
beyond the normal limits in derivatives or ETFs that are consistent with the
Fund's objective when those instruments are more favorably priced or provide
needed liquidity, as might be the case when the Fund receives large cash flows
that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
10
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. Generally, index-oriented
funds sell securities only in response to redemption requests or changes in the
composition of a target index. The Financial Highlights section of this
prospectus shows historical turnover rates for the Fund. A turnover rate of
100%, for example, would mean that the Fund had sold and replaced securities
valued at 100% of its net assets within a one-year period. The average turnover
rate for indexed domestic stock funds was approximately 61%, and for all
domestic stock funds, the average turnover rate was approximately 94%, both as
reported by Morningstar, Inc., on August 31, 2007.
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 145 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
11
--------------------------------------------------------------------------------
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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Fund through its
Quantitative Equity Group. As of August 31, 2007, Vanguard served as advisor for
approximately $977 billion in assets. Vanguard manages the Fund on an at-cost
basis, subject to the supervision and oversight of the trustees and officers of
the Fund.
For the fiscal year ended August 31, 2007, the advisory expenses represented an
effective annual rate of 0.02% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the annual report to shareholders covering the Fund's
most recent fiscal year, which ended August 31.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University
of Chicago.
12
--------------------------------------------------------------------------------
Plain Talk About the Fund's Portfolio Manager
The manager primarily responsible for the day-to-day management of the Fund
is:
Michael Perre, Principal of Vanguard. He has been with Vanguard since 1990;
has managed investment portfolios since 1999; and has managed the Fund since
its inception. Education: B.A., Saint Joseph's University; M.B.A., Villanova
University.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about the portfolio
manager's compensation, other accounts under management, and ownership of
securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December. You
can receive distributions of income or capital gains in cash, or you can have
them automatically reinvested in more shares of the Fund.
--------------------------------------------------------------------------------
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
13
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
. 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.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes. If you are an
individual and meet certain holding-period requirements with respect to your
Fund shares, you may be eligible for reduced federal tax rates on "qualified
dividend income," if any, distributed by the Fund.
. 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.
. Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
. 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.
. 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.
. Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different funds is
a taxable event.
--------------------------------------------------------------------------------
Plain Talk About "Buying a Dividend"
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should consider avoiding a purchase of fund shares shortly
before the fund 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 will 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.
--------------------------------------------------------------------------------
14
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." 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 advisor for detailed information about
a fund's tax consequences for you.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally
4 p.m., Eastern time. NAV per share is computed by dividing the net assets
allocated to each share class by the number of Fund shares outstanding for that
class. On holidays or other days when the Exchange is closed, the NAV is not
calculated, and the Fund does not transact purchase or redemption requests.
However, on those days the value of the Fund's assets may be affected to the
extent that the Fund holds foreign securities that trade on foreign markets that
are open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
15
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities. Fair-value
pricing may be used for domestic securities--for example, if (1) trading in a
security is halted and does not resume before the fund's pricing time or if a
security does not trade in the course of a day, and (2) the fund holds enough of
the security that its price could affect the fund's NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
16
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Investor Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Investor Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Investor Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
17
--------------------------------------------------------------------------------
Plain Talk About How to Read the Financial Highlights Table
The Investor Shares began fiscal year 2007 with a net asset value (price) of
$8.51 per share. During the year, each Investor Share earned $0.13 from
investment income (interest and dividends) and $0.78 from investments that
had appreciated in value or that were sold for higher prices than the Fund
paid for them.
Shareholders received $0.12 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $9.30, reflecting earnings of
$0.91 per share and distributions of $0.12 per share. This was an increase of
$0.79 per share (from $8.51 at the beginning of the year to $9.30 at the end
of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 10.70% for the year.
As of August 31, 2007, the Investor Shares had approximately $540 million in
net assets. For the year, the expense ratio was 0.24% ($2.40 per $1,000 of
net assets), and the net investment income amounted to 1.48% of average net
assets. The Fund sold and replaced securities valued at 20% of its net
assets.
--------------------------------------------------------------------------------
18
FTSE Social Index Fund Investor Shares
Year Ended August 31,
---------------------
2007 2006 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.51 $8.03 $7.40 $6.87 $6.02
-------------------------------------------------------------------------------------------------------------------------
Investment Operations
-------------------------------------------------------------------------------------------------------------------------
Net Investment Income .13 .11 .13(1) .08 .07
-------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .78 .47 .62 .52 .84
-------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .91 .58 .75 .60 .91
-------------------------------------------------------------------------------------------------------------------------
Distributions
-------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.12) (.10) (.12) (.07) (.06)
-------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
Total Distributions (.12) (.10) (.12) (.07) (.06)
-------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.30 $8.51 $8.03 $7.40 $6.87
=========================================================================================================================
Total Return(2) 10.70% 7.25% 10.16% 8.75% 15.28%
=========================================================================================================================
Ratios/Supplemental Data
-------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $540 $405 $361 $274 $150
-------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
-------------------------------------------------------------------------------------------------------------------------
Average Net Assets 0.24% 0.25% 0.25% 0.25% 0.25%
-------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 1.48% 1.41% 1.74%(1) 1.17% 1.18%
-------------------------------------------------------------------------------------------------------------------------
Turnover Rate 20% 51%3 12% 8% 14%
=========================================================================================================================
1 Net investment income per share and the ratio of net investment income to average net assets include
$0.04 and 0.43%, respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
2 Total returns do not include the account service fee that may be applicable to certain accounts with
balances below $10,000.
3 Includes activity related to a change in the Fund's target index.
19
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Investor Shares
To open and maintain an account. $3,000.
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
How to Purchase Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may open certain types of accounts, request an
electronic bank transfer, and make an exchange (the purchase of shares in an
open fund with the proceeds of a redemption from another fund) through our
website at www.vanguard.com.
By telephone. You may begin the account registration process or request that
the account-opening forms be sent to you. You may also call Vanguard to request
a purchase of shares by wire, by electronic bank transfer, or by an exchange.
See Contacting Vanguard.
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. The request must be in good
order. See How to Make a Purchase Request: By check. For a list of Vanguard
addresses, see Contacting Vanguard.
20
How to Make a Purchase Request
By electronic bank transfer. To establish the electronic bank transfer option
on an account, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can purchase shares by
electronic bank transfer on a regular schedule (Automatic Investment Plan) or
whenever you wish. Your purchase request can be initiated online, by telephone,
or by mail if your request is in good order.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. You may
initiate your wire purchase by phone or online. See Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your
fund account. Also see How to Purchase Shares: By mail. Make your check payable
to Vanguard and include the appropriate fund number (e.g., Vanguard--213). See
Contacting Vanguard.
Trade Date
If the New York Stock Exchange (NYSE) is open for regular trading (a business
day) at the time a purchase, conversion, exchange, or redemption request is
received in good order, the trade date will generally be the same day. See Other
Rules You Should Know--Good Order for additional information on all transaction
requests.
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are purchased at that day's NAV. This is known as
your trade date.
For check purchases into all funds other than money market funds, and for
exchanges and wire purchases into all funds: For a purchase request received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the same day the purchase request was
received. For a purchase request received after the close of regular trading on
the NYSE, the trade date will be the first business day following the day the
purchase request was received.
For check purchases of money market funds only: For a purchase request received
by Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the first business day following the day
the purchase request was received. For a purchase request received after the
close of regular trading on the NYSE, the trade date will be the second business
day following the day the purchase request was received. Because money market
instruments must be purchased with federal funds and it takes a money market
mutual fund one business
21
day to convert check proceeds into federal funds, the trade date will be one
business day later than for other funds.
For an electronic bank transfer by Automatic Investment Plan: If you have
established the Automatic Investment Option, your trade date generally will be
one business day before the date you designated for withdrawal from your bank
account.
For an electronic bank transfer (other than an Automatic Investment Plan
purchase): For a purchase request received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the following business day.
Your purchase request must be accurate and complete. See Other Rules You Should
Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Purchase Rules You Should Know
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large
dollar amount.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
22
CONVERTING SHARES
A conversion between share classes of the same fund is a nontaxable event.
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
For a conversion request received in good order by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the conversion request was received. For a conversion
request received after the close of regular trading on the NYSE, the trade date
will be the first business day following the day the conversion request was
received. See Other Rules You Should Know.
Pricing of Share Class Conversions
If you convert from one class of shares to another, the transaction will be
based on the respective net asset values of the separate classes on the trade
date for the conversion. At the time of conversion, the total dollar value of
your "old" shares will equal the total dollar value of your "new" shares.
However, subsequent share price fluctuations may decrease or increase the total
dollar value of each class of shares.
Conversions to Institutional Shares
You are eligible for a self-directed conversion from Investor Shares to
Institutional Shares of the Fund, provided that your account meets all
Institutional Shares'
eligibility requirements. Registered users of our website, www.vanguard.com, may
request a conversion online, or you may contact Vanguard by telephone or by mail
to request this transaction. Accounts that qualify for Institutional Shares will
not be automatically converted.
Mandatory Conversions to Investor Shares
If an account no longer meets the balance requirements for Institutional Shares,
the Fund may automatically convert the shares in the account to Investor Shares.
A decline in the account balance because of market movement may result in such a
conversion. The Fund will notify the investor in writing before any mandatory
conversion occurs.
23
REDEEMING SHARES
How to Redeem Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may redeem shares, request an electronic bank
transfer, and make an exchange (the purchase of shares with the proceeds of a
redemption from another fund) through our website at www.vanguard.com.
By telephone. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. The request must be in good order. See
Contacting Vanguard.
How to Receive Redemption Proceeds
By electronic bank transfer. To establish the electronic bank transfer option,
you must designate a bank account online, complete a special form, or fill out
the appropriate section of your account registration form. You can then redeem
shares by electronic bank transfer on a regular schedule (Automatic Withdrawal
Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be
initiated online, by telephone, or by mail if your request is in good order.
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before
24
the close of regular trading on the NYSE (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your trade date.
For check redemptions and exchanges from all funds: For a redemption request
received by Vanguard before the close of regular trading on the NYSE (generally
4 p.m., Eastern time), the trade date will be the same day the redemption
request was received. For a redemption request received after the close of
regular trading on the NYSE, the trade date will be the first business day
following the day the redemption request was received.
For money market fund redemptions by wire: For telephone requests received by
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund), on a day that the NYSE has regular trading hours, the
redemption proceeds will leave Vanguard by the close of business the day the
redemption request was received. For other money market wire redemption requests
received before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the redemption proceeds will leave Vanguard by the close of
business on the first business day following the day the redemption request was
received.
For bond fund redemptions by wire: For a redemption request received by Vanguard
before the close of regular trading on the NYSE (generally 4 p.m., Eastern
time), the redemption proceeds will leave Vanguard by the close of business on
the first business day following the day the redemption request was received.
For an electronic bank transfer by Automatic Withdrawal Plan: Your trade date
generally will be the date you designated for withdrawal of funds (redemption of
shares) from your Vanguard account. Proceeds of redeemed shares generally will
be transferred from Vanguard to your designated bank account two business days
after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
For an electronic bank transfer (other than an Automatic Withdrawal Plan
redemption): For a redemption request received by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the redemption request was received. For a redemption
request received after the close of regular trading on the NYSE, the trade date
will be the first business day following the day the redemption request was
received.
Your redemption request must be accurate and complete. See Other Rules You
Should Know--Good Order.
25
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, 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 a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in frequent
trading. Under these circumstances, Vanguard also reserves the right to delay
payment of the redemption proceeds for up to seven calendar days. By calling us
before you attempt to redeem a large dollar amount, you may avoid in-kind or
delayed payment of your redemption. Please see Frequent-Trading Limits for
information about Vanguard's policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may 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
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, 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 and may require a signature guarantee. You can obtain a signature
guarantee from most commercial and savings banks, credit unions, trust
companies, or member firms of a U.S. stock exchange. A notary public cannot
provide a signature guarantee.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
26
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
EXCHANGING SHARES
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
An exchange occurs when the assets redeemed from one Vanguard fund are used to
purchase shares in an open Vanguard fund. You can make exchange requests online
(if you are a registered user of Vanguard.com), by telephone, or by mail. See
Purchasing Shares and Redeeming Shares.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
. Transfers and re-registrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
27
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares.
. Conversions of shares from one share class to another in the same fund.
Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard
will systematically monitor for frequent trading in institutional clients'
accounts. If we detect suspicious trading activity, we will investigate and take
appropriate action, which may include applying to a client's accounts the 60-day
policy previously described, prohibiting a client's purchases of fund shares,
and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and
28
redemption fees and frequent-trading policies may vary among intermediaries.
There are no assurances that Vanguard will successfully identify all
intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
OTHER RULES YOU SHOULD KNOW
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under "My
Profile." You can revoke your electronic consent at any time, and we will begin
to send paper copies of these documents within 30 days of receiving your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN before using this service.
29
Proof of a caller's authority. We reserve the right to refuse a telephone
request if the caller is unable to provide the requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
. Authorization to act on the account (as the account owner or by legal
documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Subject to revision. For any or all shareholders, we reserve the right, at any
time and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for
good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
30
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business 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
statements that we provide to you. It is important that 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.
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.
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
Account Service Fee
For most shareholders, Vanguard deducts a $20 account service fee from all fund
accounts that have a balance below $10,000 for any reason, including market
fluctuation. The account service fee applies to both retirement and
nonretirement fund accounts. The fee will be assessed on fund accounts in all
Vanguard funds, regardless of a fund's minimum investment amount. The account
service fee, which will be assessed by redeeming fund shares in the amount of
$20, will be deducted from a fund account only once per calendar year.
If you register on Vanguard.com and elect to receive electronic delivery of
statements, reports, and other materials for all of your fund accounts, the
account service fee for balances below $10,000 will not be charged, so long as
that election remains in effect.
31
The account service fee also does not apply to the following:
. Money market sweep accounts held through Vanguard Brokerage Services/(R)/.
. Accounts held through intermediaries.
. Accounts held by Voyager, Voyager Select, and Flagship clients. Membership is
based on total household assets held at Vanguard, with a minimum of $100,000 to
qualify for Vanguard Voyager Services/TM/, $500,000 for Vanguard Voyager Select
Services/TM/, and $1 million for Vanguard Flagship Services/TM/. Vanguard
determines membership by aggregating assets of all eligible accounts held by the
investor and immediate family members who reside at the same address. Aggregate
assets include investments in Vanguard mutual funds, Vanguard ETFs/TM/,
annuities through Vanguard, the Vanguard 529 Plan, certain small-business
accounts, and employer-sponsored retirement plans for which Vanguard provides
recordkeeping services.
. Participant accounts in employer-sponsored defined contribution plans (other
than those served by the Vanguard Small Business Services Department, which are
subject to various fee structures). Please consult your enrollment materials for
the rules that apply to your account.
. Section 529 college savings plans.
Low-Balance Accounts
The Fund reserves the right, without prior notice, to liquidate any
investment-only retirement-plan fund account or any nonretirement fund account
whose balance falls below the minimum initial investment for any reason,
including market fluctuation. Shares redeemed in accordance with this policy
will be subject to applicable redemption fees.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon Vanguard's initial notification of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at
32
the sole discretion of Vanguard management, we reasonably believe they are
deemed to be in the best interest of a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
FUND AND ACCOUNT UPDATES
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you 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 and
other retirement plans. These statements can be viewed online.
33
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard FTSE Social Index Fund twice a year, in April and October. These
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
34
CONTACTING VANGUARD
----------------------------------------------------------------------------------------
Web
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
----------------------------------------------------------------------------------------
Phone
----------------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R)/ For exchange transactions (subject to limitations)
800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
----------------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
----------------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
----------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
----------------------------------------------------------------------------------------
Intermediary Sales For information and services for financial intermediaries
Support including broker-dealers, trust institutions, insurance
800-997-2798 companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to
7 p.m., Eastern time
----------------------------------------------------------------------------------------
35
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) 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
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
Fund Number
Please use the specific fund number when contacting us:
Investor Shares
-------------------------------------------------------------
Vanguard FTSE Social Index Fund 213
-------------------------------------------------------------
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Vanguard
Tele-Account, Tele-Account, Vanguard ETF, Vanguard ETFs, Vanguard Small Business
Online, Vanguard Brokerage Services, Vanguard Voyager Services, Voyager,
Vanguard Voyager Select Services, Voyager Select, Vanguard Flagship Services,
Flagship, and the ship logo are trademarks of The Vanguard Group, Inc.
"FTSE/(R)/" and "FTSE4Good/(TM)/" are trademarks jointly owned by the London
Stock Exchange Plc and The Financial Times Limited and are used by FTSE
International Limited under license. The FTSE4Good US Select Index is calculated
by FTSE International Limited. FTSE International Limited does not sponsor,
endorse, or promote the Fund; is not in any way connected to it; and does not
accept any liability in relation to its issue, operation, and trading. All other
marks are the exclusive property of their respective owners.
36
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
37
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming 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 in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
38
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[VANGUARD SHIP LOGO]
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard FTSE Social Index Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P213 122007
--------------------------------------------------------------------------------
VANGUARD/(R)/ FTSE SOCIAL INDEX FUND
> Prospectus
Institutional Shares
December 10, 2007
--------------------------------------------------------------------------------
[VANGUARD SHIP LOGO]
--------------------------------------------------------------------------------
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
--------------------------------------------------------------------------------
Contents
-----------------------------------------------------------------------------------
Fund Profile 1 Investing With Vanguard 20
-----------------------------------------------------------------------------------
Investing in Index Funds 6 Purchasing Shares 20
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More on the Fund 7 Converting Shares 23
-----------------------------------------------------------------------------------
The Fund and Vanguard 11 Redeeming Shares 24
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Investment Advisor 12 Exchanging Shares 27
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Dividends, Capital Gains, and Taxes 13 Frequent-Trading Limits 27
-----------------------------------------------------------------------------------
Share Price 16 Other Rules You Should Know 29
-----------------------------------------------------------------------------------
Financial Highlights 17 Fund and Account Updates 32
-----------------------------------------------------------------------------------
Contacting Vanguard 34
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Glossary of Investment Terms 36
-----------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
This prospectus offers the Fund's Institutional Shares, which are for investors
who generally do not require special employee benefit plan services and who
invest a minimum of $5 million. A separate prospectus offers the Fund's Investor
Shares, which have an investment minimum of $3,000.
The Fund's separate share classes have different expenses; as a result, their
investment performances will differ.
Fund Profile
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of large- and mid-capitalization stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the FTSE4Good US Select Index. The Index is
composed primarily of large- and mid-cap stocks that have been screened for
certain social and environmental criteria by the Index sponsor, which is
independent of Vanguard. The Fund attempts to replicate the Index by investing
all, or substantially all, of its assets in the stocks that make up the Index.
For more information, please see More on the Fund.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Investment style risk, which is the chance that the stocks selected for the
FTSE4Good US Select Index will, in the aggregate, trail returns from other
mutual funds screened with similar criteria, from other asset classes, or from
the overall stock market. Historically, mid-cap stocks, like those included in
the Index, have been more volatile in price than the large-cap stocks that
dominate the overall market, and they often perform quite differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Institutional Shares has varied from one calendar year to another over the
periods shown. The table shows how the average annual total returns of the
Institutional Shares compare with those of the Fund's target index and other
comparative indexes. Keep in mind that the Fund's past performance (before and
after taxes) does not indicate how the Fund will perform in the future.
1
Annual Total Return--Institutional Shares/1/
-------------------------------------------------------------------------------
[Bar Chart Range: 60% to -40%]
2004 8.51
2005 4.09
2006 13.35
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 3.90%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 9.68% (quarter ended December 31, 2004), and the lowest return for a
quarter was -4.98% (quarter ended March 31, 2005).
Average Annual Total Returns For Periods Ended December 31, 2006
Since
1 Year Inception/1/
--------------------------------------------------------------------------------------
Vanguard FTSE Social Index Fund Institutional Shares
--------------------------------------------------------------------------------------
Return Before Taxes 13.35% 11.95%
--------------------------------------------------------------------------------------
Return After Taxes on Distributions 13.11 11.73
--------------------------------------------------------------------------------------
Return After Taxes on Distributions and Sale of Fund Shares 9.00 10.37
--------------------------------------------------------------------------------------
Comparative Indexes
(reflect no deduction for fees, expenses, or taxes)
--------------------------------------------------------------------------------------
Spliced Social Index/2/ 13.38% 12.04%
--------------------------------------------------------------------------------------
FTSE4Good US Select Index 13.38 --
--------------------------------------------------------------------------------------
Dow Jones Wilshire 5000 Composite Index 15.87 14.88
--------------------------------------------------------------------------------------
1 Since inception returns are from January 14, 2003, through December 31, 2006.
2 Reflects performance of the Calvert Social Index through December 16, 2005,
and performance of the FTSE4Good US Select Index thereafter.
2
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.07%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.11%
-------------------------------------------------------------------------
3
The following example is intended to help you compare the cost of investing in
the Fund's Institutional 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's shares. This example assumes
that the Shares provide 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 the given period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$11 $35 $62 $141
--------------------------------------------------------
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.
--------------------------------------------------------------------------------
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 FTSE Social Index Fund Institutional Shares' expense
ratio in fiscal year 2007 was 0.11%, or $1.10 per $1,000 of average net
assets. The average large-cap growth fund had expenses in 2006 of 1.43%, or
$14.30 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.
--------------------------------------------------------------------------------
4
--------------------------------------------------------------------------------
Plain Talk About 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
Additional Information
As of August 31, 2007
----------------------------------------------------------------------------------------------
Net Assets (all share classes) $651 million
----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge Pa., since inception
----------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
----------------------------------------------------------------------------------------------
Inception Date Investor Shares--May 31, 2000
Institutional Shares--January 14, 2003
----------------------------------------------------------------------------------------------
Minimum Initial Investment $5 million
----------------------------------------------------------------------------------------------
Newspaper Abbreviation FTScInst
----------------------------------------------------------------------------------------------
Vanguard Fund Number 223
----------------------------------------------------------------------------------------------
CUSIP Number 921910402
----------------------------------------------------------------------------------------------
Ticker Symbol VFTNX
----------------------------------------------------------------------------------------------
5
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." 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. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror what the target index does,
for better or worse. However, an index fund does not always perform exactly like
its target index. For example, like all mutual funds, index funds have operating
expenses and transaction costs. Market indexes do not, and therefore will
usually have a slight performance advantage over funds that track them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run, compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus brokerage commissions and other transaction costs--to a
minimum.
6
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. The Fund's policy of
investing all, or substantially all, of its assets in the stocks that make up
the FTSE4Good US Select Index may be changed only upon 60 days' notice to
shareholders.
Market Exposure
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. 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 annual 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.
U.S. Stock Market Returns
(1926-2006)
1 Year 5 Years 10 Years 20 Years
-----------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
-----------------------------------------------------
Worst -43.1 -12.4 -0.8 3.1
-----------------------------------------------------
Average 12.3 10.4 11.1 1.4
-----------------------------------------------------
7
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2006. You can see, for example, that although the average return on common
stocks for all of the 5-year periods was 10.4%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance of common stocks;
you should not regard them as an indication of future performance of either the
stock market as a whole or the Fund in particular.
Stocks of publicly traded companies and funds that invest in stocks are often
classified according to market value, or market capitalization. These
classifications typically include small-cap, mid-cap, and large-cap. It's
important to understand that, for both companies and stock funds,
market-capitalization ranges change over time. Also, interpretations of size
vary, and there are no "official" definitions of small-, mid-, and large-cap,
even among Vanguard fund advisors. The market-capitalization range of the
FTSE4Good US Select Index as of August 31, 2007, was $1.1 billion to $223.8
billion. The asset-weighted median market capitalization of the Fund as of
August 31, 2007, was $28.9 billion.
[FLAG]
The Fund is subject to investment style risk, which is the chance that the
stocks selected for the FTSE4Good US Select Index will, in the aggregate, trail
returns from other mutual funds screened with similar criteria, from other
asset classes, or from the overall stock market. Historically, mid-cap stocks,
like those included in the Index, have been more volatile in price than the
large-cap stocks that dominate the overall market, and they often perform quite
differently.
Security Selection
Index Replication Strategy. The Fund uses the replication method of indexing.
This means that the Fund holds each security found in the FTSE4Good US Select
Index in approximately the same proportion as represented in the Index itself.
For example, if 5% of the Index were made up of the stock of a specific company,
the Fund would invest about 5% of its assets in that company.
The Fund seeks to provide investment results that correspond to those of the
FTSE4Good US Select Index. The correlation between the performance of the Fund
and that of the Index is expected to be at least 95% (100% would indicate
perfect correlation). Keep in mind that the social screening policies employed
by the Index may result in economic sector weightings that are significantly
different from those of the overall market.
The FTSE4Good US Select Index. The FTSE4Good US Select Index is maintained by
FTSE Group (FTSE), a widely known global index provider that currently
calculates over 60,000 indexes daily. In the United States, FTSE has retained
Institutional Shareholder Services (ISS), a respected and established source of
high-quality,
8
impartial information on corporate governance and social responsibility issues,
as the advisory committee determining which stocks are eligible for inclusion in
the Index. FTSE selects stocks from approximately 700 of the largest public
companies in the United States by evaluating each company's performance in the
following categories: environmental sustainability, upholding and supporting
universal human rights, and developing positive relations with stakeholders. The
Index includes companies considered to have: (1) superior environmental
policies; (2) a strong hiring and promotion record for minorities and women; and
(3) a safe and healthy workplace.
Excluded from the Index are companies that are involved with: (1) tobacco; (2)
alcohol; (3) adult entertainment; (4) firearms; (5) gambling; (6) nuclear power;
or (7) those that violate fair labor practices and equal opportunity standards.
For further information about the FTSE4Good US Select Index's selection
criteria, please visit the FTSE4Good website at www.ftse4good.com.
Other Investment Policies and Risks
The Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund is generally managed without regard to tax ramifications.
The Fund may invest in foreign securities to the extent necessary to carry out
its
investment strategy of holding all, or substantially all, of the stocks that
make up the index it tracks.
To track its target index as closely as possible, the Fund attempts to remain
fully invested in stocks. To help stay fully invested and to reduce transaction
costs, the Fund may invest, to a limited extent, in derivatives. Generally
speaking, a derivative is a financial contract whose value is based on the value
of a financial asset (such as a stock, bond, or currency), a physical asset
(such as gold), or a market index (such as the S&P 500 Index). The Fund will not
use derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns. Derivatives will not be screened based on social or
environmental criteria.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
9
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
10
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. Generally, index-oriented
funds sell securities only in response to redemption requests or changes in the
composition of a target index. The Financial Highlights section of this
prospectus shows historical turnover rates for the Fund. A turnover rate of
100%, for example, would mean that the Fund had sold and replaced securities
valued at 100% of its net assets within a one-year period. The average turnover
rate for indexed domestic stock funds was approximately 61%, and for all
domestic stock funds, the average turnover rate was approximately 94%, both as
reported by Morningstar, Inc., on August 31, 2007.
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 145 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
11
--------------------------------------------------------------------------------
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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Fund through its
Quantitative Equity Group. As of August 31, 2007, Vanguard served as advisor for
approximately $977 billion in assets. Vanguard manages the Fund on an at-cost
basis, subject to the supervision and oversight of the trustees and officers of
the Fund.
For the fiscal year ended August 31, 2007, the advisory expenses represented an
effective annual rate of 0.02% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the annual report to shareholders covering the Fund's
most recent fiscal year, which ended August 31.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University
of Chicago.
12
--------------------------------------------------------------------------------
Plain Talk About the Fund's Portfolio Manager
The manager primarily responsible for the day-to-day management of the Fund
is:
Michael Perre, Principal of Vanguard. He has been with Vanguard since 1990;
has managed investment portfolios since 1999; and has managed the Fund since
its inception. Education: B.A., Saint Joseph's University; M.B.A., Villanova
University.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about the portfolio
manager's compensation, other accounts under management, and ownership of
securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December. You
can receive distributions of income or capital gains in cash, or you can have
them automatically reinvested in more shares of the Fund.
--------------------------------------------------------------------------------
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
13
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
. 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.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes. If you are an
individual and meet certain holding-period requirements with respect to your
Fund shares, you may be eligible for reduced federal tax rates on "qualified
dividend income," if any, distributed by the Fund.
. 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.
. Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
. 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.
. 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.
. Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different funds is
a taxable event.
14
--------------------------------------------------------------------------------
Plain Talk About "Buying a Dividend"
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should consider avoiding a purchase of fund shares shortly
before the fund 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 will 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.
--------------------------------------------------------------------------------
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." 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 advisor for detailed information about
a fund's tax consequences for you.
15
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally
4 p.m., Eastern time. NAV per share is computed by dividing the net assets
allocated to each share class by the number of Fund shares outstanding for that
class. On holidays or other days when the Exchange is closed, the NAV is not
calculated, and the Fund does not transact purchase or redemption requests.
However, on those days the value of the Fund's assets may be affected to the
extent that the Fund holds foreign securities that trade on foreign markets that
are open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities. Fair-value
pricing may be used for domestic securities--for example, if (1) trading in a
security is halted and does not resume before the fund's pricing time or if a
security does not trade in the course of a day, and (2) the fund holds enough of
the security that its price could affect the fund's NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
16
Financial Highlights
The following financial highlights table is intended to help you understand the
Institutional Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Institutional Share. The
total returns in the table represent the rate that an investor would have earned
or lost each period on an investment in the Institutional Shares (assuming
reinvestment of all distributions). This information has been derived from the
financial statements audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
17
--------------------------------------------------------------------------------
Plain Talk About How to Read the Financial Highlights Table
The Institutional Shares began fiscal year 2007 with a net asset value
(price) of $8.52 per share. During the year, each Institutional Share earned
$0.152 from investment income (interest and dividends) and $0.78 from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid
for them.
Shareholders received $0.132 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $9.32, reflecting earnings of
$0.932 per share and distributions of $0.132 per share. This was an increase
of $0.80 per share (from $8.52 at the beginning of the year to $9.32 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 10.95% for the year.
As of August 31, 2007, the Institutional Shares had approximately $111
million in net assets. For the year, the expense ratio was 0.11% ($1.10 per
$1,000 of net assets), and the net investment income amounted to 1.61% of
average net assets. The Fund sold and replaced securities valued at 20% of
its net assets.
--------------------------------------------------------------------------------
18
FTSE Social Index Fund Institutional Shares
Year Ended Aug. 31, Jan. 14/1/ to
--------------------------------------------- Aug. 31,
2007 2006 2005 2004 2003
----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.52 $8.04 $7.41 $6.88 $6.22
----------------------------------------------------------------------------------------------------------------------------
Investment Operations
----------------------------------------------------------------------------------------------------------------------------
Net Investment Income .152 .12 .138(2) .084 .05
----------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments .780 .47 .620 .522 .61
----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .932 .59 .758 .606 .66
----------------------------------------------------------------------------------------------------------------------------
Distributions
----------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.132) (.11) (.128) (0.76) --
----------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------------------------------------------------------------------------------
Total Distributions (.132) (.11) (.128) (0.76) --
----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.32 $8.52 $8.04 $7.41 $6.88
============================================================================================================================
Total Return 10.95% 7.37% 10.26% 8.83% 10.61%
============================================================================================================================
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $111 $87 $27 $13 $12
----------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.11% 0.12% 0.12% 0.12% 0.12%(4)
----------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
----------------------------------------------------------------------------------------------------------------------------
Average Net Assets 1.61% 1.54% 1.83%(2) 1.30% 1.32%(4)
----------------------------------------------------------------------------------------------------------------------------
Turnover Rate 20% 51%(3) 12% 8% 14%
============================================================================================================================
1 Inception.
2 Net investment income per share and the ratio of net investment income to average net assets include $0.036 and 0.43%,
respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
3 Includes activity related to a change in the Fund's target index.
4 Annualized.
19
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
PURCHASING SHARES
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Institutional Shares
To open and maintain an account. $5 million. Vanguard institutional clients may
meet the minimum investment amount by aggregating up to three separate accounts
within the same Fund. This policy does not apply to clients receiving special
administrative services from Vanguard, nor does this policy apply to omnibus
accounts maintained by financial intermediaries.
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
How to Purchase Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may open certain types of accounts, request an
electronic bank transfer, and make an exchange (the purchase of shares in an
open fund with the proceeds of a redemption from another fund) through our
website at www.vanguard.com.
By telephone. You may begin the account registration process or request that
the account-opening forms be sent to you. You may also call Vanguard to request
a purchase of shares by wire, by electronic bank transfer, or by an exchange.
See Contacting Vanguard.
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. The request must be in good
order. See How to Make a Purchase Request: By check. For a list of Vanguard
addresses, see Contacting Vanguard.
20
How to Make a Purchase Request
By electronic bank transfer. To establish the electronic bank transfer option
on an account, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can purchase shares by
electronic bank transfer on a regular schedule (Automatic Investment Plan) or
whenever you wish. Your purchase request can be initiated online, by telephone,
or by mail if your request is in good order.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. You may
initiate your wire purchase by phone or online. See Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your
fund account. Also see How to Purchase Shares: By mail. Make your check payable
to Vanguard and include the appropriate fund number (e.g., Vanguard--223). See
Contacting Vanguard.
Trade Date
If the New York Stock Exchange (NYSE) is open for regular trading (a business
day) at the time a purchase, conversion, exchange, or redemption request is
received in good order, the trade date will generally be the same day. See Other
Rules You Should Know--Good Order for additional information on all transaction
requests.
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are purchased at that day's NAV. This is known as
your trade date.
For check purchases into all funds other than money market funds, and for
exchanges and wire purchases into all funds: For a purchase request received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the same day the purchase request was
received. For a purchase request received after the close of regular trading on
the NYSE, the trade date will be the first business day following the day the
purchase request was received.
For check purchases of money market funds only: For a purchase request received
by Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the first business day following the day
the purchase request was received. For a purchase request received after the
close of regular trading on the NYSE, the trade date will be the second business
day following the day the purchase request was received. Because money market
instruments must be purchased with federal funds and it takes a money market
mutual fund one business
21
day to convert check proceeds into federal funds, the trade date will be one
business day later than for other funds.
For an electronic bank transfer by Automatic Investment Plan: If you have
established the Automatic Investment Option, your trade date generally will be
one business day before the date you designated for withdrawal from your bank
account.
For an electronic bank transfer (other than an Automatic Investment Plan
purchase): For a purchase request received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the following business day.
Your purchase request must be accurate and complete. See Other Rules You Should
Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Purchase Rules You Should Know
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
Large purchases. Please call Vanguard before attempting to invest a large
dollar amount.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
22
CONVERTING SHARES
A conversion between share classes of the same fund is a nontaxable event.
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
For a conversion request received in good order by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the conversion request was received. For a conversion
request received after the close of regular trading on the NYSE, the trade date
will be the first business day following the day the conversion request was
received. See Other Rules You Should Know.
Pricing of Share Class Conversions
If you convert from one class of shares to another, the transaction will be
based on the respective net asset values of the separate classes on the trade
date for the conversion. At the time of conversion, the total dollar value of
your "old" shares will equal the total dollar value of your "new" shares.
However, subsequent share price fluctuations may decrease or increase the total
dollar value of each class of shares.
Conversions to Institutional Shares
You are eligible for a self-directed conversion from Investor Shares to
Institutional Shares of the Fund, provided that your account meets all
Institutional Shares'
eligibility requirements. Registered users of our website, www.vanguard.com, may
request a conversion online, or you may contact Vanguard by telephone or by mail
to request this transaction. Accounts that qualify for Institutional Shares will
not be automatically converted.
Mandatory Conversions to Investor Shares
If an account no longer meets the balance requirements for Institutional Shares,
the Fund may automatically convert the shares in the account to Investor Shares.
A decline in the account balance because of market movement may result in such a
conversion. The Fund will notify the investor in writing before any mandatory
conversion occurs.
23
REDEEMING SHARES
How to Redeem Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may redeem shares, request an electronic bank
transfer, and make an exchange (the purchase of shares with the proceeds of a
redemption from another fund) through our website at www.vanguard.com.
By telephone. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. The request must be in good order. See
Contacting Vanguard.
How to Receive Redemption Proceeds
By electronic bank transfer. To establish the electronic bank transfer option,
you must designate a bank account online, complete a special form, or fill out
the appropriate section of your account registration form. You can then redeem
shares by electronic bank transfer on a regular schedule (Automatic Withdrawal
Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be
initiated online, by telephone, or by mail if your request is in good order.
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's balanced or stock funds. The wire redemption option is not
automatic; you must designate a bank account online, complete a special form, or
fill out the appropriate section of your account registration form. Vanguard
charges a $5 fee for wire redemptions under $5,000.
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before
24
the close of regular trading on the NYSE (generally 4 p.m., Eastern time), your
shares are redeemed at that day's NAV. This is known as your trade date.
For check redemptions and exchanges from all funds: For a redemption request
received by Vanguard before the close of regular trading on the NYSE (generally
4 p.m., Eastern time), the trade date will be the same day the redemption
request was received. For a redemption request received after the close of
regular trading on the NYSE, the trade date will be the first business day
following the day the redemption request was received.
For money market fund redemptions by wire: For telephone requests received by
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund), on a day that the NYSE has regular trading hours, the
redemption proceeds will leave Vanguard by the close of business the day the
redemption request was received. For other money market wire redemption requests
received before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the redemption proceeds will leave Vanguard by the close of
business on the first business day following the day the redemption request was
received.
For bond fund redemptions by wire: For a redemption request received by Vanguard
before the close of regular trading on the NYSE (generally 4 p.m., Eastern
time), the redemption proceeds will leave Vanguard by the close of business on
the first business day following the day the redemption request was received.
For an electronic bank transfer by Automatic Withdrawal Plan: Your trade date
generally will be the date you designated for withdrawal of funds (redemption of
shares) from your Vanguard account. Proceeds of redeemed shares generally will
be transferred from Vanguard to your designated bank account two business days
after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
For an electronic bank transfer (other than an Automatic Withdrawal Plan
redemption): For a redemption request received by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the redemption request was received. For a redemption
request received after the close of regular trading on the NYSE, the trade date
will be the first business day following the day the redemption request was
received.
Your redemption request must be accurate and complete. See Other Rules You
Should Know--Good Order.
25
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, 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 a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in frequent
trading. Under these circumstances, Vanguard also reserves the right to delay
payment of the redemption proceeds for up to seven calendar days. By calling us
before you attempt to redeem a large dollar amount, you may avoid in-kind or
delayed payment of your redemption. Please see Frequent-Trading Limits for
information about Vanguard's policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may 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
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, 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 and may require a signature guarantee. You can obtain a signature
guarantee from most commercial and savings banks, credit unions, trust
companies, or member firms of a U.S. stock exchange. A notary public cannot
provide a signature guarantee.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
26
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
EXCHANGING SHARES
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
An exchange occurs when the assets redeemed from one Vanguard fund are used to
purchase shares in an open Vanguard fund. You can make exchange requests online
(if you are a registered user of Vanguard.com), by telephone, or by mail. See
Purchasing Shares and Redeeming Shares.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
FREQUENT-TRADING LIMITS
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
. Transfers and re-registrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
27
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares.
. Conversions of shares from one share class to another in the same fund.
Accounts Held by Institutions (Other Than Defined Contribution Plans)
Vanguard will systematically monitor for frequent trading in institutional
clients' accounts. If we detect suspicious trading activity, we will investigate
and take appropriate action, which may include applying to a client's accounts
the 60-day
policy previously described, prohibiting a client's purchases of fund shares,
and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and
28
redemption fees and frequent-trading policies may vary among intermediaries.
There are no assurances that Vanguard will successfully identify all
intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
OTHER RULES YOU SHOULD KNOW
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under "My
Profile." You can revoke your electronic consent at any time, and we will begin
to send paper copies of these documents within 30 days of receiving your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN before using this service.
29
Proof of a caller's authority. We reserve the right to refuse a telephone
request if the caller is unable to provide the requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
. Authorization to act on the account (as the account owner or by legal
documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
Subject to revision. For any or all shareholders, we reserve the right, at any
time and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for
good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
30
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business 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
statements that we provide to you. It is important that 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.
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.
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
Low-Balance Accounts
The Fund reserves the right to convert an investor's Institutional Shares to
Investor Shares if the fund account balance falls below the minimum initial
investment for any reason, including market fluctuation. Any such conversion
will be preceded by written notice to the investor.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a
31
fraudulent transaction may occur or has occurred; (4) temporarily freeze any
account and/or suspend account services upon Vanguard's initial notification of
the death of the shareholder until Vanguard receives required documentation in
good order; (5) alter, impose, discontinue, or waive any redemption fee, account
service fee, or other fees charged to a group of shareholders; and (6) redeem an
account, without the owner's permission to do so, in cases of threatening
conduct or suspicious, fraudulent, or illegal activity. Changes may affect any
or all investors. These actions will be taken when, at the sole discretion of
Vanguard management, we reasonably believe they are deemed to be in the best
interest of a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
FUND AND ACCOUNT UPDATES
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
32
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you 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 and
other retirement plans. These statements can be viewed online.
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard FTSE Social Index Fund twice a year, in April and October. These
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
33
CONTACTING VANGUARD
----------------------------------------------------------------------------------------
Web
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
----------------------------------------------------------------------------------------
Phone
----------------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R)/ For exchange transactions (subject to limitations)
800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
----------------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
----------------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
----------------------------------------------------------------------------------------
Institutional Division For information and services for large institutional investors
888-809-8102 Business hours only
: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
----------------------------------------------------------------------------------------
Intermediary Sales For information and services for financial intermediaries
Support including broker-dealers, trust institutions, insurance
800-997-2798 companies, and financial advisors
Business hours only: Monday-Friday, 8:30 a.m. to
7 p.m., Eastern time
----------------------------------------------------------------------------------------
34
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) 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
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
Fund Number
Please use the specific fund number when contacting us:
Institutional Shares
------------------------------------------------------------------
Vanguard FTSE Social Index Fund 223
------------------------------------------------------------------
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Vanguard
Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business Online, and
the ship logo are trademarks of The Vanguard Group, Inc. "FTSE/(R)/" and
"FTSE4Good/(TM)/" are trademarks jointly owned by the London Stock Exchange Plc
and The Financial Times Limited and are used by FTSE International Limited under
license. The FTSE4Good US Select Index is calculated by FTSE International
Limited. FTSE International Limited does not sponsor, endorse, or promote the
Fund; is not in any way connected to it; and does not accept any liability in
relation to its issue, operation, and trading. All other marks are the exclusive
property of their respective owners.
35
GLOSSARY OF INVESTMENT TERMS
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
36
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming 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 in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
37
[VANGUARD SHIP LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard FTSE Social Index Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
If you are an individual investor:
The Vanguard Group
Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a client of Vanguard's Institutional Division:
The Vanguard Group
Institutional Investor Information Department
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 888-809-8102; Text telephone for people with hearing impairment:
800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW); Text telephone for people with hearing
impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I223 122007
--------------------------------------------------------------------------------
VANGUARD/(R)/ FTSE SOCIAL INDEX FUND
> Prospectus
For Participants
December 10, 2007
--------------------------------------------------------------------------------
[VANGUARD SHIP LOGO]
--------------------------------------------------------------------------------
This prospectus contains financial data for the Fund through the fiscal year
ended August 31, 2007.
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.
--------------------------------------------------------------------------------
Contents
----------------------------------------------------------------------------------------------
FUND PROFILE 1 FINANCIAL HIGHLIGHTS 14
----------------------------------------------------------------------------------------------
INVESTING IN INDEX FUNDS 5 INVESTING WITH VANGUARD 16
----------------------------------------------------------------------------------------------
MORE ON THE FUND 6 ACCESSING FUND INFORMATION BY COMPUTER 19
----------------------------------------------------------------------------------------------
THE FUND AND VANGUARD 10 GLOSSARY OF INVESTMENT TERMS 20
----------------------------------------------------------------------------------------------
INVESTMENT ADVISOR 11
----------------------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES 12
---------------------------------------------------------------------------------------------
SHARE PRICE 13
----------------------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with the 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
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 800-662-7447.
FUND PROFILE
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of large- and mid-capitalization stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the FTSE4Good US Select Index. The Index is
composed primarily of large- and mid-cap stocks that have been screened for
certain social and environmental criteria by the Index sponsor, which is
independent of Vanguard. The Fund attempts to replicate the Index by investing
all, or substantially all, of its assets in the stocks that make up the Index.
For more information, please see More on the Fund.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Investment style risk, which is the chance that the stocks selected for the
FTSE4Good US Select Index will, in the aggregate, trail returns from other
mutual funds screened with similar criteria, from other asset classes, or from
the overall stock market. Historically, mid-cap stocks, like those included in
the Index, have been more volatile in price than the large-cap stocks that
dominate the overall market, and they often perform quite differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Investor Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns compare with those
of the Fund's target index and other comparative indexes. Keep in mind that the
Fund's past performance does not indicate how the Fund will perform in the
future.
1
Annual Total Return--Investor Shares/1/
-------------------------------------------------------------------------------
[Bar Chart Range: 60% to -40%]
2001 -14.08
2002 -24.24
2003 30.45
2004 8.27
2005 4.10
2006 13.09
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 3.80%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 16.23% (quarter ended June 30, 2003), and the lowest return for a
quarter was -17.62% (quarter ended September 30, 2002).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year 5 Years Inception/1/
---------------------------------------------------------------------------------------------------
Vanguard FTSE Social Index Fund Investor Shares 13.09% 4.73% -0.23%
---------------------------------------------------------------------------------------------------
Comparative Indexes
(reflect no deduction for fees or expenses)
---------------------------------------------------------------------------------------------------
Spliced Social Index/2/ 13.38% 4.97% -0.07%
---------------------------------------------------------------------------------------------------
FTSE4Good US Select Index 13.38 -- --
---------------------------------------------------------------------------------------------------
Dow Jones Wilshire 5000 Composite Index 15.87 7.65 2.90
---------------------------------------------------------------------------------------------------
1 Subscription period for the Fund was May 8, 2000, to May 31, 2000, during which time
all assets were held in money market instruments. Since-inception returns are as of
May 31, 2000, through December 31, 2006.
2 Reflects performance of the Calvert Social Index through December 16, 2005, and
performance of the FTSE4Good US Select Index thereafter.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
2
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------
Purchase Fee None
-------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------
Redemption Fee None
-------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------
Management Expenses 0.19%
-------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------
Other Expenses 0.05%
-------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.24%
-------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing in
the Fund's Investor 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$25 $77 $135 $306
--------------------------------------------------------
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.
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 FTSE Social Index Fund Investor Shares' expense ratio
in fiscal year 2007 was 0.24%, or $2.40 per $1,000 of average net assets. The
average large-cap growth fund had expenses in 2006 of 1.43%, or $14.30 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Plain Talk About 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
Additional Information
As of August 31, 2007
-----------------------------------------------------------------------------------------------
Net Assets (all share classes) $651 million
-----------------------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception
-----------------------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-----------------------------------------------------------------------------------------------
Inception Date May 31, 2000
-----------------------------------------------------------------------------------------------
Newspaper Abbreviation FTSESoc
-----------------------------------------------------------------------------------------------
Vanguard Fund Number 213
-----------------------------------------------------------------------------------------------
CUSIP Number 921910303
-----------------------------------------------------------------------------------------------
Ticker Symbol VFTSX
-----------------------------------------------------------------------------------------------
4
INVESTING IN INDEX FUNDS
What Is Indexing?
Indexing is an investment strategy for tracking the performance of a specified
market benchmark, or "index." 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. There are many types of indexes. Some represent entire
markets--such as the U.S. stock market or the U.S. bond market. Other indexes
cover market segments--such as small-capitalization stocks or short-term bonds.
An index fund holds all, or a representative sample, of the securities that make
up its target index. Index funds attempt to mirror what the target index does,
for better or worse. However, an index fund does not always perform exactly like
its target index. For example, like all mutual funds, index funds have operating
expenses and transaction costs. Market indexes do not, and therefore will
usually have a slight performance advantage over funds that track them.
Index funds typically have the following characteristics:
. Variety of investments. Most Vanguard index funds generally invest in the
securities of a wide variety of companies and industries.
. Relative performance consistency. Because they seek to track market
benchmarks, index funds usually do not perform dramatically better or worse than
their benchmarks.
. Low cost. Index funds are inexpensive to run, compared with actively managed
funds. They have low or no research costs and typically keep trading
activity--and thus brokerage commissions and other transaction costs--to a
minimum.
5
MORE ON THE FUND
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for fluctuations in the securities
markets. Look for this [FLAG] symbol throughout the prospectus. It is used to
mark detailed information about the more significant risks that you would
confront as a Fund shareholder.
The following sections explain the primary investment strategies and policies
that the Fund uses in pursuit of its objective. The Fund's board of trustees,
which oversees the Fund's management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. The Fund's policy of
investing all, or substantially all, of its assets in the stocks that make up
the FTSE4Good US Select Index may be changed only upon 60 days' notice to
shareholders.
Market Exposure
[FLAG]
The Fund is subject to stock market risk, which is the chance that stock prices
overall will decline. 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 annual 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.
U.S. Stock Market Returns
(1926-2006)
1 Year 5 Years 10 Years 20 Years
-----------------------------------------------------
Best 54.2% 28.6% 19.9% 17.8%
-----------------------------------------------------
Worst -43.1 -12.4 -0.8 3.1
-----------------------------------------------------
Average 12.3 10.4 11.1 1.4
-----------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2006. You can see, for example, that although the average return on common
stocks for all of the 5-year periods was 10.4%, average returns for individual
5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance of common stocks;
you should not regard
6
them as an indication of future performance of either the stock market as a
whole or the Fund in particular.
Stocks of publicly traded companies and funds that invest in stocks are often
classified according to market value, or market capitalization. These
classifications typically include small-cap, mid-cap, and large-cap. It's
important to understand that, for both companies and stock funds,
market-capitalization ranges change over time. Also, interpretations of size
vary, and there are no "official" definitions of small-, mid-, and large-cap,
even among Vanguard fund advisors. The market-capitalization range of the
FTSE4Good US Select Index as of August 31, 2007, was $1.1 billion to $223.8
billion. The asset-weighted median market capitalization of the Fund as of
August 31, 2007, was $28.9 billion.
[FLAG]
The Fund is subject to investment style risk, which is the chance that the
stocks selected for the FTSE4Good US Select Index will, in the aggregate, trail
returns from other mutual funds screened with similar criteria, from other
asset classes, or from the overall stock market. Historically, mid-cap stocks,
like those included in the Index, have been more volatile in price than the
large-cap stocks that dominate the overall market, and they often perform quite
differently.
Security Selection
Index Replication Strategy. The Fund uses the replication method of indexing.
This means that the Fund holds each security found in the FTSE4Good US Select
Index in approximately the same proportion as represented in the Index itself.
For example, if 5% of the Index were made up of the stock of a specific company,
the Fund would invest about 5% of its assets in that company.
The Fund seeks to provide investment results that correspond to those of the
FTSE4Good US Select Index. The correlation between the performance of the Fund
and that of the Index is expected to be at least 95% (100% would indicate
perfect correlation). Keep in mind that the social screening policies employed
by the Index may result in economic sector weightings that are significantly
different from those of the overall market.
The FTSE4Good US Select Index. The FTSE4Good US Select Index is maintained by
FTSE Group (FTSE), a widely known global index provider that currently
calculates over 60,000 indexes daily. In the United States, FTSE has retained
Institutional Shareholder Services (ISS), a respected and established source of
high-quality, impartial information on corporate governance and social
responsibility issues, as the advisory committee determining which stocks are
eligible for inclusion in the Index. FTSE selects stocks from approximately 700
of the largest public companies in the United States by evaluating each
company's performance in the following categories: environmental sustainability,
upholding and supporting universal human rights, and
7
developing positive relations with stakeholders. The Index includes companies
considered to have: (1) superior environmental policies; (2) a strong hiring and
promotion record for minorities and women; and (3) a safe and healthy workplace.
Excluded from the Index are companies that are involved with: (1) tobacco; (2)
alcohol; (3) adult entertainment; (4) firearms; (5) gambling; (6) nuclear power;
or (7) those that violate fair labor practices and equal opportunity standards.
For further information about the FTSE4Good US Select Index's selection
criteria, please visit the FTSE4Good website at www.ftse4good.com.
Other Investment Policies and Risks
The Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund is generally managed without regard to tax ramifications.
The Fund may invest in foreign securities to the extent necessary to carry out
its
investment strategy of holding all, or substantially all, of the stocks that
make up the index it tracks.
To track its target index as closely as possible, the Fund attempts to remain
fully invested in stocks. To help stay fully invested and to reduce transaction
costs, the Fund may invest, to a limited extent, in derivatives. Generally
speaking, a derivative is a financial contract whose value is based on the value
of a financial asset (such as a stock, bond, or currency), a physical asset
(such as gold), or a market index (such as the S&P 500 Index). The Fund will not
use derivatives for speculation or for the purpose of leveraging (magnifying)
investment returns. Derivatives will not be screened based on social or
environmental criteria.
Cash Management
The Fund's daily cash balance may be invested in one or more Vanguard CMT Funds,
which are very low-cost money market funds. When investing in a Vanguard CMT
Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT
Fund in which it invests.
Temporary Investment Measures
The Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest
8
beyond the normal limits in derivatives or ETFs that are consistent with the
Fund's objective when those instruments are more favorably priced or provide
needed liquidity, as might be the case when the Fund receives large cash flows
that it cannot prudently invest immediately.
FREQUENT TRADING OR MARKET-TIMING
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF/ TM/ Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, a participant from exchanging into a fund account for 60
calendar days after the participant exchanged out of that fund account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
9
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
Turnover Rate
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. Generally, index-oriented
funds sell securities only in response to redemption requests or changes in the
composition of a target index. The Financial Highlights section of this
prospectus shows historical turnover rates for the Fund. A turnover rate of
100%, for example, would mean that the Fund had sold and replaced securities
valued at 100% of its net assets within a one-year period. The average turnover
rate for indexed domestic stock funds was approximately 61%, and for all
domestic stock funds, the average turnover rate was approximately 94%, both as
reported by Morningstar, Inc., on August 31, 2007.
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 145 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
10
--------------------------------------------------------------------------------
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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
INVESTMENT ADVISOR
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Fund through its
Quantitative Equity Group. As of August 31, 2007, Vanguard served as advisor for
approximately $977 billion in assets. Vanguard manages the Fund on an at-cost
basis, subject to the supervision and oversight of the trustees and officers of
the Fund.
For the fiscal year ended August 31, 2007, the advisory expenses represented an
effective annual rate of 0.02% of the Fund's average net assets.
For a discussion of why the board of trustees approved the Fund's investment
advisory arrangement, see the annual report to shareholders covering the Fund's
most recent fiscal year, which ended August 31.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University
of Chicago.
11
--------------------------------------------------------------------------------
Plain Talk About the Fund's Portfolio Manager
The manager primarily responsible for the day-to-day management of the Fund
is:
Michael Perre, Principal of Vanguard. He has been with Vanguard since 1990;
has managed investment portfolios since 1999; and has managed the Fund since
its inception. Education: B.A., Saint Joseph's University; M.B.A., Villanova
University.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about the portfolio
manager's compensation, other accounts under management, and ownership of
securities in the Fund.
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 net capital gains realized from the
sale of its holdings. Distributions generally occur annually in December.
Your 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 advisor about the tax
consequences of plan withdrawals.
--------------------------------------------------------------------------------
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
12
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
to the extent that the Fund holds foreign securities that trade on foreign
markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities. Fair-value
pricing may be used for domestic securities--for example, if (1) trading in a
security is halted and does not resume before the fund's pricing time or if a
security does not trade in the course of a day, and (2) the fund holds enough of
the security that its price could affect the fund's NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
13
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Investor Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Investor Share. The total
returns in the table represent the rate that an investor would have earned or
lost each period on an investment in the Investor Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
--------------------------------------------------------------------------------
Plain Talk About How to Read the Financial Highlights Table
The Investor Shares began fiscal year 2007 with a net asset value (price) of
$8.51 per share. During the year, each Investor Share earned $0.13 from
investment income (interest and dividends) and $0.78 from investments that
had appreciated in value or that were sold for higher prices than the Fund
paid for them.
Shareholders received $0.12 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $9.30, reflecting earnings of
$0.91 per share and distributions of $0.12 per share. This was an increase of
$0.79 per share (from $8.51 at the beginning of the year to $9.30 at the end
of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 10.70% for the year.
As of August 31, 2007, the Investor Shares had approximately $540 million in
net assets. For the year, the expense ratio was 0.24% ($2.40 per $1,000 of
net assets), and the net investment income amounted to 1.48% of average net
assets. The Fund sold and replaced securities valued at 20% of its net
assets.
--------------------------------------------------------------------------------
14
FTSE Social Index Fund Investor Shares
Year Ended August 31,
----------------------------------------------------------------
2007 2006 2005 2004 2003
-------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $8.51 $8.03 $7.40 $6.87 $6.02
-------------------------------------------------------------------------------------------------------------------------
Investment Operations
-------------------------------------------------------------------------------------------------------------------------
Net Investment Income .13 .11 .13/1/ .08 .07
-------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) .78 .47 .62 .52 .84
on Investments
-------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .91 .58 .75 .60 .91
-------------------------------------------------------------------------------------------------------------------------
Distributions
-------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.12) (.10) (.12) (.07) (.06)
-------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- -- --
-------------------------------------------------------------------------------------------------------------------------
Total Distributions (.12) (.10) (.12) (.07) (.06)
-------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $9.30 $8.51 $8.03 $7.40 $6.87
==========================================================================================================================
Total Return 10.70% 7.25% 10.16% 8.75% 15.28%
==========================================================================================================================
Ratios/Supplemental Data
-------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $540 $405 $361 $274 $150
-------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to
Average Net Assets 0.24% 0.25% 0.25% 0.25% 0.25%
-------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to
Average Net Assets 1.48% 1.41% 1.74%/1/ 1.17% 1.18%
-------------------------------------------------------------------------------------------------------------------------
Turnover Rate 20% 51%/2/ 12% 8% 14%
==========================================================================================================================
1 Net investment income per share and the ratio of net investment income to average net assets include $0.04 and 0.43%,
respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
2 Includes activity related to a change in the Fund's target index.
15
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.
. 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 800-523-1188.
. If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
. Be sure to carefully read each topic that pertains to your transactions with
Vanguard.
. Vanguard reserves the right to change these policies without prior notice
to shareholders.
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
Contribution, exchange, or redemption requests must be 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 NAV
after Vanguard receives your request (or, in the case of new contributions, the
next-determined NAV 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 NAV. This is known as your trade date.
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 disrupt the management of the Vanguard funds and increase their transaction
costs, Vanguard places certain limits on the exchange privilege.
16
If you are exchanging out of any Vanguard fund (other than money market funds
and short-term bond funds), the following policy applies, regardless of the
dollar amount:
. You must wait 60 days before exchanging back into the fund. The 60-day clock
restarts after every exchange out of the fund.
The policy does not apply to the following:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
Before making an exchange to or from another fund available in your plan,
consider
the following:
. Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
. Be sure to read that fund's prospectus. Contact Vanguard's Participant Access
Center, toll-free, at 800-523-1188 for a copy.
. Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on other exchange policies that apply to your
plan.
Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not
serve as recordkeeper for your plan, your plan's recordkeeper will establish
accounts in Vanguard funds. In such accounts, we cannot always monitor the
trading activity of individual clients. However, we review trading activity at
the omnibus level, and if we detect suspicious activity, we will investigate and
take appropriate action. If necessary, Vanguard may prohibit additional
purchases of fund shares by an intermediary or by certain of the intermediary's
clients. Intermediaries may also monitor participants' trading activity in the
Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
that establish accounts in the Vanguard funds will be asked to assess purchase
and redemption fees on participant accounts and remit these fees to the funds.
The application of purchase and redemption fees and frequent-trading policies
may vary among intermediaries. There are no assurances that Vanguard will
successfully
17
identify all intermediaries or that intermediaries will properly assess purchase
and redemption fees or administer frequent-trading policies. If a firm other
than Vanguard serves as recordkeeper for your plan, please read that firm's
materials carefully to learn of any other rules or fees that may apply.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
the Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
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; the
online Education Center that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
Vanguard, Connect with Vanguard, PlainTalk, Vanguard ETF, and the ship logo are
trademarks of The Vanguard Group, Inc. "FTSE/(R)/" and "FTSE4Good/(TM)/" are
trademarks jointly owned by the London Stock Exchange Plc and The Financial
Times Limited and are used by FTSE International Limited under license. The
FTSE4Good US Select Index is calculated by FTSE International Limited. FTSE
International Limited does not sponsor, endorse, or promote the Fund; is not in
any way connected to it; and does not accept any liability in relation to its
issue, operation, and trading. All other marks are the exclusive property of
their respective owners.
19
Glossary of Investment Terms
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
20
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming 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 in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
21
[VANGUARD SHIP LOGO]
Institutional Division
P.O. Box 2900
Valley Forge, PA 19482-2900
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard FTSE Social Index Fund, the
following documents are available free upon request:
Annual/Semiannual Reports to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In the annual report, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance during its last fiscal year.
Statement of Additional Information (SAI)
The SAI provides more detailed information about
the Fund.
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 Fund or other Vanguard funds, please
visit www.vanguard.com or contact us as follows:
The Vanguard Group
Participant Access Center
P.O. Box 2900
Valley Forge, PA 19482-2900
Telephone: 800-523-1188
Text telephone for people with hearing impairment: 800-749-7273
Information Provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (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 202-551-8090. Reports and other information
about the Fund are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Fund's Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
I213 122007
Vanguard/(R)/ U.S. Sector Index Funds
> Prospectus
Admiral Shares
December 10, 2007
[SHIP LOGO VANGUARD(R)]
Vanguard Consumer Discretionary Index Fund
Vanguard Consumer Staples Index Fund
Vanguard Energy Index Fund
Vanguard Financials Index Fund
Vanguard Health Care Index Fund
Vanguard Industrials Index Fund
Vanguard Information Technology Index Fund
Vanguard Materials Index Fund
Vanguard Telecommunication Services Index Fund
Vanguard Utilities Index Fund
[MSCI LOGO]
This prospectus contains financial data for the Funds through the fiscal year
ended August 31, 2007.
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.
Contents
-------------------------------------------------------------------------------
Vanguard Fund Profiles 1 Financial Highlights 59
-------------------------------------------------------------------------------
Consumer Discretionary Index 1 Investing With Vanguard 71
Fund
-------------------------------------------------------------------------------
Consumer Staples Index Fund 5 Purchasing Shares 71
-------------------------------------------------------------------------------
Energy Index Fund 9 Converting Shares 74
-------------------------------------------------------------------------------
Financials Index Fund 13 Redeeming Shares 74
-------------------------------------------------------------------------------
Health Care Index Fund 18 Exchanging Shares 78
-------------------------------------------------------------------------------
Industrials Index Fund 22 Frequent-Trading Limits 79
-------------------------------------------------------------------------------
Information Technology Index 27 Other Rules You Should Know 81
Fund
-------------------------------------------------------------------------------
Materials Index Fund 31 Fund and Account Updates 84
-------------------------------------------------------------------------------
Telecommunication Services 35 Contacting Vanguard 86
Index Fund
-------------------------------------------------------------------------------
Utilities Index Fund 39 ETF Shares 88
-------------------------------------------------------------------------------
Investing in Index Funds 44 Glossary of Investment Terms 93
-------------------------------------------------------------------------------
More on the Funds 46
-------------------------------------------------------------------------------
The Funds and Vanguard 53
-------------------------------------------------------------------------------
Investment Advisor 54
-------------------------------------------------------------------------------
Dividends, Capital Gains, and 55
Taxes
-------------------------------------------------------------------------------
Share Price 58
-------------------------------------------------------------------------------
Why Reading This Prospectus Is Important
This prospectus explains the investment objective, policies, strategies, and
risks associated with each 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 decide whether a Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
Share Class Overview
This prospectus offers the Funds' Admiral Shares, which are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
Each Fund provides an exchange-traded class of shares (ETF Shares), which are
offered through a separate prospectus. A brief discussion of ETF Shares and how
to convert into them appears on pages 88 to 92 of this prospectus.
The Funds' separate share classes have different expenses; as a result, their
investment performances will differ.
Fund Profile--Vanguard Consumer Discretionary Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of consumer discretionary stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Morgan Stanley Capital
International/(R)/ (MSCI/(R)/) U.S. Investable Market Consumer Discretionary
Index, an index made up of stocks of large, medium-size, and small U.S.
companies within the consumer discretionary sector, as classified under the
Global Industry Classification Standard (GICS). This GICS sector is made up of
those manufacturing and service industries that tend to be the most sensitive to
economic cycles. Its manufacturing segment includes the following industries:
automotive, household durable goods, textiles and apparel, and leisure
equipment. The services segment includes hotels, restaurants and other leisure
facilities, media production and services, and consumer retailing.
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a sampling strategy only if
regulatory constraints or other considerations prevent it from replicating the
Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the consumer discretionary sector,
the Fund's performance largely depends--for better or for worse--on the general
condition of that sector. The consumer discretionary sector could be adversely
affected by overall economic conditions, interest rates, consumer confidence,
and disposable income.
1
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows the performance of the Fund's
Admiral Shares in their first full calendar year. The table shows how the
average annual total returns of the Admiral Shares compare with those of the
Fund's target index. Keep in mind that the Fund's past performance (before and
after taxes) does not indicate how the Fund will perform in the future.
Annual Total Return--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2006 16.47%
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was -1.27%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 10.41% (quarter ended December 31, 2006), and the lowest return for
a quarter was -2.52% (quarter ended June 30, 2006).
2
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Consumer
Discretionary Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 16.47% 8.31%
-------------------------------------------------------------------------------
Return After Taxes on 16.34 8.17
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 10.88 7.08
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable Market
Consumer Discretionary Index
(reflects no deduction for 16.79% 8.56%
fees, expenses, or taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from July 14, 2005--the inception date of the
Admiral Shares--through December 31, 2006.
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
3
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.23%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.27%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$28 $87 $152 $343
--------------------------------------------------------
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.
4
Additional Information
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $115 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date July 14, 2005
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation CoDilxAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5483
-------------------------------------------------------------------------------
CUSIP Number 92204A868
-------------------------------------------------------------------------------
Ticker Symbol VCDAX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Consumer Staples Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of consumer staples stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market Consumer
Staples Index, an index made up of stocks of large, medium-size, and small U.S.
companies within the consumer staples sector, as classified under the Global
Industry Classification Standard (GICS). This GICS sector is made up of
companies whose businesses are less sensitive to economic cycles. It includes
manufacturers and distributors of food, beverages, and tobacco, as well as
producers of nondurable household goods and personal products. It also includes
food and drug retailing companies as well as hypermarkets and consumer
supercenters.
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a sampling strategy only if
regulatory constraints or other considerations prevent it from replicating the
Index.
5
As of the date of this prospectus, the proportions of certain stocks in the
Fund's target index exceeded Internal Revenue Code limits applicable to
investments by regulated investment companies. As a result, the Fund currently
samples (rather than replicates) the Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the consumer staples sector, the
Fund's performance largely depends--for better or for worse--on the general
condition of that sector. The consumer staples sector could be adversely
affected by consumer tastes, government regulation, marketing, and consumer
confidence.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Index sampling risk, which is the chance that stocks held by the Fund will not
provide investment performance closely tracking that of the Index.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Admiral
Shares compare with
6
those of the Fund's target index. Keep in mind that the Fund's past performance
(before and after taxes) does not indicate how the Fund will perform in the
future.
Annual Total Returns--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 3.90%
2006 15.77
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 9.91%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 5.55% (quarter ended September 30, 2006), and the lowest return for
a quarter was -0.04% (quarter ended December 31, 2005).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Consumer Staples
Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 15.77% 10.01%
-------------------------------------------------------------------------------
Return After Taxes on 15.52 9.71
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 10.59 8.56
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable
Market Consumer Staples Index
(reflects no deduction
for fees, expenses, or 15.03% 9.71%
taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from January 30, 2004--the inception date of
the Admiral Shares--through December 31, 2006.
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k)
7
plan. Also, figures captioned Return After Taxes on Distributions and Sale of
Fund Shares will be higher than other figures for the same period if a capital
loss occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.22%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
8
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
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
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $319 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date January 30, 2004
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation CoStlxAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5484
-------------------------------------------------------------------------------
CUSIP Number 92204A850
-------------------------------------------------------------------------------
Ticker Symbol VCSAX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Energy Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of energy stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI Investable Market Energy Index, an
index made up of stocks of large, medium-size, and small U.S. companies within
the energy sector, as classified under the Global Industry Classification
Standard (GICS). This GICS sector is made up of companies whose businesses are
dominated by either of the following activities: the construction or provision
of oil rigs, drilling equipment, and other energy-related equipment and services
(such as seismic data collection); or companies engaged in the exploration,
production, marketing, refining, and/or transportation of oil and gas products.
9
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a sampling strategy only if
regulatory constraints or other considerations prevent it from replicating the
Index.
As of the date of this prospectus, the proportions of certain stocks in the
Fund's target index exceeded Internal Revenue Code limits applicable to
investments by regulated investment companies. As a result, the Fund currently
samples (rather than replicates) the Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the energy sector, the Fund's
performance largely depends--for better or for worse--on the general condition
of that sector. The energy sector could be adversely affected by geopolitical
events, government regulation, supply and demand of energy fuels, economic
cycles and fuel prices.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Index sampling risk, which is the chance that stocks held by the Fund will not
provide investment performance closely tracking that of the Index.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these
10
stocks have been more volatile in price than the large-cap stocks that dominate
the overall market, and they often perform quite differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Admiral
Shares compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 38.97%
2006 18.96
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 28.02%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 21.57% (quarter ended September 30, 2005), and the lowest return for
a quarter was -6.02% (quarter ended December 31, 2005).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
-------------------------------------------------------------------------------
Vanguard Energy Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 18.96% 25.86%
-------------------------------------------------------------------------------
Return After Taxes on 18.79 25.66
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 12.58 22.39
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable
Market Energy Index
(reflects no deduction
for fees, expenses, or 21.03% 25.29%
taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from October 7, 2004--the inception date of the
Admiral Shares--through December 31, 2006.
11
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.22%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or
if your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
12
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
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
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $771 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date October 7, 2004
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation EnergyAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5480
-------------------------------------------------------------------------------
CUSIP Number 92204A843
-------------------------------------------------------------------------------
Ticker Symbol VENAX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Financials Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of financial stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market Financials
Index, an index made up of stocks of large, medium-size, and small U.S.
companies within the financials sector, as classified under the Global Industry
Classification
13
Standard (GICS). This GICS sector is made up of companies involved in activities
such as banking, mortgage finance, consumer finance, specialized finance,
investment banking and brokerage, asset management and custody, corporate
lending, insurance, financial investment, and real estate (including REITs).
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a sampling strategy only if
regulatory constraints or other considerations prevent it from replicating the
Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the financials sector, the Fund's
performance largely depends--for better or for worse--on the general condition
of that sector. The financials sector could be adversely affected by government
regulation, interest rates, cost of capital funds, credit losses, and financial
markets.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
14
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Admiral
Shares compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 6.04%
2006 19.21
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was -5.11%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 7.17% (quarter ended September 30, 2006), and the lowest return for
a quarter was -6.63% (quarter ended March 31, 2005).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Financials Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 19.21% 12.21%
-------------------------------------------------------------------------------
Return After Taxes on Distributions 18.78 11.80
-------------------------------------------------------------------------------
Return After Taxes on Distributions
and Sale of Fund Shares 12.86 10.42
-------------------------------------------------------------------------------
MSCI U.S. Investable Market Financials Index
(reflects no deduction for fees, expenses, or 19.50% 12.45%
taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from February 4, 2004--the inception date of
the Admiral Shares--through December 31, 2006.
15
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.20%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.06%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
16
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
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
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $301 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are distributed quarterly in March,
June, September, and December; capital gains,
if any, are distributed annually in December.
-------------------------------------------------------------------------------
Inception Date February 4, 2004
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation FinlxdAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5486
-------------------------------------------------------------------------------
CUSIP Number 92204A835
-------------------------------------------------------------------------------
Ticker Symbol VFAIX
-------------------------------------------------------------------------------
17
Fund Profile--Vanguard Health Care Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of health care stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market Health Care
Index, an index made up of stocks of large, medium-size, and small U.S.
companies within the health care sector, as classified under the Global Industry
Classification Standard (GICS). This GICS sector is made up of two main industry
groups. The first group includes companies that manufacture health care
equipment and supplies or provide health care-related services (such as
distributors of health care products, providers of basic health care services,
and owners and operators of health care facilities and organizations). The
second group includes companies primarily involved in the research, development,
production, and marketing of pharmaceuticals and biotechnology products.
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a sampling strategy only if
regulatory constraints or other considerations prevent it from replicating the
Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the health care sector, the Fund's
performance largely depends--for better or for worse--on the general condition
of that sector. The health care sector could be adversely affected by patent
protection, government regulation, research and development costs, litigation,
and competitive forces.
18
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Admiral
Shares compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 8.21%
2006 6.58
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 7.90%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 8.26% (quarter ended September 30, 2006), and the lowest return for
a quarter was -5.15% (quarter ended June 30, 2006).
19
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Health Care Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 6.58% 4.87%
-------------------------------------------------------------------------------
Return After Taxes on 6.42 4.75
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 4.50 4.16
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable
Market Health Care Index
(reflects no deduction
for fees, expenses, or taxes) 6.85% 5.14%
-------------------------------------------------------------------------------
1 Since-inception returns are from February 5, 2004--the inception date of
the Admiral Shares--through December 31, 2006.
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
20
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.23%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.03%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or
if your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
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.
21
Additional Information
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $609 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date February 5, 2004
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation HltClxAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5485
-------------------------------------------------------------------------------
CUSIP Number 92204A827
-------------------------------------------------------------------------------
Ticker Symbol VHCIX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Industrials Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of industrial stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market Industrials
Index, an index made up of stocks of large, medium-size, and small U.S.
companies within the industrial sector, as classified under the Global Industry
Classification Standard (GICS). This GICS sector is made up of companies whose
businesses are dominated by one of the following activities: the manufacture and
distribution of capital goods (including aerospace and defense, construction,
engineering, and building products, electrical equipment, and industrial
machinery); the provision of commercial services and supplies (including
printing, employment, environmental, and office services); or the provision of
transportation services (including airlines, couriers, marine, road, and rail
services, and transportation infrastructure).
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a
22
sampling strategy only if regulatory constraints or other considerations prevent
it from replicating the Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the industrials sector, the Fund's
performance largely depends--for better or for worse--on the general condition
of that sector. The Industrials sector could be adversely affected by government
regulation, world events and economic conditions, insurance costs, and labor
relations.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
23
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. Because there is no calendar-year performance
information for the Fund's Admiral Shares, the information presented in the bar
chart and table reflects the performance of the ETF Shares of Vanguard
Industrials Index Fund. (ETF Shares are offered through a separate prospectus.)
Performance based on net asset value for the Admiral Shares would be
substantially similar, because both share classes constitute an investment in
the same portfolio of securities; their returns generally should differ only to
the extent that the expenses of the two classes differ. The bar chart shows how
the performance of the Fund's ETF Shares has varied from one calendar year to
another over the periods shown. The table shows how the average annual total
returns of the Fund's ETF Shares compare with those of the Fund's target index.
Keep in mind that the Fund's past performance (before and after taxes) does not
indicate how the Fund will perform in the future.
Annual Total Returns--ETF Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 5.31%
2006 15.15
-------------------------------------------------------------------------------
1 Return figures assume that an investor purchased shares at net asset value,
and do not reflect the transaction fee imposed on purchases and redemptions of
Creation Units or the commissions that investors pay their brokers to buy and
sell ETF Shares on the secondary market. The year-to-date return as of the most
recent calendar-quarter, which ended on September 30, 2007, was 17.92%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 9.81% (quarter ended March 31, 2006), and the lowest return for a
quarter was -2.15% (quarter ended June 30, 2005).
24
Average Annual Total Returns for Periods Ended December 31, 2006
1 Year Since Inception/1/
Vanguard Industrials ETF
Based on NAV
-------------------------------------------------------------------------------
Return Before Taxes 15.15% 14.98%
-------------------------------------------------------------------------------
Return After Taxes on 14.95 14.79
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 10.10 12.88
Fund Shares
-------------------------------------------------------------------------------
Based on Market Price
-------------------------------------------------------------------------------
Return Before Taxes 15.19% 15.00%
-------------------------------------------------------------------------------
MSCI U.S. Investable Market
Industrials Index 14.73% 14.42%
(reflects no deduction for
fees, expenses, or taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from September 23, 2004--the inception date of
the ETF Shares--through December 31, 2006.
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
25
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.24%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.02%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
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.
26
Additional Information
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $233 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date May 8, 2006
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation IndustAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5482
-------------------------------------------------------------------------------
CUSIP Number 92204A819
-------------------------------------------------------------------------------
Ticker Symbol VINAX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Information Technology Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of information technology stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market Information
Technology Index, an index made up of stocks of large, medium-size, and small
U.S. companies within the information technology sector, as classified under the
Global Industry Classification Standard (GICS). This GICS sector is made up of
companies in the following three general areas: technology software and
services, including companies that primarily develop software in various fields
(such as the Internet, applications, systems, databases, management, and/or home
entertainment) and companies that provide information technology consulting and
services, data processing, and outsourced services; technology hardware and
equipment, including manufacturers and distributors of communications equipment,
computers and peripherals, electronic equipment, and related instruments; and
semiconductors and semiconductor equipment manufacturers.
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index.
27
The Fund also may sample its target index by holding stocks that, in the
aggregate, are intended to approximate the Index in terms of key
characteristics, such as price/ earnings ratio, earnings growth, and dividend
yield. Typically, the Fund will use a sampling strategy only if regulatory
constraints or other considerations prevent it from replicating the Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the information technology sector,
the Fund's performance largely depends--for better or for worse--on the general
condition of that sector. The information technology sector could be adversely
affected by overall economic conditions, short product cycles, rapid
obsolescence of products, competition, and government regulation.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Admiral
Shares compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
28
Annual Total Returns--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 2.85%
2006 8.93
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 15.51%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 7.29% (quarter ended September 30, 2006), and the lowest return for
a quarter was -9.37% (quarter ended June 30, 2006).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Information
Technology Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 8.93% 5.79%
-------------------------------------------------------------------------------
Return After Taxes on 8.90 5.69
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 5.86 4.95
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable Market
Information Technology Index
(reflects no deduction for 9.21% 6.02%
fees, expenses, or taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from March 25, 2004--the inception date of the
Admiral Shares--through December 31, 2006.
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
29
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.21%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.05%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or
if your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
30
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
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $451 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date March 25, 2004
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation InfTecAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5487
-------------------------------------------------------------------------------
CUSIP Number 92204A793
-------------------------------------------------------------------------------
Ticker Symbol VITAX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Materials Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of materials stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market Materials
Index, an index made up of stocks of large, medium-size, and small U.S.
companies within the materials sector, as classified under the Global Industry
Classification Standard (GICS). This GICS sector is made up of companies in a
wide range of commodity-related manufacturing industries. Included within this
sector are companies that manufacture chemicals, construction materials, glass,
paper, forest products, and related packaging products, as well as metals,
minerals, and mining companies, including producers of steel.
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/
31
earnings ratio, earnings growth, and dividend yield. Typically, the Fund will
use a sampling strategy only if regulatory constraints or other considerations
prevent it from replicating the Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the materials sector, the Fund's
performance largely depends--for better or for worse--on the general condition
of that sector. The materials sector could be adversely affected by commodity
prices, government regulation, interest rates, resource availability, and
economic cycles.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Admiral
Shares compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
32
Annual Total Returns--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 3.67%
2006 19.46
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 24.67%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 12.40% (quarter ended December 31, 2006), and the lowest return for
a quarter was -8.83% (quarter ended June 30, 2005).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Materials Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 19.46% 13.52%
-------------------------------------------------------------------------------
Return After Taxes on 19.19 13.23
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 13.03 11.65
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable
Market Materials Index
(reflects no deduction
for fees, expenses, or 19.80% 13.80%
taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from February 11, 2004--the inception date of
the Admiral Shares--through December 31, 2006.
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
33
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.22%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.04%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
34
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
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $369 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date February 11, 2004
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation MatrlxAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5481
-------------------------------------------------------------------------------
CUSIP Number 92204A785
-------------------------------------------------------------------------------
Ticker Symbol VMIAX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Telecommunication Services Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of telecommunication services stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market
Telecommunication Services Services Index, an index made up of stocks of large,
medium-size, and small U.S. companies within the telecommunication services
sector, as classified under the Global Industry Classification Standard (GICS).
This GICS sector is made up of companies that provide communication services
primarily through fixed-line, cellular, wireless, high-bandwidth, and/or
fiber-optic cable networks.
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a
35
sampling strategy only if regulatory constraints or other considerations prevent
it from replicating the Index.
As of the date of this prospectus, the proportions of certain stocks in the
Fund's target index exceeded Internal Revenue Code limits applicable to
investments by regulated investment companies. As a result, the Fund currently
samples (rather than replicates) the Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the telecommunication services
sector, the Fund's performance largely depends--for better or for worse--on the
general condition of that sector. The telecommunication services sector could be
adversely affected by overall economic conditions, supply and demand,
competition, and government regulation.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Index sampling risk, which is the chance that stocks held by the Fund will not
provide investment performance closely tracking that of the Index.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
36
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows the performance of the Fund's
Admiral Shares in their first full calendar year. The table shows how the
average annual total returns of the Admiral Shares compare with those of the
Fund's target index. Keep in mind that the Fund's past performance (before and
after taxes) does not indicate how the Fund will perform in the future.
Annual Total Return--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2006 36.65%
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 13.05%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 14.83% (quarter ended March 31, 2006), and the lowest return for a
quarter was -0.72% (quarter ended June 30, 2006).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Telecommunication
Services Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 36.65% 23.09%
-------------------------------------------------------------------------------
Return After Taxes on 36.39 22.68
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 24.16 19.80
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable Market
Telecommunication Services Index
(reflects no deduction for 37.26% 20.79%
fees, expenses, or taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from March 11, 2005--the inception date of the
Admiral Shares--through December 31, 2006.
37
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.24%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.03%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.27%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
38
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$28 $87 $152 $343
--------------------------------------------------------
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
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $317 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Distributed annually in December
-------------------------------------------------------------------------------
Inception Date March 11, 2005
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation TelComAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5488
-------------------------------------------------------------------------------
CUSIP Number 92204A777
-------------------------------------------------------------------------------
Ticker Symbol VTCAX
-------------------------------------------------------------------------------
Fund Profile--Vanguard Utilities Index Fund
Investment Objective
The Fund seeks to track the performance of a benchmark index that measures the
investment return of utilities stocks.
Primary Investment Strategies
The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the MSCI U.S. Investable Market Utilities
Index, an index made up of stocks of large, medium-size, and small U.S.
companies within the utilities sector, as classified under the Global Industry
Classification Standard
39
(GICS). This GICS sector is made up of electric, gas, and water utility
companies, as well as companies that operate as independent producers and/or
distributors of power. The sector includes both nuclear and nonnuclear
facilities.
As its primary indexing strategy, the Fund attempts to replicate the target
index by investing all, or substantially all, of its assets in the stocks that
make up the Index, holding each stock in approximately the same proportion as
its weighting in the Index. The Fund also may sample its target index by holding
stocks that, in the aggregate, are intended to approximate the Index in terms of
key characteristics, such as price/ earnings ratio, earnings growth, and
dividend yield. Typically, the Fund will use a sampling strategy only if
regulatory constraints or other considerations prevent it from replicating the
Index.
Primary Risks
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the fluctuations of the overall stock market. The Fund's performance
could be hurt by:
. Stock market risk, which is the chance that stock prices overall will decline.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
. Sector risk, which is the chance that significant problems will affect a
particular sector, or that returns from that sector will trail returns from the
overall stock market. Daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall market. Because the Fund invests
all, or substantially all, of its assets in the utilities sector, the Fund's
performance largely depends--for better or for worse--on the general condition
of that sector. The utilities sector could be adversely affected by
deregulation, government spending, and supply and demand of fuels.
. Nondiversification risk, which is the chance that the Fund's performance may
be hurt disproportionately by the poor performance of relatively few stocks or
even a single stock. The Fund is considered nondiversified, which means that it
may invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds. Because the Fund tends to invest a
relatively high percentage of its assets in its ten largest holdings, and in its
single largest holding, nondiversification risk is high for the Fund.
. Investment style risk, which is the chance that returns from small- and
mid-capitalization stocks (to the extent that the Fund's assets are invested in
small- and mid-cap stocks) will trail returns from the overall stock market.
Historically, these stocks have been more volatile in price than the large-cap
stocks that dominate the overall market, and they often perform quite
differently.
40
Performance/Risk Information
The following bar chart and table are intended to help you understand the risks
of investing in the Fund. The bar chart shows how the performance of the Fund's
Admiral Shares has varied from one calendar year to another over the periods
shown. The table shows how the average annual total returns of the Admiral
Shares compare with those of the Fund's target index. Keep in mind that the
Fund's past performance (before and after taxes) does not indicate how the Fund
will perform in the future.
Annual Total Returns--Admiral Shares/1/
-------------------------------------------------------------------------------
BAR CHART
RANGE -40% TO 60%
2005 14.72%
2006 21.54
-------------------------------------------------------------------------------
1 The year-to-date return as of the most recent calendar quarter, which ended
September 30, 2007, was 10.16%.
During the periods shown in the bar chart, the highest return for a calendar
quarter was 9.44% (quarter ended December 31, 2006), and the lowest return for a
quarter was -6.02% (quarter ended December 31, 2005).
Average Annual Total Returns for Periods Ended December 31, 2006
Since
1 Year Inception/1/
Vanguard Utilities Index Fund
-------------------------------------------------------------------------------
Return Before Taxes 21.54% 21.38%
-------------------------------------------------------------------------------
Return After Taxes on 20.98 20.79
Distributions
-------------------------------------------------------------------------------
Return After Taxes on
Distributions and Sale of 14.64 18.45
Fund Shares
-------------------------------------------------------------------------------
MSCI U.S. Investable Market
Utilities Index
(reflects no deduction for 21.71% 21.64%
fees, expenses, or taxes)
-------------------------------------------------------------------------------
1 Since-inception returns are from April 28, 2004--the inception date of the
Admiral Shares--through December 31, 2006.
41
Note on after-tax returns. Actual after-tax returns depend on your tax
situation and may differ from those shown in the preceding table. When after-tax
returns are calculated, it is assumed that the shareholder was in the highest
federal marginal income tax bracket at the time of each distribution of income
or capital gains or upon redemption. State and local income taxes are not
reflected in the calculations. Please note that after-tax returns will differ
among a fund's share classes only to the extent that expense ratios differ.
After-tax returns are not relevant for a shareholder who holds fund shares in a
tax-deferred account, such as an individual retirement account or a 401(k) plan.
Also, figures captioned Return After Taxes on Distributions and Sale of Fund
Shares will be higher than other figures for the same period if a capital loss
occurs upon redemption and results in an assumed tax deduction for the
shareholder.
Fees and Expenses
The following table describes the fees and expenses you may pay if you buy and
hold Admiral Shares of the Funds. As is the case with all mutual funds,
transaction costs incurred by the Fund for buying and selling securities are not
reflected in the table. However, these costs are reflected in the investment
performance figures included in this prospectus. The expenses shown under Annual
Fund Operating Expenses are based on those incurred in the fiscal year ended
August 31, 2007.
Shareholder Fees
(Fees paid directly from your investment)
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Purchases None
-------------------------------------------------------------------------------
Purchase Fee None/1/
-------------------------------------------------------------------------------
Sales Charge (Load) Imposed on Reinvested Dividends None
-------------------------------------------------------------------------------
Redemption Fee 2%/2/
-------------------------------------------------------------------------------
Annual Fund Operating Expenses
(Expenses deducted from the Fund's assets)
-------------------------------------------------------------------------------
Management Expenses 0.23%
-------------------------------------------------------------------------------
12b-1 Distribution Fee None
-------------------------------------------------------------------------------
Other Expenses 0.03%
-------------------------------------------------------------------------------
Total Annual Fund Operating Expenses 0.26%
-------------------------------------------------------------------------------
1 The Fund reserves the right to deduct a purchase fee from future purchases
of shares.
2 The 2% fee applies to shares redeemed within one year of purchase. The fee
applies to shares redeemed by selling or by exchanging to another fund, or if
your shares are redeemed because your Fund account balance falls below the
minimum initial investment for any reason, including market fluctuation. The
fee is withheld from redemption proceeds and retained by the Fund. Shares
held for one year or more are not subject to the 2% fee.
42
The following example is intended to help you compare the cost of investing in
the Fund's 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's shares. This example assumes that the Shares
provide 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 the given
period.
1 Year 3 Years 5 Years 10 Years
--------------------------------------------------------
$27 $84 $146 $331
--------------------------------------------------------
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
As of August 31, 2007
-------------------------------------------------------------------------------
Net Assets (all share classes) $393 million
-------------------------------------------------------------------------------
Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa.,
since inception
-------------------------------------------------------------------------------
Dividends and Capital Gains Dividends are distributed quarterly in March,
June, September, and December; capital gains,
if any, are distributed annually in December.
-------------------------------------------------------------------------------
Inception Date April 28, 2004
-------------------------------------------------------------------------------
Suitable for IRAs Yes
-------------------------------------------------------------------------------
Minimum Initial Investment $100,000
-------------------------------------------------------------------------------
Newspaper Abbreviation UtillxAd
-------------------------------------------------------------------------------
Vanguard Fund Number 5489
-------------------------------------------------------------------------------
CUSIP Number 92204A769
-------------------------------------------------------------------------------
Ticker Symbol VUIAX
-------------------------------------------------------------------------------
43
INVESTING IN INDEX FUNDS
WHAT IS INDEXING?
Indexing is an investment strategy for tracking the performance of a specialized
market benchmark, or "index". 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 or portion of a market. There are many types of stock
indexes. Some represent entire markets--such as the U.S. stock market or the
European stock market. Other stock indexes cover market segments, usually
defined by market capitalization (e.g., small-capitalization stocks), investment
style (e.g., growth stocks), or industry groupings (e.g., health care stocks).
WHAT ARE THE VANGUARD U.S. SECTOR INDEX FUNDS?
The Vanguard U.S. Sector Index Funds are a group of ten index funds that seek to
track the performance of the following distinct components--or "sectors"--of the
U.S. economy:
Consumer Discretionary Industrials
------------------------------------------------------
Consumer Staples Information Technology
------------------------------------------------------
Energy Materials
------------------------------------------------------
Financials Telecommunication Services
------------------------------------------------------
Health Care Utilities
------------------------------------------------------
For their benchmarks, the Funds use ten sector indexes licensed to Vanguard by
MSCI. Each of these indexes measures the performance of a separate group of
industries, as classified under the Global Industry Classification Standard
(GICS). Together, the Funds' target indexes make up the MSCI Investable Market
2500 Index, a broad market index covering companies and industries across the
entire U.S. economy.
WHAT INDEXING STRATEGIES DO THE VANGUARD U.S. SECTOR INDEX FUNDS USE?
Each Fund may use either of two distinct indexing strategies: replication or
sampling.
Index Replication. Whenever practicable, a Fund will attempt to "replicate" its
target index by holding all stocks represented in its index in approximately the
same proportions as the stocks' respective weightings in the index.
Index Sampling. When replication is not practicable, a Fund has the flexibility
to use a secondary indexing strategy: It can "sample" its target index by
holding all stocks represented in its index, but in proportions that vary from
the stocks' respective weightings in the index. When sampling its target index,
a Fund will attempt to hold securities that, in the aggregate, approximate the
target index in terms of key characteristics such as price/earnings ratio,
earnings growth, and dividend yield.
44
A Fund typically will use this type of index sampling only if regulatory
constraints or other considerations prevent it from using index replication. For
example, the Consumer Staples, Energy, and Telecommunication Services Index
Funds use index sampling in order to comply with Internal Revenue Code (IRC)
diversification limits on the amount of assets that a regulated investment
company may invest in the securities of a single company or group of companies.
Their target indexes currently include proportions of certain stocks that exceed
the IRC limits, so index replication is not possible for these Funds at this
time.
HOW CLOSELY WILL THE VANGUARD U.S. SECTOR INDEX FUNDS TRACK THEIR
TARGET INDEXES?
Funds using index replication can be expected to track the performance of their
target indexes relatively closely. When sampling their target indexes, however,
the Funds may experience a greater degree of "tracking error"--performance that
lags or exceeds that of the target index. Tracking differences may be
particularly wide if regulatory constraints--such as the IRC limits previously
described above--inhibit a Fund's ability to approximate key characteristics of
the target index.
In addition, it should be noted that, like all mutual funds, index funds have
operating expenses and transaction costs. Market indexes do not, and therefore
will usually have a slight performance advantage over funds that track them.
45
MORE ON THE FUNDS
This prospectus describes the primary risks you would face as a Fund
shareholder. 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 any mutual fund, you should
take into account your personal tolerance for daily fluctuations in the
securities markets. When considering an investment in sector mutual funds, you
should be aware that daily fluctuations in specific market sectors are often
more extreme than fluctuations in the overall securities markets. Look for this
FLAG LOGO symbol throughout the prospectus. It is used to mark detailed
information about the more significant risks that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and policies
that each Fund uses in pursuit of its objective. The Funds' board of trustees,
which oversees the Funds' management, may change investment strategies or
policies in the interest of shareholders without a shareholder vote, unless
those strategies or policies are designated as fundamental. Under normal
circumstances, each Fund will invest at least 80% of its assets in the stocks
that make up its target index. A Fund may change its 80% policy only upon 60
days' notice to shareholders. Note that each Fund's investment objective is not
fundamental and may be changed without a shareholder vote.
Market Exposure
The Funds invest mainly in common stocks of companies within designated market
sectors. As a result, the Funds are subject to certain risks.
FLAG LOGO
Each Fund is subject to stock market risk, which is the chance that stock
prices overall will decline. Stock markets tend to move in cycles, with periods
of rising prices and periods of falling prices.
FLAG LOGO
Each Fund is subject to sector risk, which is the chance that significant
problems will affect a particular sector, or that returns from that sector will
trail returns from the overall stock market. Daily fluctuations in specific
market sectors are often more extreme than fluctuations in the overall market.
Because each Fund invests all, or substantially all, of its assets in a
specific sector, the Fund's performance largely depends--for better or for
worse--on the general condition of that sector.
A variety of circumstances and events can affect the overall performance of a
given market sector. In addition, a sector's sensitivity to specific factors
tends to change over time, so it is impossible to identify in advance the exact
circumstances and events that will be most important to the future performance
of that sector. Examples of factors that have proven important to the past
performance of each Fund's targeted market sector are shown in the following
table.
46
Sectors and Key Past Performance Factors
-------------------------------------------------------------------------------
Consumer Discretionary Sector:
Overall economic conditions, interest rates, consumer confidence, and
disposable income.
-------------------------------------------------------------------------------
Consumer Staples Sector:
Consumer tastes, government regulation, marketing, and consumer confidence.
-------------------------------------------------------------------------------
Energy Sector:
Geopolitical events, government regulation, supply of and demand for energy
fuels, economic cycles, and fuel prices.
-------------------------------------------------------------------------------
Financials Sector:
Government regulation, interest rates, cost of capital funds, credit losses,
and financial markets.
-------------------------------------------------------------------------------
Health Care Sector:
Patent protection, government regulation, research and development costs,
litigation, and competitive forces.
-------------------------------------------------------------------------------
Industrials Sector:
Government regulation, world events and economic conditions, insurance costs,
and labor relations.
-------------------------------------------------------------------------------
Information Technology Sector:
Overall economic conditions, short product cycles, rapid obsolescence of
products, competition, and government regulation.
-------------------------------------------------------------------------------
Materials Sector:
Commodity prices, government regulation, interest rates, resource availability,
and economic cycles.
-------------------------------------------------------------------------------
Telecommunication Services Sector:
Overall economic conditions, supply and demand, competition, and government
regulation.
-------------------------------------------------------------------------------
Utilities Sector:
Deregulation, government spending, and supply of and demand for fuels.
-------------------------------------------------------------------------------
47
Each Fund invests across large-, mid-, and small-capitalization stocks,
depending on the composition of its target index. The chart that follows
provides a market capitalization breakdown for each Index as of August 31, 2007.
For purposes of this chart, we have used market-capitalization ranges determined
by Frank Russell Company. It's important to understand that, for both companies
and stock funds, market-capitalization ranges change over time. Also,
interpretations of size vary, and there are no "official" definitions of large-,
mid-, and small-cap, even among Vanguard fund advisors.
Target Index Large-Cap Mid-Cap Small-Cap
>$18.1 billion $2.4 - $18.1 <$2.4 billion
billion
--------------------------------------------------------------------------
Consumer Discretionary 45.8% 42.0% 12.1%
--------------------------------------------------------------------------
Consumer Staples 77.0 19.5 3.5
--------------------------------------------------------------------------
Energy 75.4 19.4 5.2
--------------------------------------------------------------------------
Financials 63.1 27.4 9.4
--------------------------------------------------------------------------
Health Care 71.9 19.6 8.5
--------------------------------------------------------------------------
Industrials 60.0 28.1 11.9
--------------------------------------------------------------------------
Information Technology 66.7 24.5 8.8
--------------------------------------------------------------------------
Materials 43.4 46.4 10.2
--------------------------------------------------------------------------
Telecommunication Services 75.3 21.6 3.0
--------------------------------------------------------------------------
Utilities 43.0 50.2 6.8
--------------------------------------------------------------------------
Security Selection
Each Fund attempts to track the investment performance of a benchmark index that
measures the return of a particular market sector. Whenever practicable, each
Fund uses the replication method of indexing, meaning that it holds the same
stocks as its target index and in approximately the same proportions.
FLAG LOGO
To the extent that each Fund samples its benchmark index, it is subject to
index sampling risk, which is the chance that the securities held by the Fund
will not provide investment performance closely tracking that of the Index.
Each Fund may also sample its index by holding stocks that, in the aggregate,
are intended to approximate the target index in terms of key characteristics,
such as price/ earnings ratio, earnings growth, and dividend yield. Typically,
the Fund will use a sampling strategy only if regulatory constraints or other
considerations prevent it from replicating the index.
48
The following table shows the number of stocks in each Fund's target index as of
August 31, 2007, along with the percentage of each index represented by its top
ten holdings as of the same date.
Percentage of Index
Number of Stocks Holdings in
Fund in Target Index Top 10 Stocks
----------------------------------------------------------------------------------------
Vanguard Consumer
Discretionary Index Fund 427 31.2%
----------------------------------------------------------------------------------------
Vanguard Consumer 105 62.2
Staples Index Fund/1/
----------------------------------------------------------------------------------------
Vanguard Energy Index Fund/1/ 152 58.6
----------------------------------------------------------------------------------------
Vanguard Financials Index Fund 519 38.3
----------------------------------------------------------------------------------------
Vanguard Health Care Index Fund 267 48.3
----------------------------------------------------------------------------------------
Vanguard Industrials Index Fund 330 43.9
----------------------------------------------------------------------------------------
Vanguard Information 384 51.0
Technology Index Fund
----------------------------------------------------------------------------------------
Vanguard Materials Index Fund 120 48.9
----------------------------------------------------------------------------------------
Vanguard
Telecommunication 46 65.7
Services Index Fund/1/
----------------------------------------------------------------------------------------
Vanguard Utilities Index Fund 87 43.5
----------------------------------------------------------------------------------------
1 As of the date of this prospectus, the Fund samples its target index. This is
because the proportions of certain stocks in the Index exceed Internal Revenue Code
limits for investments by regulated investment companies.
FLAG LOGO
Each Fund is subject to nondiversification risk, which is the chance that the
Fund's performance may be hurt disproportionately by the poor performance of
relatively few stocks or even a single stock.
Each Fund is considered nondiversified, which means that it may invest a greater
percentage of its assets in the securities of particular issuers as compared
with other mutual funds. Because each Fund tends to invest a high percentage of
its assets in its ten largest holdings and in its single largest holding,
nondiversification risk is high for the Funds.
FLAG LOGO
Each Fund is subject to investment style risk, which is the chance that returns
from small- and mid-cap stocks will trail returns from the overall stock
market. Historically, these stocks have been more volatile in price than the
large-cap stocks that dominate the overall market, and they often perform quite
differently.
49
Other Investment Policies and Risks
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, if the Fund's agreement
with the sponsor of its target index is terminated, or for any other reason
determined in good faith by the Fund's board of trustees. In any such instance,
the substitute index would measure the same market segment as the current index.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds are generally managed without regard to tax ramifications.
Each Fund may invest in foreign securities to the extent necessary to carry out
its investment strategy of holding all, or substantially all, of the stocks that
make up the index it tracks. It is not expected that any Fund will invest more
than 5% of its assets in foreign securities.
FLAG LOGO
Each Fund may invest in derivatives. In general, derivatives may involve risks
different from, and possibly greater than, those of the underlying securities,
assets, or market indexes.
To track their target indexes as closely as possible, the Funds attempt to
remain fully invested in stocks. To help stay fully invested and to reduce
transaction costs, the Funds may invest, to a limited extent, in stock futures
and options contracts, warrants, convertible securities, and swap agreements,
which are types of derivatives. Generally speaking, a derivative is a financial
contract whose value is based on the value of a financial asset (such as a
stock, bond, or currency), a physical asset (such as gold), or a market index
(such as the S&P 500 Index). Investments in derivatives may subject a Fund to
risks different from, and possibly greater than, those of the underlying
securities, assets, or market indexes. 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. Similar risks exist for warrants (securities that permit their owners to
purchase a specific number of stock shares at a predetermined price),
convertible securities (securities that may be exchanged for another asset), and
swap agreements (contracts between parties in which each agrees to make payments
to the other based on the return of a specified index or asset).
The Funds will not use derivatives for speculation or for the purpose of
leveraging (magnifying) investment returns. In addition, each Fund's obligation
under futures contracts will not exceed 20% of its total assets.
The reasons for which a Fund may invest in futures and options include:
. To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
50
. To reduce the Fund's transaction costs or add value when these instruments are
favorably priced.
--------------------------------------------------------------------------------
Plain Talk About Derivatives
Derivatives can take many forms. Some forms of derivatives, such as
exchange-traded futures and options on securities, commodities, or indexes,
have been trading on regulated exchanges for decades. These types of
derivatives are standardized contracts that can easily be bought and sold,
and whose market values are determined and published daily. Nonstandardized
derivatives (such as swap agreements and forward currency contracts), on the
other hand, tend to be more specialized or complex, and may be harder to
value.
--------------------------------------------------------------------------------
Cash Management
Each Fund's daily cash balance may be invested in one or more Vanguard CMT
Funds, which are very low-cost money market funds. When investing in a Vanguard
CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the
CMT Fund in which it invests.
Temporary Investment Measures
Each Fund may temporarily depart from its normal investment policies and
strategies when doing so is believed to be in the Fund's best interest, so long
as the alternative is consistent with the Fund's investment objective. For
instance, the Fund may invest beyond the normal limits in derivatives or ETFs
that are consistent with the Fund's objective when those instruments are more
favorably priced or provide needed liquidity, as might be the case when the Fund
receives large cash flows that it cannot prudently invest immediately.
Redemption Fee
Each Fund charges a 2% fee on shares that are redeemed before they have been
held for one year. The fee applies when shares are redeemed by selling or by
exchanging to another Vanguard fund. Shares you have held the longest will be
redeemed first.
Unlike a sales charge or a load paid to a broker or a fund management company,
the redemption fee is paid directly to the Fund to offset the costs of buying
and selling securities. The fee is designed to ensure that short-term investors
pay their share of the Fund's transaction costs and that long-term investors do
not subsidize the activities of short-term traders.
See the Fund Profiles and Investing With Vanguard for more information about
fees.
51
Frequent Trading or Market-Timing
Background. Some investors try to profit from strategies involving frequent
trading of mutual fund shares, such as market-timing. For funds holding foreign
securities, investors may try to take advantage of an anticipated difference
between the price of the fund's shares and price movements in overseas markets,
a practice also known as time-zone arbitrage. Investors also may try to engage
in frequent trading of funds holding investments such as small-cap stocks and
high-yield bonds. As money is shifted into and out of a fund by a shareholder
engaging in frequent trading, a fund incurs costs for buying and selling
securities, resulting in increased brokerage and administrative costs. These
costs are borne by all fund shareholders, including the long-term investors who
do not generate the costs. In addition, frequent trading may interfere with an
advisor's ability to efficiently manage the fund.
Policies to Address Frequent Trading. The Vanguard funds (other than money
market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not
knowingly accommodate frequent trading. The board of trustees of each Vanguard
fund has adopted policies and procedures reasonably designed to detect and
discourage frequent trading and, in some cases, to compensate the fund for the
costs associated with it. Although there is no assurance that Vanguard will be
able to detect or prevent frequent trading or market-timing in all
circumstances, the following policies have been adopted to address these issues:
. Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--without notice and
regardless of size. For example, a purchase request could be rejected if
Vanguard determines that such purchase may negatively affect a fund's operation
or performance or because of a history of frequent trading by the investor.
. Each Vanguard fund (other than money market funds, short-term bond funds, and
ETF Shares) generally prohibits, except as otherwise noted in the Investing With
Vanguard section, an investor's purchases or exchanges into a fund account for
60 calendar days after the investor has redeemed or exchanged out of that fund
account.
. Certain Vanguard funds charge shareholders purchase and/or redemption fees
on transactions.
See the Investing With Vanguard section of this prospectus for further details
on Vanguard's transaction policies.
Each fund (other than money market funds), in determining its net asset value,
will use fair-value pricing as described in the Share Price section. Fair-value
pricing may reduce or eliminate the profitability of certain frequent-trading
strategies.
Do not invest with Vanguard if you are a market-timer.
52
--------------------------------------------------------------------------------
Plain Talk About 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 incurred when the fund buys or sells securities. These
costs can erode a substantial portion of the gross income or the capital
appreciation a fund achieves. Even seemingly small differences in expenses
can, over time, have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
Turnover Rate
Although the Funds normally seek to invest for the long term, each Fund may sell
securities regardless of how long they have been held. The average turnover rate
for indexed domestic stock funds investing in common stocks was approximately
61%, and for domestic stock funds, the average turnover rate was approximately
94%, both as reported by Morningstar, Inc., on August 31, 2007.
--------------------------------------------------------------------------------
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, which are not included in the
fund's expense ratio, 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 taxable income.
--------------------------------------------------------------------------------
THE FUNDS AND VANGUARD
Each Fund is a member of The Vanguard Group, a family of 37 investment companies
with more than 145 funds holding assets in excess of $1.2 trillion. All of the
funds that are members of The Vanguard Group share in the expenses associated
with administrative services and 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 (or in the case
of a fund with multiple share classes, each share class of the fund) pays its
allocated share of The Vanguard Group's marketing costs.
53
--------------------------------------------------------------------------------
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 management companies that may
be owned by one person, by a group of individuals, or by investors who own
the management company's stock. The management fees charged by these
companies include a profit component over and above the companies' cost of
providing services. By contrast, Vanguard provides services to its member
funds on an at-cost basis, with no profit component, which helps to keep the
funds' expenses low.
--------------------------------------------------------------------------------
Investment Advisor
The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482,
which began operations in 1975, serves as advisor to the Funds through its
Quantitative Equity Group. As of August 31, 2007, Vanguard served as advisor for
approximately $977 billion in assets. Vanguard manages the Funds on an at-cost
basis, subject to the supervision and oversight of the trustees and officers of
the Funds.
For the fiscal year ended August 31, 2007, the advisory expenses represented an
effective annual rate of 0.02% (0.01% for Vanguard Consumer Discretionary and
Telecommunication Services Index Funds) of each Fund's average net assets.
For a discussion of why the board of trustees approved each Fund's investment
advisory arrangements, see the annual report to shareholders covering the Funds'
most recent fiscal year, which ended on August 31.
George U. Sauter is Chief Investment Officer and Managing Director of Vanguard.
As Chief Investment Officer, he is responsible for the oversight of Vanguard's
Quantitative Equity and Fixed Income Groups. The investments managed by these
two groups include active quantitative equity funds, equity index funds, active
bond funds, index bond funds, stable value portfolios, and money market funds.
Since joining Vanguard in 1987, Mr. Sauter has been a key contributor to the
development of Vanguard's stock indexing and active quantitative equity
investment strategies. He received his A.B. in Economics from Dartmouth College
and an M.B.A. in Finance from the University of Chicago.
54
--------------------------------------------------------------------------------
Plain Talk About The Funds' Portfolio Managers
The managers primarily responsible for the day-to-day management of the
Funds' portfolios are:
Michael H. Buek, CFA, Principal of Vanguard. He has been with Vanguard since
1987; has managed investment portfolios since 1991; and has managed the
Materials Index Fund since its inception. Education: B.S., University of
Vermont; M.B.A., Villanova University.
Donald M. Butler, CFA, Principal of Vanguard. He has been with Vanguard since
1992; has managed investment portfolios since 1997; and has managed the
Utilities Index Fund since its inception. Education: B.S.B.A., Shippensburg
University.
Ryan E. Ludt, Principal of Vanguard. He has been with Vanguard since 1997;
has managed investment portfolios since 2000; has managed the Financials
Index, Health Care Index, and Telecommunication Services Index Funds since
their inception; and has managed the Energy Index Fund since 2006. Education:
B.S., The Pennsylvania State University.
Gerard C. O'Reilly, Principal of Vanguard. He has been with Vanguard since
1992; has managed investment portfolios since 1994; and has managed the
Consumer Staples Index Fund since its inception. Education: B.S., Villanova
University.
Michael Perre, Principal of Vanguard. He has been with Vanguard since 1990;
has managed investment portfolios since 1999; and has managed the Consumer
Discretionary Index, Industrials Index, and Information Technology Index
Funds since their inception. Education: B.A., Saint Joseph's University;
M.B.A., Villanova University.
--------------------------------------------------------------------------------
The Statement of Additional Information provides information about each
portfolio manager's compensation, other accounts under management, and ownership
of securities in the Funds.
Dividends, Capital Gains, and Taxes
Fund Distributions
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses) as well as any net capital gains realized from the
sale of its holdings. Income dividends for the Financials and Utilities Index
Funds generally are distributed quarterly in March, June, September, and
December; income dividends for the Consumer Discretionary, Consumer Staples,
Energy, Health Care, Industrials,
55
Information Technology, Materials, and Telecommunication Services Index Funds
generally are distributed annually in December. Capital gains distributions
generally occur annually in December.
--------------------------------------------------------------------------------
Plain Talk About Distributions
As a shareholder, you are entitled to your portion of a fund's income from
interest and dividends as well as gains from the sale of investments. Income
consists of both the dividends that the fund earns from any stock holdings
and the interest it receives from any 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 for more than one year. You receive the fund's earnings as either a
dividend or capital gains distribution.
--------------------------------------------------------------------------------
Basic Tax Points
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, investors in taxable accounts should be aware of the
following basic tax points:
. Distributions are taxable to you for federal income tax purposes, whether or
not you reinvest these amounts in additional Fund shares.
. 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.
. Any dividend and short-term capital gains distributions that you receive are
taxable to you as ordinary income for federal income tax purposes. If you are an
individual and meet certain holding-period requirements with respect to your
Fund shares, you may be eligible for reduced federal tax rates on "qualified
dividend income," if any, distributed by the Fund.
. 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.
. Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
. 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.
. 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.
56
. Any conversion between classes of shares of the same fund is a nontaxable
event. By contrast, an exchange between classes of shares of different funds is
a taxable event.
--------------------------------------------------------------------------------
Plain Talk About 'Buying a Dividend'
Unless you are investing through a tax-deferred retirement account (such as
an IRA), you should consider avoiding a purchase of fund shares shortly
before the fund 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 will 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.
--------------------------------------------------------------------------------
General Information
Backup withholding. By law, Vanguard must withhold 28% of any taxable
distributions or redemptions from your account if you do not:
. Provide us with your correct taxpayer identification number;
. Certify that the taxpayer identification number is correct; and
. Confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold taxes from your account if the IRS instructs
us to do so.
Foreign investors. Vanguard funds generally are not sold outside the United
States, except to certain qualified investors. If you reside outside the United
States, please consult our website at www.vanguard.com and review "Non-U.S.
investors." 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 advisor for detailed information about
a fund's tax consequences for you.
57
Share Price
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange,
generally 4 p.m., Eastern time. NAV per share is computed by dividing the net
assets allocated to each share class by the number of Fund shares outstanding
for that class. On holidays or other days when the Exchange is closed, the NAV
is not calculated, and the Fund does not transact purchase or redemption
requests. However, on those days the value of the Fund's assets may be affected
to the extent that the Fund holds foreign securities that trade on foreign
markets that are open.
Stocks held by a Vanguard fund are valued at their market value when reliable
market quotations are readily available. Certain short-term debt instruments
used to manage a fund's cash are valued on the basis of amortized cost. The
values of any foreign securities held by a fund are converted into U.S. dollars
using an exchange rate obtained from an independent third party. The values of
any mutual fund shares held by a fund are based on the NAVs of the underlying
mutual funds (in the case of conventional share classes) or the market value of
the shares (in the case of exchange-traded fund shares, such as ETF Shares).
When reliable market quotations are not readily available, securities are priced
at their fair value (the amount that the owner might reasonably expect to
receive upon the current sale of a security). A fund also will use fair-value
pricing if the value of a security it holds has been materially affected by
events occurring before the fund's pricing time but after the close of the
primary markets or exchanges on which the security is traded. This most commonly
occurs with foreign securities, which may trade on foreign exchanges that close
many hours before the fund's pricing time. Intervening events might be
company-specific (e.g., earnings report, merger announcement); country-specific
(e.g., natural disaster, economic or political news, act of terrorism, interest
rate change); or global. Intervening events include price movements in U.S.
markets that are deemed to affect the value of foreign securities. Fair-value
pricing may be used for domestic securities--for example, if (1) trading in a
security is halted and does not resume before the fund's pricing time or if a
security does not trade in the course of a day, and (2) the fund holds enough of
the security that its price could affect the fund's NAV.
Fair-value prices are determined by Vanguard according to procedures adopted by
the board of trustees. When fair-value pricing is employed, the prices of
securities used by a fund to calculate its NAV may differ from quoted or
published prices for the same securities.
Vanguard fund share prices can be found daily in the mutual fund listings of
most major newspapers under various "Vanguard" headings.
58
Financial Highlights
The following financial highlights tables are intended to help you understand
the Admiral Shares' financial performance for the periods shown, and certain
information reflects financial results for a single Admiral Share. The total
returns in each table represent the rate that an investor would have earned or
lost each period on an investment in the Admiral Shares (assuming reinvestment
of all distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, whose report--along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
To receive a free copy of the latest annual or semiannual report, you may access
a report online at www.vanguard.com, or you may contact Vanguard by telephone or
by mail.
59
--------------------------------------------------------------------------------
Plain Talk About How to Read the Financial Highlights Tables
This explanation uses the Consumer Discretionary Index Fund's Admiral Shares
as an example. The Admiral Shares began fiscal year 2007 with a net asset
value (price) of $27.03 per share. During the year, each Admiral Share earned
$0.217 from investment income (interest and dividends) and $4.015 from
investments that had appreciated in value or that were sold for higher prices
than the Fund paid for them.
Shareholders received $0.242 per share in the form of dividend distributions.
A portion of each year's distributions may come from the prior year's income
or capital gains.
The share price at the end of the year was $31.02, reflecting earnings of
$4.232 per share and distributions of $0.242 per share. This was an increase
of $3.99 per share (from $27.03 at the beginning of the year to $31.02 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return was 15.64% for the year.
As of August 31, 2007, the Admiral Shares had approximately $1 million in net
assets. For the year, the expense ratio was 0.27% ($2.70 per $1,000 of net
assets), and the net investment income amounted to 0.84% of average net
assets. The Fund sold and replaced securities valued at 8% of its net assets.
--------------------------------------------------------------------------------
60
Consumer Discretionary Index Fund Admiral Shares
July 14/1/ to
Aug. 31,
Year Ended Aug. 31, 2005
-------------------------------------------------------------
2007 2006
------------------------------------------------------------------------------------------
Net Asset Value, $27.03 $27.75 $28.29
Beginning of Period
------------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------------
Net Investment Income .217 .245/2/ .16/2/
------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain (Loss) 4.015 (.808) (.70)
on Investments
------------------------------------------------------------------------------------------
Total from Investment
Operations 4.232 (.563) (.54)
------------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------------
Dividends from Net (.242) (.157) --
Investment Income
------------------------------------------------------------------------------------------
Distributions from -- -- --
Realized Capital Gains
------------------------------------------------------------------------------------------
Total Distributions (.242) (.157) --
------------------------------------------------------------------------------------------
Net Asset Value, End $31.02 $27.03 $27.75
of Period
------------------------------------------------------------------------------------------
Total Return/3/ 15.64% -2.03% -1.91%
------------------------------------------------------------------------------------------
Ratios/Supplemental Data
------------------------------------------------------------------------------------------
Net Assets, End of $1 $0.6 $0.1
Period (Millions)
------------------------------------------------------------------------------------------
Ratio of Total
Expenses to Average 0.27% 0.28% 0.28%/4/
Net Assets
------------------------------------------------------------------------------------------
Ratio of Net
Investment Income to 0.84% 0.89% 0.67%/4/
Average Net Assets
------------------------------------------------------------------------------------------
Turnover Rate/5/ 8% 10% 13%
------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than
one year.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind
purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
61
Consumer Staples Index Fund Admiral Shares
Jan.30/1/to
Year Ended Aug. 31, Aug. 31,
-----------------------------------------------------------------------------
2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $30.56 $27.64 $25.82 $25.00
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .662 .547/2/ .427/2/ .24
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 2.460 2.716 1.952 .58
on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 3.122 3.263 2.379 .82
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.462) (.343) (.440) --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- (.119) --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.462) (.343) (.559) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $33.22 $30.56 $27.64 $25.82
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/3/ 10.30% 11.92% 9.29% 3.28%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $9 $6 $4 $1
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net 0.26% 0.28% 0.28% 0.28%/4/
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average 2.16% 1.90% 1.69% 1.51%/4/
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/5/ 12% 14% 7% 20%
-----------------------------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
62
Energy Index Fund Admiral Shares
Oct. 7, 2004/1/
to Aug. 31,
Year Ended Aug. 31, 2005
----------------------------------------------------------------
2007 2006
------------------------------------------------------------------------------------------------------
Net Asset Value, $40.36 $36.29 $25.98
Beginning of Period
------------------------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------------------------
Net Investment Income .501/2/ .46/2/ .588/2,3/
------------------------------------------------------------------------------------------------------
Net Realized and
Unrealized Gain (Loss) 9.944 3.96 9.833
on Investments
------------------------------------------------------------------------------------------------------
Total from Investment 10.445 4.42 10.421
Operations
------------------------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------------------------
Dividends from Net (.445) (.35) (.111)
Investment Income
------------------------------------------------------------------------------------------------------
Distributions from -- -- --
Realized Capital Gains
------------------------------------------------------------------------------------------------------
Total Distributions (.445) (.35) (.111)
------------------------------------------------------------------------------------------------------
Net Asset Value, End $50.36 $40.36 $36.29
of Period
------------------------------------------------------------------------------------------------------
Total Return/4/ 26.03% 12.27% 40.27%
------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
------------------------------------------------------------------------------------------------------
Net Assets, End of $115 $83 $60
Period (Millions)
------------------------------------------------------------------------------------------------------
Ratio of Total
Expenses to Average 0.26% 0.28% 0.28%/5/
Net Assets
------------------------------------------------------------------------------------------------------
Ratio of Net
Investment Income to 1.16% 1.20% 1.95%/3/,5/
Average Net Assets
------------------------------------------------------------------------------------------------------
Turnover Rate/6/ 15% 21% 16%
------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Net investment income per share and the ratio of net investment income to average net assets
include $.163 and 0.52%, respectively, resulting from a cash payment received in connection with
the merger of Chevron Corp. and Unocal Corp. in August 2005.
4 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one
year.
5 Annualized.
6 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases
or redemptions of the Fund's capital shares, including ETF Creation Units.
63
Financials Index Fund Admiral Shares
Feb. 4/1/ to
Year Ended Aug. 31, Aug. 31,
--------------------------------------------------------------------------
2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $29.86 $26.36 $25.35 $24.90
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .770/2/ .716/2/ .660/2/ .31
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on .145 3.392 1.086 .14
Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .915 4.108 1.746 .45
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.675) (.608) (.736) --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.675) (.608) (.736) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $30.10 $29.86 $26.36 $25.35
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/3/ 2.95% 15.76% 6.88% 1.81%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $19 $8 $3 $1
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.26% 0.28% 0.28% 0.28%/4/
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net 2.37% 2.49% 2.59% 2.38%/4/
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/5/ 12% 6% 6% 9%
-----------------------------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
64
Health Care Index Fund Admiral Shares
Year Ended Aug. 31, Feb. 5/1/ to
--------------------------------------------------------- Aug. 31,
2007 2006 2005 2004
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $27.99 $26.92 $23.97 $25.33
------------------------------------------------------------------------------------------------------------------------------------
Investment Operations
------------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .392 .304/2/ .274/2/ .13
------------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 1.736 .951 2.762 (1.49)
on Investments
------------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.128 1.255 3.036 (1.36)
------------------------------------------------------------------------------------------------------------------------------------
Distributions
------------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.298) (.185) (.086) --
------------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.298) (.185) (.086) --
------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $29.82 $27.99 $26.92 $23.97
------------------------------------------------------------------------------------------------------------------------------------
Total Return/3/ 7.65% 4.68% 12.70% -5.37%
------------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
------------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $132 $108 $73 $11
------------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.26% 0.28% 0.28% 0.28%/4/
------------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average 1.42% 1.12% 1.11% 1.09%/4/
Net Assets
------------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/5/ 10% 11% 9% 8%
------------------------------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
65
Industrials Index Fund Admiral Shares
Year Ended Aug. 31, May 8/1/ to
------------------------------------------ Aug. 31,
2007 2006
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $30.72 $34.10
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .51/2/ .164/2/
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 7.09 (3.544)
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 7.60 (3.380)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.38) --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.38) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $37.94 $30.72
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/3/ 24.90% -9.91%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $4 $.2
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.26% 0.28%/4/
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 1.46% 1.35%/4/
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/5/ 13% 9%
-----------------------------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
66
Information Technology Index Fund Admiral Shares
Year Ended Aug. 31, Mar. 25/1/ to
----------------------------------------------------------- Aug. 31,
2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $24.40 $23.93 $20.72 $23.40
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .11/2/ .084/2/ .351/3/ .01
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 5.50 .424 3.182 (2.69)
on Investments
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 5.61 .508 3.533 (2.68)
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.06) (.038) (.323) --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.06) (.038) (.323) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $29.95 $24.40 $23.93 $20.72
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/4/ 23.02% 2.12% 17.05% -11.45%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $12 $5 $2 $0.2
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net 0.26% 0.28% 0.28% 0.28%/5/
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average 0.38% 0.33% 1.26%/3/ 0.12%/5/
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/6/ 8% 8% 7% 9%
-----------------------------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Net investment income per share and the ratio of net investment income to average net assets include $0.284 and 1.00%,
respectively, resulting from a special dividend from Microsoft Corp. in November 2004.
4 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
5 Annualized.
6 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
67
Materials Index Fund Admiral Shares
Year Ended Aug. 31, Feb. 11/1/ to
----------------------------------------- Aug. 31,
2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $32.37 $28.34 $26.53 $26.14
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income .70/2/ .672/2/ .48 .24
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 9.25 3.853 1.83 .15
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 9.95 4.525 2.31 .39
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.57) (.495) (.50) --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (.57) (.495) (.50) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $41.75 $32.37 $28.34 $26.53
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/3/ 31.00% 16.08% 8.61% 1.49%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $57 $12 $7 $1
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.26% 0.28% 0.28% 0.28%/4/
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 1.80% 2.13% 1.81% 1.93%/4/
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/5/ 6% 13% 12% 8%
-----------------------------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
4 Annualized.
5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
68
Telecommunication Services Index Fund
Admiral Shares Mar. 11/1 /to
Year Ended Aug. 31, Aug. 31,
-------------------------------
2007 2006 2005
----------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $33.29 $28.18 $26.75
----------------------------------------------------------------------------------------------------------------
Investment Operations
----------------------------------------------------------------------------------------------------------------
Net Investment Income .888/2/ .861/2,3/ .34/2/
----------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 7.308 5.041 1.09
----------------------------------------------------------------------------------------------------------------
Total from Investment Operations 8.196 5.902 1.43
----------------------------------------------------------------------------------------------------------------
Distributions
----------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (.476) (.792) --
----------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- --
----------------------------------------------------------------------------------------------------------------
Total Distributions (.476) (.792) --
----------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $41.01 $33.29 $28.18
----------------------------------------------------------------------------------------------------------------
Total Return/4/ 24.77% 21.47% 5.35%
----------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
----------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $51 $6 $1
----------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net Assets 0.27% 0.28% 0.28%/5/
----------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average Net Assets 2.17% 3.28%/3/ 2.70%/5/
----------------------------------------------------------------------------------------------------------------
Turnover Rate/6/ 17% 32% 41%
----------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Net investment income per share and the ratio of net investment income to average net assets include $0.112
and 0.38%, respectively, resulting from a special dividend from MCI in December 2005.
4 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
5 Annualized.
6 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions
of the Fund's capital shares, including ETF Creation Units.
69
Utilities Index Fund Admiral Shares
Year Ended Aug. 31, Apr. 28/1/ to
------------------------------------------------------ Aug. 31,
2007 2006 2005 2004
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $36.47 $34.03 $26.70 $25.03
-----------------------------------------------------------------------------------------------------------------------------------
Investment Operations
-----------------------------------------------------------------------------------------------------------------------------------
Net Investment Income 1.080 1.080/2/ .972/2/ .36
-----------------------------------------------------------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) 4.089 2.378 7.623 1.31
on Investments/3/
-----------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 5.169 3.458 8.595 1.67
-----------------------------------------------------------------------------------------------------------------------------------
Distributions
-----------------------------------------------------------------------------------------------------------------------------------
Dividends from Net Investment Income (1.039) (1.018) (1.265) --
-----------------------------------------------------------------------------------------------------------------------------------
Distributions from Realized Capital Gains -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.039) (1.018) (1.265) --
-----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $40.60 $36.47 $34.03 $26.70
-----------------------------------------------------------------------------------------------------------------------------------
Total Return/4/ 14.33% 10.48% 32.87% 6.67%
-----------------------------------------------------------------------------------------------------------------------------------
Ratios/Supplemental Data
-----------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (Millions) $108 $52 $30 $1
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Total Expenses to Average Net 0.26% 0.28% 0.28% 0.28%/5/
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Ratio of Net Investment Income to Average 2.70% 3.26% 3.34% 3.82%/5/
Net Assets
-----------------------------------------------------------------------------------------------------------------------------------
Turnover Rate/6/ 12% 9% 7% 7%
-----------------------------------------------------------------------------------------------------------------------------------
1 Inception.
2 Calculated based on average shares outstanding.
3 Includes increases from redemption fees of $0.02, $0.04, $0.00, and $0.00.
4 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than one year.
5 Annualized.
6 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's
capital shares, including ETF Creation Units.
70
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. Be sure to carefully read each topic that pertains to your
relationship with Vanguard. Vanguard reserves the right to change the following
policies, without prior notice to shareholders. Please call or check online for
current information.
Purchasing Shares
Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open, convert shares to, or maintain a fund account,
or to add to an existing fund account.
Investment minimums may differ for certain categories of investors.
Account Minimums for Admiral Shares
To open and maintain an account. $100,000.
To add to an existing account. $50 by Automatic Investment Plan; $100 by check,
exchange, wire, or electronic bank transfer (other than Automatic Investment
Plan).
How to Purchase Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may open certain types of accounts, request an
electronic bank transfer, and make an exchange (the purchase of shares in an
open fund with the proceeds of a redemption from another fund) through our
website at www.vanguard.com.
By telephone. You may begin the account registration process or request that
the account-opening forms be sent to you. You may also call Vanguard to request
a purchase of shares by wire, by electronic bank transfer, or by an exchange.
See Contacting Vanguard.
By mail. You may send your account registration form and check to open a new
fund account at Vanguard. To add to an existing fund account, you may send your
check with an Invest-by-Mail form (from your account statement) or with a
deposit slip (available online). You may also send a written request to Vanguard
to add to a fund account or to make an exchange. The request must be in good
order. See How to Make a Purchase Request: By check. For a list of Vanguard
addresses, see Contacting Vanguard.
71
How to Make a Purchase Request
By electronic bank transfer. To establish the electronic bank transfer option
on an account, you must designate a bank account online, complete a special
form, or fill out the appropriate section of your account registration form.
After the option is set up on your account, you can purchase shares by
electronic bank transfer on a regular schedule (Automatic Investment Plan) or
whenever you wish. Your purchase request can be initiated online, by telephone,
or by mail if your request is in good order.
By wire. Wiring instructions vary for different types of purchases. Please call
Vanguard for instructions and policies on purchasing shares by wire. You may
initiate your wire purchase by phone or online. See Contacting Vanguard.
By check. You may send a check to make initial or additional purchases to your
fund account. Also see How to Purchase Shares: By mail. Make your check payable
to Vanguard and include the appropriate fund number (e.g., Vanguard--xx). For a
list of Fund numbers (for Funds in this prospectus), see Contacting Vanguard.
Trade Date
If the New York Stock Exchange (NYSE) is open for regular trading (a business
day) at the time a purchase, conversion, exchange, or redemption request is
received in good order, the trade date will generally be the same day. See Other
Rules You Should Know--Good Order for additional information on all transaction
requests.
You buy shares at a fund's next-determined NAV after Vanguard receives your
purchase request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are purchased at that day's NAV. This is known as
your trade date.
For check purchases into all funds other than money market funds, and for
exchanges and wire purchases into all funds: For a purchase request received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the same day the purchase request was
received. For a purchase request received after the close of regular trading on
the NYSE, the trade date will be the first business day following the day the
purchase request was received.
For check purchases of money market funds only: For a purchase request received
by Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the trade date will be the first business day following the day
the purchase request was received. For a purchase request received after the
close of regular trading on the NYSE, the trade date will be the second business
day following the day the purchase request was received. Because money market
instruments must be purchased with federal funds and it takes a money market
mutual fund one business
72
day to convert check proceeds into federal funds, the trade date will be one
business day later than for other funds.
For an electronic bank transfer by Automatic Investment Plan: If you have
established the Automatic Investment Option, your trade date generally will be
one business day before the date you designated for withdrawal from your bank
account.
For an electronic bank transfer (other than an Automatic Investment Plan
purchase): For a purchase request received by Vanguard on a business day before
10 p.m., Eastern time, the trade date will be the following business day.
Your purchase request must be accurate and complete. See Other Rules You Should
Know--Good Order.
For further information about purchase transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Other Purchase Rules You Should Know
Admiral Shares. Please note that Admiral Shares are not available for:
. SIMPLE IRAs and 403(b)(7) custodial accounts;
. Other retirement plan accounts receiving special administrative services from
Vanguard; or
. Accounts maintained by financial intermediaries, except in limited
circumstances.
Check purchases. All purchase checks must be written in U.S. dollars and must
be drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or
money orders. In addition, Vanguard may refuse "starter checks" and checks that
are not made payable to Vanguard.
New accounts. We are required by law to obtain from you certain personal
information that we will use to verify your identity. If you do not provide the
information, we may not be able to open your account. If we are unable to verify
your identity, Vanguard reserves the right, without prior notice, to close your
account or take such other steps as we deem reasonable.
Refused or rejected purchase requests. Vanguard reserves the right to stop
selling fund shares or to reject any purchase request at any time and without
prior notice, including, but not limited to, purchases requested by exchange
from another Vanguard fund. This also includes the right to reject any purchase
request because of a history of frequent trading by the investor or because the
purchase may negatively affect a fund's operation or performance.
73
Large purchases. Please call Vanguard before attempting to invest a large
dollar amount.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
Converting Shares
A conversion between share classes of the same fund is a nontaxable event.
Pricing of Share Class Conversions
If you convert from Admiral Shares to ETF Shares, the transaction will be based
on the respective net asset values of the separate classes on the trade date for
the conversion. For more information see Conversion Privilege under ETF Shares.
Redeeming Shares
How to Redeem Shares
Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You
Should Know before initiating your request.
Online transactions. You may redeem shares, request an electronic bank
transfer, and make an exchange (the purchase of shares with the proceeds of a
redemption from another fund) through our website at www.vanguard.com.
By telephone. You may call Vanguard to request a redemption of shares by wire,
by electronic bank transfer, by check, or by an exchange. See Contacting
Vanguard.
By mail. You may send a written request to Vanguard to redeem from a fund
account or to make an exchange. The request must be in good order. See
Contacting Vanguard.
How to Receive Redemption Proceeds
By electronic bank transfer. To establish the electronic bank transfer option,
you must designate a bank account online, complete a special form, or fill out
the appropriate section of your account registration form. You can then redeem
shares by electronic bank transfer on a regular schedule (Automatic Withdrawal
Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be
initiated online, by telephone, or by mail if your request is in good order.
By wire. When redeeming from a money market fund or a bond fund, you may
instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a
previously designated bank account. Wire redemptions generally are not available
for Vanguard's
74
balanced or stock funds. The wire redemption option is not automatic; you must
designate a bank account online, complete a special form, or fill out the
appropriate section of your account registration form. Vanguard charges a $5 fee
for wire redemptions under $5,000.
By check. If you have not chosen another redemption method, Vanguard will mail
you a redemption check, normally within two business days of your trade date.
Trade Date
If the NYSE is open for regular trading (a business day) at the time a purchase,
conversion, exchange, or redemption request is received in good order, the trade
date will generally be the same day. See Other Rules You Should Know--Good Order
for additional information on all transaction requests.
You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request in good order. NAVs are determined only on days when the NYSE
is open for regular trading. For example, if your request is received by
Vanguard before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), your shares are redeemed at that day's NAV. This is known as your
trade date.
For check redemptions and exchanges from all funds: For a redemption request
received by Vanguard before the close of regular trading on the NYSE (generally
4 p.m., Eastern time), the trade date will be the same day the redemption
request was received. For a redemption request received after the close of
regular trading on the NYSE, the trade date will be the first business day
following the day the redemption request was received.
For money market fund redemptions by wire: For telephone requests received by
Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard
Prime Money Market Fund), on a day that the NYSE has regular trading hours, the
redemption proceeds will leave Vanguard by the close of business the day the
redemption request was received. For other money market wire redemption requests
received before the close of regular trading on the NYSE (generally 4 p.m.,
Eastern time), the redemption proceeds will leave Vanguard by the close of
business on the first business day following the day the redemption request was
received.
For bond fund redemptions by wire: For a redemption request received by Vanguard
before the close of regular trading on the NYSE (generally 4 p.m., Eastern
time), the redemption proceeds will leave Vanguard by the close of business on
the first business day following the day the redemption request was received.
For an electronic bank transfer by Automatic Withdrawal Plan: Your trade date
generally will be the date you designated for withdrawal of funds (redemption of
shares) from your Vanguard account. Proceeds of redeemed shares generally will
be
75
transferred from Vanguard to your designated bank account two business days
after your trade date. If the date you designated for withdrawal falls on a
weekend, holiday, or other nonbusiness day, your trade date will be the previous
business day.
For an electronic bank transfer (other than an Automatic Withdrawal Plan
redemption): For a redemption request received by Vanguard before the close of
regular trading on the NYSE (generally 4 p.m., Eastern time), the trade date
will be the same day the redemption request was received. For a redemption
request received after the close of regular trading on the NYSE, the trade date
will be the first business day following the day the redemption request was
received.
Your redemption request must be accurate and complete. See Other Rules You
Should Know--Good Order.
For further information about redemption transactions, consult our website at
www.vanguard.com or see Contacting Vanguard.
Redemption Fees
Each Fund charges a 2% fee on shares redeemed within one year of purchase by
selling or by exchanging to another fund, or when Vanguard applies the
low-balance account-closure policy.
The fee is withheld from redemption proceeds and is paid directly to the Fund.
Shares held for one year or more are not subject to the 2% fee.
After redeeming shares that are exempt from redemption fees, shares you have
held the longest will be redeemed first.
For Vanguard fund accounts (including participants in employer-sponsored defined
contribution plans that are served by Vanguard Small Business Services),
redemption fees will not apply to the following:
. Redemptions of shares purchased with reinvested dividend and capital
gains distributions.
. Share transfers, rollovers, or re-registrations within the same fund.
. Conversions of shares from one share class to another in the same fund.
. Redemptions of shares to pay fund or account fees.
. Section 529 college savings plans.
76
. For a one-year period, shares rolled over to an IRA held at Vanguard from a
retirement plan for which Vanguard serves as recordkeeper (except for Vanguard
Small Business Services retirement plans).
. Distributions by shareholders age 701/2 or older from the following:
. Traditional IRAs.
. Inherited IRAs (traditional and Roth).
. Rollover IRAs.
. SEP-IRAs.
. SIMPLE IRAs.
. Section 403(b)(7) plans served by the Vanguard Small Business Services
Department.
. Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves
as trustee.
For participants in employer-sponsored defined contribution plans (other than
those served by the Vanguard Small Business Services Department), in addition to
the exclusions previously listed, redemption fees will not apply to the
following:
. Exchanges of shares purchased with participant payroll or employer
contributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions or transfers of shares as part of a plan termination or at the
direction of the plan.
. Direct rollovers into IRAs.
Redemption fees will apply to shares exchanged out of a fund within the fund's
redemption-fee period into which fund the shares had previously been exchanged,
rolled over, or transferred by a participant.
If Vanguard does not serve as recordkeeper for your plan, redemption fees may be
applied differently. Please read your recordkeeper's plan materials carefully to
learn of any other rules or fees that may apply. Also see Frequent-Trading
Limits--Accounts Held by Intermediaries for information about the assessment of
redemption fees by intermediaries.
Other Redemption Rules You Should Know
Documentation for certain accounts. Special documentation may be required to
redeem from certain types of accounts, such as trust, corporate, nonprofit, or
retirement accounts. Please call us before attempting to redeem from these types
of accounts.
77
Potentially disruptive redemptions. Vanguard reserves the right to pay all or
part of a redemption in kind--that is, in the form of securities--if we
reasonably believe that a cash redemption would negatively affect the fund's
operation or performance or that the shareholder may be engaged in frequent
trading. Under these circumstances, Vanguard also reserves the right to delay
payment of the redemption proceeds for up to seven calendar days. By calling us
before you attempt to redeem a large dollar amount, you may avoid in-kind or
delayed payment of your redemption. Please see Frequent-Trading Limits for
information about Vanguard's policies to limit frequent trading.
Recently purchased shares. Although you can redeem shares at any time, proceeds
may 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
by electronic bank transfer. If you have written a check on a fund with
checkwriting privileges, that check may be rejected if your fund account does
not have a sufficient available balance.
Address change. If you change your address online or by telephone, there may be
a 15-day restriction on your ability to make online and telephone redemptions.
You can request a redemption in writing at any time. Confirmations of address
changes are sent to both the old and new addresses.
Payment to a different person or address. At your request, 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 and may require a signature guarantee. You can obtain a signature
guarantee from most commercial and savings banks, credit unions, trust
companies, or member firms of a U.S. stock exchange. A notary public cannot
provide a signature guarantee.
No cancellations. Place your transaction requests carefully. Vanguard will not
accept your request to cancel any transaction request after processing of the
request has begun.
Emergency circumstances. Vanguard funds can postpone payment of redemption
proceeds for up to seven calendar days. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption proceeds beyond seven
calendar days at times when the NYSE is closed or during emergency
circumstances, as determined by the SEC.
Exchanging Shares
If the NYSE is open for regular trading (a business day) at the time a purchase,
exchange, or redemption request is received in good order, the trade date will
generally be the same day. See Other Rules You Should Know--Good Order for
additional information on all transaction requests.
78
An exchange occurs when the assets redeemed from one Vanguard fund are used to
purchase shares in an open Vanguard fund. You can make exchange requests online
(if you are a registered user of Vanguard.com), by telephone, or by mail. See
Purchasing Shares and Redeeming Shares.
Please note that Vanguard reserves the right, without prior notice, to revise or
terminate the exchange privilege, limit the amount of any exchange, or reject an
exchange, at any time, for any reason.
Frequent-Trading Limits
Because excessive transactions can disrupt management of a fund and increase the
fund's costs for all shareholders, Vanguard places certain limits on frequent
trading in the Vanguard funds. Each Vanguard fund (other than money market
funds, short-term bond funds, and ETF Shares) limits an investor's purchases or
exchanges into a fund account for 60 calendar days after the investor has
redeemed or exchanged out of that fund account.
For Vanguard Retirement Investment Program pooled plans, the policy applies to
exchanges made by participants online or by phone.
The policy does not apply to the following:
. Purchases of shares with reinvested dividend or capital gains distributions.
. Transactions through Vanguard's Automatic Investment Plan, Automatic Exchange
Service, Direct Deposit Service, Automatic Withdrawal Plan, Required Minimum
Distribution Service, and Vanguard Small Business Online/(R)/.
. Redemptions of shares to pay fund or account fees.
. Transaction requests submitted by mail to Vanguard from shareholders who hold
their accounts directly with Vanguard. (Wire transactions and transaction
requests submitted by fax are not mail transactions and are subject to the
policy.)
. Transfers and re-registrations of shares within the same fund.
. Purchases of shares by asset transfer or direct rollover.
. Conversions of shares from one share class to another in the same fund.
. Checkwriting redemptions.
. Section 529 college savings plans.
. Certain approved institutional portfolios and asset allocation programs, as
well as trades made by Vanguard funds that invest in other Vanguard funds.
(Please note that shareholders of Vanguard's funds of funds are subject to the
policy.)
79
For participants in employer-sponsored defined contribution plans that are not
served by Vanguard Small Business Services, the frequent-trading policy does not
apply to:
. Purchases of shares with participant payroll or employer contributions or
loan repayments.
. Purchases of shares with reinvested dividend or capital gains distributions.
. Distributions, loans, and in-service withdrawals from a plan.
. Redemptions of shares as part of a plan termination or at the direction of the
plan.
. Automated transactions executed during the first six months of a participant's
enrollment in the Vanguard Managed Account Program.
. Redemptions of shares to pay fund or account fees.
. Share or asset transfers or rollovers.
. Re-registrations of shares.
. Conversions of shares from one share class to another in the same fund.
Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard
will systematically monitor for frequent trading in institutional clients'
accounts. If we detect suspicious trading activity, we will investigate and take
appropriate action, which may include applying to a client's accounts the 60-day
policy previously described, prohibiting a client's purchases of fund shares,
and/or eliminating the client's exchange privilege.
Accounts Held by Intermediaries
When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of the individual clients. However,
we review trading activity at the omnibus level, and if we detect suspicious
activity, we will investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.
For those Vanguard funds that charge purchase or redemption fees, intermediaries
will be asked to assess purchase and redemption fees on shareholder and
participant accounts and remit these fees to the funds. The application of
purchase and redemption fees and frequent-trading policies may vary among
intermediaries. There are no assurances that Vanguard will successfully identify
all intermediaries or that intermediaries will properly assess purchase and
redemption fees or administer frequent-trading policies. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.
80
Other Rules You Should Know
Prospectus and Shareholder Report Mailings
Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one prospectus and/or report when two or more shareholders have the
same last name and address. You may request individual prospectuses and reports
by contacting our Client Services Department in writing, by telephone, or by
e-mail.
Vanguard.com
Registration. If you are a registered user of Vanguard.com, you can use your
personal computer to review your account holdings; to buy, sell, or exchange
shares of most Vanguard funds; and to perform most other transactions. You must
register for this service online.
Electronic delivery. Vanguard can deliver your account statements, transaction
confirmations, and fund financial reports electronically. If you are a
registered user of Vanguard.com, you can consent to the electronic delivery of
these documents by logging on and changing your mailing preference under "My
Profile." You can revoke your electronic consent at any time, and we will begin
to send paper copies of these documents within 30 days of receiving your notice.
Telephone Transactions
Automatic. When we set up your account, we'll automatically enable you to do
business with us by telephone, unless you instruct us otherwise in writing.
Tele-Account/(R)/. To conduct account transactions through Vanguard's automated
telephone service, you must first obtain a Personal Identification Number (PIN).
Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after
requesting the PIN 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 requested information or if we
reasonably believe that the caller is not an individual authorized to act on the
account. Before we allow a caller to act on an account, we may request the
following information:
. Authorization to act on the account (as the account owner or by legal
documentation or other means).
. Account registration and address.
. Fund name and account number, if applicable.
. Other information relating to the caller, the account holder, or the account.
81
Subject to revision. For any or all shareholders, we reserve the right, at any
time and without prior notice, to revise, suspend, or terminate the privilege to
transact or communicate with Vanguard by telephone.
Good Order
We reserve the right to reject any transaction instructions that are not in
"good order." Good order generally means that your instructions include:
. The fund name and account number.
. The amount of the transaction (stated in dollars, shares, or percentage).
Written instructions also must include:
. Signatures of all registered owners.
. Signature guarantees, if required for the type of transaction. (Call Vanguard
for specific signature-guarantee requirements.)
. Any supporting documentation that may be required.
The requirements vary among types of accounts and transactions.
Vanguard reserves the right, without prior notice, to revise the requirements
for good order.
Future Trade-Date Requests
Vanguard does not accept requests to hold a purchase, conversion, redemption, or
exchange transaction for a future date. All such requests will receive trade
dates as previously described in Purchasing Shares, Converting Shares, and
Redeeming Shares. Vanguard reserves the right to return future-dated purchase
checks.
Accounts With More Than One Owner
If an account has more than one owner or authorized person, Vanguard will accept
telephone or online instructions from any one owner or authorized person.
Responsibility for Fraud
Vanguard will not be responsible for any account losses because of fraud if we
reasonably believe that the person transacting business 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
statements that we provide to you. It is important that you contact Vanguard
immediately about any transactions you believe to be unauthorized.
82
Uncashed Checks
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
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.
Investing With Vanguard Through Other Firms
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment advisor. Please consult your
financial intermediary to determine which, if any, shares are available through
that firm and to learn about other rules that may apply.
Please see Frequent-Trading Limits--Accounts Held by Intermediaries for
information about the assessment of redemption fees and monitoring of frequent
trading for accounts held by intermediaries.
Low-Balance Accounts
Each Fund reserves the right, without prior notice, to liquidate any
investment-only retirement-plan fund account or any nonretirement fund account
whose balance falls below the minimum initial investment for any reason,
including market fluctuation. Shares redeemed in accordance with this policy
will be subject to applicable redemption fees.
Right to Change Policies
In addition to the rights expressly stated elsewhere in this prospectus,
Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase (including eligibility requirements), redemption, exchange, conversion,
service, or privilege at any time without prior notice; (2) accept initial
purchases by telephone; (3) freeze any account and/or suspend account services
when Vanguard has received reasonable notice of a dispute regarding the assets
in an account, including notice of a dispute between the registered or
beneficial account owners or when we reasonably believe a fraudulent transaction
may occur or has occurred; (4) temporarily freeze any account and/or suspend
account services upon Vanguard's initial notification of the death of the
shareholder until Vanguard receives required documentation in good order; (5)
alter, impose, discontinue, or waive any redemption fee, account service fee, or
other fees charged to a group of shareholders; and (6) redeem an account,
without the owner's permission to do so, in cases of threatening conduct or
suspicious, fraudulent, or illegal activity. Changes may affect any or all
investors. These actions will be taken when, at
83
the sole discretion of Vanguard management, we reasonably believe they are
deemed to be in the best interest of a fund.
Share Classes
Vanguard reserves the right, without prior notice, to change the eligibility
requirements of its share classes, including the types of clients who are
eligible to purchase each share class.
Fund and Account Updates
Confirmation Statements
We will send (or provide online, whichever you prefer) a confirmation of your
trade date and the amount of your transaction when you buy, sell, exchange, or
convert shares. However, we will not send confirmations reflecting only
checkwriting redemptions or the reinvestment of dividends or capital gains
distributions. For any month in which you had a checkwriting redemption, a
Checkwriting Activity Statement will be sent to you itemizing the checkwriting
redemptions for that month. Promptly review each confirmation statement that we
provide to you by mail or online. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on a
confirmation statement, or Vanguard will consider the transaction properly
processed.
Portfolio Summaries
We will send (or provide online, whichever you prefer) quarterly portfolio
summaries to help you keep track of your accounts throughout the year. Each
summary shows the market value of your account at the close of the statement
period, as well as all distributions, purchases, redemptions, exchanges,
transfers, and conversions for the current calendar year. Promptly review each
summary that we provide to you by mail or online. It is important that you
contact Vanguard immediately with any questions you may have about any
transaction reflected on the summary, or Vanguard will consider the transaction
properly processed.
Tax Statements
For most taxable accounts, we will send annual tax statements to assist you 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 and
other retirement plans. These statements can be viewed online.
84
Average-Cost Review Statements
For most taxable accounts, average-cost review statements will accompany annual
1099B tax forms. These tax forms show the average cost of shares that you
redeemed during the previous calendar year, using the average-cost
single-category method, which is one of the methods established by the IRS.
Annual and Semiannual Reports
We will send (or provide online, whichever you prefer) financial reports about
Vanguard U.S. Sector Index Funds twice a year, in April and October. These
comprehensive reports include overviews of the financial markets and provide the
following specific Fund information:
. Performance assessments and comparisons with industry benchmarks.
. Financial statements with listings of Fund holdings.
Portfolio Holdings
We generally post on our website at www.vanguard.com, in the Holdings section of
each Fund's Profile page, a detailed list of the securities held by the Fund
(under Portfolio Holdings), as of the most recent calendar-quarter-end. This
list is generally updated within 30 days after the end of each calendar quarter.
Vanguard may exclude any portion of these portfolio holdings from publication
when deemed in the best interest of the Fund. We also generally post the ten
largest stock portfolio holdings of the Fund and the percentage of the Fund's
total assets that each of these holdings represents, as of the most recent
calendar-quarter-end. This list is generally updated within 15 calendar days
after the end of each calendar quarter. Please consult the Fund's Statement of
Additional Information or our website for a description of the policies and
procedures that govern disclosure of the Fund's portfolio holdings.
85
Contacting Vanguard
--------------------------------------------------------------------------------
Web
Vanguard.com For the most complete source of Vanguard news
24 hours a day, 7 days For fund, account, and service information
a week For most account transactions
For literature requests
--------------------------------------------------------------------------------
Phone
--------------------------------------------------------------------------------
Vanguard For automated fund and account information
Tele-Account/(R) / For exchange transactions (subject to limitations)
800-662-6273 Toll-free, 24 hours a day, 7 days a week
(ON-BOARD)
--------------------------------------------------------------------------------
Investor Information For fund and service information
800-662-7447 (SHIP) For literature requests
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-952-3335)
--------------------------------------------------------------------------------
Client Services For account information
800-662-2739 (CREW) For most account transactions
(Text telephone for Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
people with hearing Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
impairment at
800-749-7273)
--------------------------------------------------------------------------------
Admiral Service Center For Admiral account information
888-237-9949 For most Admiral transactions
Business hours only: Monday-Friday, 8 a.m. to 10 p.m.,
Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time
--------------------------------------------------------------------------------
Institutional Division For information and services for large
888-809-8102 institutional investors
Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m.,
Eastern time
--------------------------------------------------------------------------------
Intermediary Sales For information and services for financial
Support intermediaries including broker-dealers, trust
800-997-2798 institutions, insurance companies, and financial
advisors
Business hours only: Monday-Friday, 8:30 a.m. to 7 p.m.,
Eastern time
--------------------------------------------------------------------------------
86
Vanguard Addresses
Please be sure to use the correct address, depending on your method of delivery.
Use of an incorrect address could delay the processing of your transaction.
Regular Mail (Individuals) 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
----------------------------------------------------------------------
Registered, Express, or Overnight The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
----------------------------------------------------------------------
Fund Numbers
Please use the specific fund number when contacting us:
Vanguard Consumer Discretionary Index Fund 5483
--------------------------------------------------------------
Vanguard Consumer Staples Index Fund 5484
--------------------------------------------------------------
Vanguard Energy Index Fund 5480
--------------------------------------------------------------
Vanguard Financials Index Fund 5486
--------------------------------------------------------------
Vanguard Health Care Index Fund 5485
--------------------------------------------------------------
Vanguard Industrials Index Fund 5482
--------------------------------------------------------------
Vanguard Information Technology Index Fund 5487
--------------------------------------------------------------
Vanguard Materials Index Fund 5481
--------------------------------------------------------------
Vanguard Telecommunication Services Index Fund 5488
--------------------------------------------------------------
Vanguard Utilities Index Fund 5489
--------------------------------------------------------------
Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Admiral, Vanguard
Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business Online,
Vanguard Brokerage Services, and the ship logo are trademarks of The Vanguard
Group, Inc. The funds or securities referred to herein are not sponsored,
endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any
such funds or securities. For any such funds or securities, the Statement of
Additional Information contains a more detailed description of the limited
relationship MSCI has with The Vanguard Group and any related funds. All other
marks are the exclusive property of their respective owners.
87
ETF Shares
In addition to Admiral Shares, certain Vanguard funds offer a class of shares,
known as Vanguard ETF* Shares, that are listed for trading on the American Stock
Exchange (AMEX). If you own Admiral Shares issued by one of these funds, you may
convert those shares into ETF Shares of the same fund.
Note: Vanguard reserves the right to modify or terminate the conversion
privilege in the future.
Each Fund offers an ETF Share class:
Ticker
Fund ETF Shares Symbol
-------------------------------------------------------------------------------
Consumer Discretionary Index Consumer Discretionary ETF Shares VCR
Fund
-------------------------------------------------------------------------------
Consumer Staples Index Fund Consumer Staples ETF Shares VDC
-------------------------------------------------------------------------------
Energy Index Fund Energy ETF Shares VDE
-------------------------------------------------------------------------------
Financials Index Fund Financials ETF Shares VFH
-------------------------------------------------------------------------------
Health Care Index Fund Health Care ETF Shares VHT
-------------------------------------------------------------------------------
Industrials Index Fund Industrials ETF Shares VIS
-------------------------------------------------------------------------------
Information Technology Index Information Technology ETF Shares VGT
Fund
-------------------------------------------------------------------------------
Materials Index Fund Materials ETF Shares VAW
-------------------------------------------------------------------------------
Telecommunication Services Telecommunication Services ETF Shares VOX
Index Fund
-------------------------------------------------------------------------------
Utilities Index Fund Utilities ETF Shares VPU
-------------------------------------------------------------------------------
Although ETF Shares represent an investment in the same portfolio of securities
as Admiral Shares, they have different characteristics and may appeal to a
different group of investors. It is important that you understand the
differences before deciding whether to convert your shares to ETF Shares.
The following material summarizes key information about ETF Shares. A separate
prospectus with more complete information about ETF Shares is also available.
Investors should review that prospectus before deciding whether to convert.
*U.S. Pat. No. 6,879,964 B2.
88
Differences Between ETF Shares and Conventional Mutual Fund Shares
Admiral Shares are "conventional" mutual fund shares; that is, they can be
purchased from and redeemed with the issuing fund for cash at a net asset value
(NAV) calculated once a day. ETF Shares, by contrast, cannot be purchased from
or redeemed with the issuing fund, except as noted.
An organized trading market is expected to exist for ETF Shares, unlike
conventional mutual fund shares, because ETF Shares are listed for trading on
the AMEX. Investors can purchase and sell ETF Shares on the secondary market
through a broker. Secondary-market transactions occur not at NAV, but at market
prices that change throughout the day based on the supply of, and demand for,
ETF Shares and on changes in the prices of the fund's portfolio holdings.
The market price of a fund's ETF Shares will differ somewhat from the NAV of
those shares. The difference between market price and NAV is expected to be
small most of the time, but in times of extreme market volatility the difference
may become significant.
Buying and Selling ETF Shares
Vanguard ETF Shares must be held in a brokerage account. Therefore, before
acquiring ETF Shares, whether through a conversion or an open-market purchase,
you must have an account with a broker.
You buy and sell ETF Shares in the same way you buy and sell any other
exchange-traded security--on the open market, through a broker. In most cases,
the broker will charge you a commission to execute the transaction. Unless
imposed by your broker, there is no minimum dollar amount you must invest and no
minimum number of ETF Shares you must purchase. Because open-market transactions
occur at market prices, you may pay more than NAV when you buy ETF Shares and
receive less than NAV when you sell those shares.
If you own conventional shares of a Vanguard fund that issues ETF Shares, you
can convert those shares into ETF Shares of equivalent value--but you cannot
convert back. See "Conversion Privilege" for a discussion of the conversion
process.
There is one other way to buy and sell ETF Shares. Investors can purchase and
redeem ETF Shares directly from the issuing fund at NAV if they do so (1)
through certain authorized broker-dealers, (2) in large blocks of 100,000 ETF
Shares, known as Creation Units, and (3) in exchange for baskets of securities
rather than cash. However, because Creation Units will be worth millions of
dollars, and because most investors prefer to transact in cash rather than with
securities, it is expected that only a limited number of institutional investors
will purchase and redeem ETF Shares this way.
89
Risks
ETF Shares issued by a fund are subject to the same risks as conventional shares
of the same fund. ETF Shares also are subject to the following risks:
. The market price of a fund's ETF Shares will vary somewhat from the NAV of
those shares. Therefore, you may pay more than NAV when buying ETF Shares and
you may receive less than NAV when selling them.
. ETF Shares cannot be redeemed with the Fund, except in Creation Unit
aggregations. Therefore, if you no longer wish to own ETF Shares, you must sell
them on the open market. Although ETF Shares will be listed for trading on the
AMEX, it is possible that an active trading market may not be maintained.
. Trading of a fund's ETF Shares on the AMEX may be halted if AMEX officials
deem such action appropriate, if the shares are delisted from the AMEX, or if
the activation of marketwide "circuit breakers" (which are tied to large
decreases in stock prices) halts stock trading generally.
Fees and Expenses
When you buy and sell ETF Shares through a brokerage firm, you will pay whatever
commissions the firm charges. You also will incur the cost of the "bid-asked
spread," which is the difference between the price a dealer will pay for a
security and the somewhat higher price at which the dealer will sell the same
security. If you convert from conventional shares to ETF Shares, you will not
pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50
for each conversion transaction, and your broker may impose its own conversion
fees as well.
The total annual operating expenses (the expense ratio) for each Fund's ETF
Shares as of August 31, 2007 were:
ETF Shares Expense Ratio
---------------------------------------------------------
Consumer Discretionary ETF 0.22%
---------------------------------------------------------
Consumer Staples ETF 0.22
---------------------------------------------------------
Energy ETF 0.22
---------------------------------------------------------
Financials ETF 0.22
---------------------------------------------------------
Health Care ETF 0.22
---------------------------------------------------------
Industrials ETF 0.22
---------------------------------------------------------
Information Technology ETF 0.22
---------------------------------------------------------
Materials ETF 0.22
---------------------------------------------------------
Telecommunication Services ETF 0.23
---------------------------------------------------------
Utilities ETF 0.22
---------------------------------------------------------
90
Account Services
Because you hold ETF Shares through a brokerage account, Vanguard will have no
record of your ownership unless you hold the shares through Vanguard Brokerage
Services/(R)/ (Vanguard Brokerage). Your broker will service your account. For
example, the broker will provide account statements, confirmations of your
purchases and sales of ETF Shares, and year-end tax information. The broker also
will be responsible for ensuring that you receive shareholder reports and other
communications from the fund whose ETF Shares you own. You will receive certain
services (e.g., dividend reinvestment and average-cost information) only if your
broker offers those services.
Conversion Privilege
Owners of conventional shares issued by the Funds may convert those shares into
ETF Shares of equivalent value of the same fund. Please note that investors who
own conventional shares through a 401(k) plan or other employer-sponsored
retirement or benefit plan may not convert those shares into ETF Shares.
Vanguard imposes a $50 charge on conversion transactions and reserves the right,
in the future, to raise or lower the fee and to limit or terminate the
conversion privilege. Your broker may charge an additional fee to process a
conversion. ETF Shares, whether acquired through a conversion or purchased on
the open market, cannot be converted into conventional shares of the same Fund.
Similarly, ETF Shares of one fund cannot be exchanged for ETF Shares of another
fund.
Unless you are an Authorized Participant, you must hold ETF Shares in a
brokerage account. Thus, before converting conventional shares into ETF Shares,
you must have an existing, or open a new, brokerage account. To initiate a
conversion of conventional shares into ETF Shares, please contact your broker.
Please note that upon converting your conventional mutual fund shares to ETF
Shares, you will need to select a cost-basis method of accounting for your ETF
Shares. Options for your cost-basis method will depend on your historical
transaction activity in the conventional shares. Prior to conversion, please
consult your tax advisor to identify your options and select a method. You
should also contact your broker to ensure that the method you choose is offered
by your particular brokerage firm.
Converting conventional shares into ETF Shares generally is accomplished as
follows. First, after your broker notifies Vanguard of your request to convert,
Vanguard will transfer your conventional shares from your account to the
broker's omnibus account with Vanguard (an account maintained by the broker on
behalf of all its customers who hold conventional Vanguard fund shares through
the broker). After the transfer, Vanguard's records will reflect your broker,
not you, as the owner of the shares. Next, your broker will instruct Vanguard to
convert the appropriate number or dollar amount of conventional shares in its
omnibus account into ETF Shares of equivalent value, based on the respective net
asset values of the two share classes.
91
Your Fund's transfer agent will reflect ownership of all ETF Shares in the name
of the Depository Trust Company (DTC). The DTC will keep track of which ETF
Shares belong to your broker, and your broker, in turn, will keep track of which
ETF Shares belong to you.
Because the DTC is unable to handle fractional shares, only whole shares will be
converted. For example, if you owned 300.250 conventional shares, and this was
equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF
Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would
be 2.481 conventional shares) would remain in the broker's omnibus account with
Vanguard. Your broker then could either (1) credit your account with 0.750 ETF
Shares rather than 2.481 conventional shares, or (2) redeem the 2.481
conventional shares at net asset value, in which case you would receive cash in
place of those shares. If your broker chooses to redeem your conventional
shares, you will realize a gain or loss on the redemption that must be reported
on your tax return (unless you hold the shares in an IRA or other tax-deferred
account). Please consult your broker for information on how it will handle the
conversion process, including whether it will impose a fee to process a
conversion.
If you convert your conventional shares to ETF Shares through Vanguard
Brokerage, all conventional shares for which you request conversion will be
converted into ETF Shares of equivalent value. Because no fractional shares will
have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does
not impose a conversion fee over and above the fee imposed by Vanguard.
Here are some important points to keep in mind when converting conventional
shares of a Vanguard fund into ETF Shares:
. The conversion transaction is nontaxable except, as applicable, to the limited
extent as previously described.
. The conversion process can take anywhere from several days to several weeks,
depending on your broker. Vanguard generally will process conversion requests
either on the day they are received or on the next business day. Vanguard
imposes conversion blackout windows around the dates when a fund with ETF Shares
declares dividends. This is necessary to prevent a shareholder from collecting a
dividend from both the conventional share class currently held and also from the
ETF share class into which the shares will be converted.
. Until the conversion process is complete, you will remain fully invested in a
fund's conventional shares, and your investment will increase or decrease in
value in tandem with the net asset value of those shares.
. During the conversion process, you will be able to liquidate all or part of
your investment by instructing Vanguard or your broker (depending on who
maintains records of your share ownership) to redeem your conventional shares.
After the conversion process is complete, you will be able to liquidate all or
part of your investment by instructing your broker to sell your ETF Shares.
92
Glossary of Investment Terms
Active Management. An investment approach that seeks to exceed the average
returns of the financial markets. Active managers rely on research, market
forecasts, and their own judgment and experience in selecting securities to buy
and sell.
Capital Gains Distribution. Payment to mutual fund shareholders of gains
realized on securities that a fund has sold at a profit, minus any realized
losses.
Cash Investments. Cash deposits, short-term bank deposits, and money market
instruments that include U.S. Treasury bills and notes, bank certificates of
deposit (CDs), repurchase agreements, commercial paper, and banker's
acceptances.
Circuit Breaker. A rule that requires a halt in trading in the U.S. stock
markets for a specific period of time when the Dow Jones Industrial Average
declines by a specified percentage during the course of a trading day.
Common Stock. A security representing ownership rights in a corporation. A
stockholder is entitled to share in the company's profits, some of which may be
paid out as dividends.
Distributions. Payments to shareholders of dividend income, capital gains, and
return of capital generated by the fund's investment activities and distribution
policies, after expenses.
Dividend Distribution. Payment to mutual fund shareholders of income from
interest or dividends generated by a fund's investments.
ETF Shares. A class of exchange-traded shares issued by certain Vanguard mutual
funds. ETF Shares can be bought and sold continuously throughout the day at
market prices.
Expense Ratio. The percentage of a fund's average net assets used to pay its
expenses during a fiscal year. The expense ratio includes management
expenses--such as advisory fees, account maintenance, reporting, accounting,
legal, and other administrative expenses--and any 12b-1 distribution fees. It
does not include the transaction costs of buying and selling portfolio
securities.
Inception Date. The date on which the assets of a fund (or one of its share
classes) are first invested in accordance with the fund's investment objective.
For funds with a subscription period, the inception date is the day after that
period ends. Investment performance is measured from the inception date.
Index. An unmanaged group of securities whose overall performance is used as a
standard to measure the investment performance of a particular market.
Investment Advisor. An organization that is responsible for making the
day-to-day decisions regarding a fund's investments.
93
Median Market Cap. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
Mutual Fund. An investment company that pools the money of many people and
invests it in a variety of securities in an effort to achieve a specific
objective over time.
Net Asset Value (NAV). The market value of a mutual fund's total assets, minus
liabilities, divided by the number of shares outstanding. The value of a single
share is also called its share value or share price.
Passive Management. A low-cost investment strategy in which a mutual fund
attempts to track--rather than outperform--a specified market benchmark or
"index"; also known as indexing.
Price/Earnings (P/E) Ratio. The current share price of a stock, divided by its
per-share earnings (profits). A stock selling for $20, with earnings of $2 per
share, has a price/earnings ratio of 10.
Principal. The face value of a debt instrument or the amount of money put into
an investment.
Securities. Stocks, bonds, money market instruments, and other investment
vehicles.
Total Return. A percentage change, over a specified time period, in a mutual
fund's net asset value, assuming 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 in its returns.
Yield. Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
94
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SHIP LOGO VANGUARD(R)
P.O. Box 2600
Valley Forge, PA 19482-2600
CONNECT WITH VANGUARD/(R)/ > www.vanguard.com
For More Information
If you would like more information about Vanguard U.S. Sector 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. In the annual reports, you will
find a discussion of the market conditions and investment strategies that
significantly affected the Funds' performance during their last fiscal year.
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 visit www.vanguard.com or contact us as follows:
The Vanguard Group
Investor Information Department
P.O. Box 2600
Valley Forge, PA 19482-2600
Telephone: 800-662-7447 (SHIP)
Text telephone for people with hearing impairment: 800-952-3335
If you are a current Vanguard shareholder and would like information about your
account, account transactions, and/or account statements, please call:
Client Services Department
Telephone: 800-662-2739 (CREW)
Text telephone for people with hearing impairment: 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 202-551-8090. Reports and other information
about the Funds are also available in the EDGAR database on the SEC's Internet
site at www.sec.gov, or you can receive copies of this information, for a fee,
by electronic request at the following e-mail address: publicinfo@sec.gov, or by
writing the Public Reference Section, Securities and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act file number: 811-1027
(C) 2007 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.
P5483 122007
Vanguard/(R)/ U.S. Sector ETFs
> Prospectus
Exchange-traded fund shares that are not individually redeemable
December 10, 2007
SHIP LOGO VANGUARD(R)
Vanguard Consumer Discretionary ETF
Vanguard Consumer Staples ETF
Vanguard Energy ETF
Vanguard Financials ETF
Vanguard Health Care ETF
Vanguard Industrials ETF
Vanguard Information Technology ETF
Vanguard Materials ETF
Vanguard Telecommunication Services ETF
Vanguard Utilities ETF
[MSCI LOGO]
This prospectus contains financial data for the Funds through the fiscal year
ended August 31, 2007.
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.
Contents
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Vanguard ETF Profiles 1 More on the Funds and ETF Shares 53
-------------------------------------------------------------------------------
Consumer Discretionary 1 The Funds an