485APOS

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------






                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                   FORM N-1A

                   REGISTRATION STATEMENT (NO. 2-88116) UNDER
                           THE SECURITIES ACT OF 1933

                           PRE-EFFECTIVE AMENDMENT NO.


                        POST-EFFECTIVE AMENDMENT NO. 57


                                      AND

              REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
                                  ACT OF 1940


                                AMENDMENT NO. 60



                           VANGUARD SPECIALIZED 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 AMENDMENT BECOME EFFECTIVE


           ON APRIL 15, 2006, PURSUANT TO PARAGRAPH (A) OF RULE 485.




-------------------------------------------------------------------------------
-------------------------------------------------------------------------------






VANGUARD/(R)/ DIVIDEND APPRECIATION
INDEX FUND

Prospectus

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED FEBRUARY 1, 2006

Investor Shares
April 15, 2006


{SHIP GRAPHIC}VANGUARD(R)

 INFORMATION CONTAINED IN THIS PROSPECTUS IS SUBJECT TO COMPLETION OR AMENDMENT.
A REGISTRATION STATEMENT FOR VANGUARD DIVIDEND APPRECIATION INDEX FUND HAS BEEN
FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME
EFFECTIVE.
 SHARES OF VANGUARD DIVIDEND APPRECIATION INDEX FUND MAY NOT BE SOLD, NOR
MAY OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO SELL, NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.


The Fund began operations on April 15, 2006, so the prospectus contains no
performance data.

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.


VANGUARD DIVIDEND APPRECIATION INDEX FUND
Investor Shares
Prospectus
April 15, 2006

================================================================================
CONTENTS
--------------------------------------------------------------------------------
  1 AN INTRODUCTION TO INDEX FUNDS
  2 FUND PROFILE
  4 ADDITIONAL INFORMATION
  4 MORE ON THE FUND
  7 THE FUND AND VANGUARD
  8 INVESTMENT ADVISOR
  9 DIVIDENDS, CAPITAL GAINS,
    AND TAXES
 10 SHARE PRICE
 12 INVESTING WITH VANGUARD
   12 Buying Shares
   14 Redeeming Shares
   17 Exchanging Shares
   17 Frequent-Trading Limits
   19 Other Rules You Should Know
   22 Fund and Account Updates
   23 Contacting Vanguard
 25 VIPER SHARES
GLOSSARY OF INVESTMENT TERMS
================================================================================

================================================================================
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 VIPER
Shares. This prospectus offers the Fund's Investor Shares, which have an
investment minimum of $3,000 and are NOT available to:

- 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.

Investor Shares of the Fund can be converted into an exchange-traded class of
shares known as VIPER Shares. A brief description of VIPER Shares and how to
convert into them appears on pages 25 to 28 of this prospectus. A separate
prospectus containing additional information about VIPER Shares is available at
Vanguard's website, www.Vanguard.com, or by calling 866-499-8473
(866-499-VIPER).

The Fund's separate share classes have different expenses; as a result, their
investment performances will differ.
--------------------------------------------------------------------------------


                                                                               1

AN INTRODUCTION TO 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. Vanguard index funds generally invest in the stocks or
 bonds 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 costs. 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.

INDEX FUND IN THIS PROSPECTUS

Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about the Vanguard
Dividend Appreciation Index Fund. The Fund seeks to track the performance of a
benchmark index that measures the investment return of common stocks that have a
record of increasing dividends over time.

 On the following pages, you'll find a profile that summarizes the key features
of the Fund. Following the profile, there is important additional information
about the Fund.



2

FUND PROFILE

INVESTMENT OBJECTIVE

The Fund seeks to track the performance of a benchmark index that measures the
investment return of common stocks of companies that have a record of increasing
dividends over time.

PRIMARY INVESTMENT STRATEGIES

The Fund employs a "passive management"--or indexing--investment approach
designed to track the performance of the Dividend Achievers Select Index*, which
consists of common stocks of companies that have a record of increasing
dividends over time. 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. For additional information on the Fund's investment
strategies, 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 returns from dividend-paying
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.

PERFORMANCE/RISK INFORMATION

The Fund began operations on ., 2005, so performance information is not yet
available.

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, although such costs are reflected in investment
performance figures. The expenses shown under Annual Fund Operating Expenses are
based on estimated amounts for the current fiscal year. The Fund has no
operating history; actual operating expenses could be different.


*Index provider: Mergent, Inc.


                                                                               3


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:                                           x.xx%
12b-1 Distribution Fee:                                         None
Other Expenses:                                                x.xx%
 TOTAL ANNUAL FUND OPERATING EXPENSES:                         0.XX%

 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. The example assumes that the Fund
provides a return of 5% a year and that operating expenses match our estimates.
The results apply whether or not you redeem your investment at the end of the
given period.

 1 YEAR    3 YEARS
--------------------
  $xx        $xxx
--------------------

 THE 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. We expect Vanguard Dividend Appreciation Index Fund's expense ratio
 for the current fiscal year to be 0.xx%, or $x.xx per $1,000 of average net
 assets. The average . mutual fund had expenses in 2004 of x.xx%, or $xx.xx 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

DIVIDENDS AND CAPITAL GAINS                        MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in March,      $3,000
June, September, and December; capital gains, if
any, are distributed in December.                  NEWSPAPER ABBREVIATION
                                                   .
INVESTMENT ADVISOR
- The Vanguard Group, Valley Forge, Pa.,           VANGUARD FUND NUMBER
 since inception                                   602

INCEPTION DATE                                     CUSIP NUMBER
.., 2005                                            .

SUITABLE FOR IRAS                                  TICKER SYMBOL
Yes                                                .
================================================================================

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 daily 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. Note that the Fund's
investment objective is not fundamental and may be changed without a shareholder
vote.

MARKET EXPOSURE

The Fund invests mainly in common stocks of companies that have a record of
increasing dividends over time. Stocks purchased by the Fund are expected to
have increasing dividends over time and also to have the potential for long-term
capital appreciation. The Fund may purchase stocks that have relatively low
dividend yields if the company issuing the stock has grown dividends in recent
years.

{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 (1926-2005)
----------------------------------------------------------
                     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      11.2       11.4
----------------------------------------------------------

 The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2005. 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 on common stocks; you
should not regard them as an indication of future returns from either the stock
market as a whole or the Fund in particular.

{FLAG}
THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS
FROM DIVIDEND-PAYING 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 attempts to track the investment performance of a benchmark index
consisting of common stocks of companies that have a record of increasing
dividends over time.

RISK OF NONDIVERSIFICATION

The Fund, by replicating the composition of its target index, is expected to
hold stocks of many companies across many different industries and economic
sectors. It is possible, however, that the Fund's target index, in the future,
could become less diversified if the index's largest companies significantly
increase in value relative to the index's other components. In an extreme
situation, the Fund might no longer meet the legal definition of "diversified."
Because the Fund will normally invest a high percentage of its assets in its ten
largest holdings, nondiversification risk is high for the Fund.

CASH MANAGEMENT

Vanguard may invest the Fund's daily cash balance in one or more Vanguard CMT
Funds, which are very low-cost money market funds. The Fund is permitted to
invest in the CMT Funds under the terms of an exemption granted by the
Securities and Exchange Commission (SEC). When investing in a CMT Fund, the Fund
bears its proportionate share of the at-cost expenses of the Vanguard CMT Fund
in which it invests.


6

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.

 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. It is not expected that the Fund will invest more
than 5% of its assets in foreign securities.

 Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund is generally managed without regard to tax ramifications.

 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 traditional security (such as a stock or bond), an asset (such as a
commodity like 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.

ACCOUNT MAINTENANCE AND CUSTODIAL FEES

To allocate the cost of maintaining accounts equitably among shareholders,
Vanguard assesses an account maintenance fee on any index fund account whose
balance falls below $10,000 (for any reason, including a decline in the value of
fund shares) on the date a dividend is distributed. Although the fee--$2.50 per
quarter--is deducted from the quarterly dividend distributions, the entire
amount of the distribution is taxable to the shareholder unless shares are held
in a nontaxable account, such as a retirement account. If the amount of the
dividend distribution is less than the fee, a fraction of a fund share may be
redeemed to make up the difference.

 A custodial fee of $10 per year applies to certain retirement fund accounts
whose balances are less than $5,000.

 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 that hold 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. Frequent trading may also interfere with an advisor's ability to
efficiently manage the fund.


                                                                               7

Policies to Address Frequent Trading
The Vanguard funds (other than money market funds, short-term bond funds, and
VIPER(R) 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 funds 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 disrupt 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
 VIPER 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.

================================================================================
                                PLAIN TALK ABOUT
                                  TURNOVER RATE

 Turnover rates give 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 36 investment companies
with more than 130 funds holding assets in excess of $xxx billion. 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.



8

 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 for-profit management companies
 that may be owned by one person, by a group of individuals, or by investors who
 own the management company's stock. 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 (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 September 30, 2005, Vanguard served as advisor for about
$xxx 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.

 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.

================================================================================
                                PLAIN TALK ABOUT
                          THE FUND'S PORTFOLIO MANAGER

 The manager primarily responsible for the day-to-day management of the Fund is:

 RYAN E. LUDT, Portfolio Manager for Vanguard. He has been with Vanguard since
 1997; has managed stock portfolios since .; and has managed the Fund since
 its inception. Education: B.S., The Pennsylvania State 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.


                                                                               9

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. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental distributions at some other time during the year. 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.

- 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.


10


================================================================================
                                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.

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.


                                                                              11


 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 VIPERs(R)).

 When reliable market quotations are not readily available, securities are
priced at their fair value; a security's fair value is the amount that the owner
might reasonably expect to receive upon the current sale of the 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. Although rare, fair-value pricing also 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.


12

================================================================================
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 these
policies, without prior notice to shareholders.

                                 BUYING SHARES
                               REDEEMING SHARES
                               EXCHANGING SHARES
                            FREQUENT-TRADING LIMITS
                          OTHER RULES YOU SHOULD KNOW
                           FUND AND ACCOUNT UPDATES
                              CONTACTING VANGUARD
================================================================================

BUYING SHARES

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, or electronic bank transfer (other than Automatic Investment Plan);
$1,000 by wire.

 Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open or maintain an account, or to add to an existing
account.

 Investment minimums may differ for certain categories of investors.

HOW TO BUY SHARES

ONLINE TRANSACTIONS. You may open certain types of accounts, request electronic
bank transfers, and exchange the proceeds of a redemption from one fund to
purchase shares in a new or existing fund account through our website at
www.vanguard.com.

BY TELEPHONE. You may call Vanguard to request a purchase of shares by wire or
by an exchange (using the proceeds from the sale of shares in another Vanguard
fund). You may also request the forms needed to open a new account.

BY MAIL. You may send your check and account registration form to open a new
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 under "Buy, by check"), or you may send written purchase
instructions. All must be in good order.

BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must
designate a bank account online, or by completing a special form or the
appropriate section of your account registration form. You can then make
purchases on a regular schedule (Automatic Investment Plan) or whenever you wish
by electronic bank transfer. Your transaction can be accomplished online, by
telephone, or by mail if your


                                                                              13

request is in good order. For further information about these options, consult
our website at www.vanguard.com or see Contacting Vanguard.

GOOD ORDER. You must include complete and accurate required information on your
purchase request. See Other Rules You Should Know--Good Order. The requirements
vary among types of accounts and transactions.

TYPES OF PURCHASES

BY CHECK. You may mail your check and a completed account registration form to
Vanguard to open a new account. When adding to an existing account, send your
check with an Invest-by-Mail form, written purchase instructions, or a printed
deposit slip. Make your check payable to: Vanguard--"Fund Number." For a list of
Fund numbers and addresses, see Contacting Vanguard.

BY EXCHANGE. You may purchase shares with the proceeds of a redemption from
another Vanguard fund. See Exchanging Shares, Frequent-Trading Limits, and Other
Rules You Should Know.

BY AUTOMATIC INVESTMENT PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make
purchases on a regular schedule (Automatic Investment Plan) or whenever you
wish by electronic bank transfer. Your transaction can be accomplished online,
by telephone, or by mail if your request is in good order.

BY WIRE. Call Vanguard to purchase shares by wire. See Contacting Vanguard.

YOUR PURCHASE PRICE

BY CHECK (TO PURCHASE ALL FUNDS OTHER THAN MONEY MARKET FUNDS), BY EXCHANGE, OR
BY WIRE. You buy shares at a fund's NAV determined as of your trade date. A
purchase request received by Vanguard before the close of regular trading on the
New York Stock Exchange (generally 4 p.m., Eastern time) receives a trade date
of the same day, and a purchase request received after that time receives a
trade date of the first business day following the date of receipt.

BY CHECK (TO PURCHASE MONEY MARKET FUNDS ONLY). For a check purchase request
received by Vanguard before the close of regular trading on the New York Stock
Exchange (generally 4 p.m., Eastern time), the trade date is the first business
day following the date of receipt. For a purchase request received after that
time, the trade date is the second business day following the date of receipt.
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 is always one day later than for other funds.



14

BY ELECTRONIC BANK TRANSFER (OTHER THAN AUTOMATIC INVESTMENT PLAN). For all
Vanguard funds, a purchase request received by Vanguard on a business day before
10 p.m., Eastern time, will receive a trade date of the following business day.

BY ELECTRONIC BANK TRANSFER (WITH AUTOMATIC INVESTMENT PLAN). Your Vanguard
account's trade date will be one business day before the date you designated for
withdrawal from your bank account.

For further information about these options, consult our website at
www.vanguard.com or see Contacting Vanguard.

PURCHASE RULES YOU SHOULD KNOW

^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn
on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money
orders. In addition, to protect the funds from fraud, 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 to close your account or take such
other steps as we deem reasonable.

^FUTURE PURCHASES. Vanguard reserves the right to reject any purchase request at
any time and without notice, including 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 disrupt a fund's operation or performance. In addition, all
Vanguard funds reserve the right to stop selling shares.

^LARGE PURCHASES. Please call Vanguard before attempting to invest a large
dollar amount.

^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will not
cancel any transaction request received by telephone or through Vanguard.com
once it has been confirmed. In the case of written transaction requests,
Vanguard will not cancel any transaction once it has been processed.

REDEEMING SHARES

HOW TO REDEEM SHARES

Be sure to check Other Rules You Should Know before initiating your request.

ONLINE TRANSACTIONS. You may redeem shares, initiate electronic bank transfers,
and exchange the proceeds of a redemption from one fund to purchase shares of
another fund through our website at www.vanguard.com.


                                                                              15

BY TELEPHONE. You may call Vanguard to request a redemption. See Contacting
Vanguard.

BY MAIL. You may send your written redemption instructions in good order to
Vanguard. See Contacting Vanguard.

BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must
designate a bank account online, or by completing a special form or the
appropriate section of your account registration form. You can then make
redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you
wish by electronic bank transfer. Your transaction can be accomplished online,
by telephone, or by mail if your request is in good order. For further
information about these options, consult our website at www.vanguard.com or see
Contacting Vanguard.

GOOD ORDER. You must include complete and accurate required information on your
redemption request. See Other Rules You Should Know--Good Order. The
requirements vary among types of accounts and transactions.

TYPES OF REDEMPTIONS

BY CHECK. Unless instructed otherwise, Vanguard will mail you a check, normally
within two business days of your trade date.

BY EXCHANGE. You may instruct Vanguard to apply the proceeds of your redemption
to purchase shares of another Vanguard fund. See Exchanging Shares, Frequent-
Trading Limits, and Other Rules You Should Know.

BY AUTOMATIC WITHDRAWAL PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make
redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you
wish by electronic bank transfer. Proceeds of redeemed shares will be credited
to your bank account two business days after your trade date. The minimum
electronic redemption is $100.

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 establish it either online or by completing a special form
or the appropriate section of your account registration form. Vanguard charges a
$5 fee for wire redemptions under $5,000.

Money Market Funds: For telephone requests received by Vanguard before 10:45
a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund),
the redemption proceeds will leave Vanguard by the close of business that same
day. For other requests received before 4 p.m., Eastern time, the redemption
proceeds will leave Vanguard by the close of business on the following business
day.


16

Bond Funds: For requests received by Vanguard before 4 p.m., Eastern time, the
redemption proceeds will leave Vanguard by the close of business on the
following business day.

YOUR REDEMPTION PRICE

You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request, including any special documentation required under the
circumstances. For example, if your request is received by Vanguard before the
close of regular trading on the New York Stock Exchange (generally 4 p.m.,
Eastern time), your shares are redeemed at that day's NAV. This is known as your
trade date. The trade date for Automatic Withdrawal Plan redemptions is two
business days prior to the date you designated for the proceeds to be in your
bank account.

REDEMPTION RULES YOU SHOULD KNOW

^SPECIAL 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 disrupt 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 balance.

^SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed 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 hold on online and telephone redemptions. Address-change confirmations
are sent to both the old and new addresses.


                                                                              17

^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
cancel any transaction request received by telephone or through Vanguard.com
once it has been confirmed. In the case of written transaction requests,
Vanguard will not cancel any transaction once it has been processed.

^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 New York Stock Exchange is closed or during
emergency circumstances, as determined by the SEC.


EXCHANGING SHARES

An exchange occurs when the assets redeemed from one Vanguard fund are used to
purchase shares in another Vanguard fund. All open Vanguard funds accept
exchange requests online (through your account registered with Vanguard.com), by
telephone, or by mail.

 Please note that Vanguard reserves the right 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 VIPER 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.

 The policy does not apply to the following:

- Purchases of shares with reinvested dividend or capital gains distributions.


18

- 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. (Transactions submitted by fax or wire
 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 Vanguard mutual funds that invest in other Vanguard mutual funds.

 For participants in employer-sponsored defined contribution plans (other than
those served by the Vanguard Small Business Services Department), 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 the 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.


                                                                              19

ACCOUNTS HELD BY INTERMEDIARIES

When intermediaries establish accounts in Vanguard funds for their clients, 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 seek to 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 or 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 or redemption fees or administer frequent-trading policies.

 For funds to which fees apply, intermediaries will be expected to begin to
assess purchase and redemption fees within the next year. Intermediaries may be
provided additional time if needed to address systems issues. 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

VANGUARD.COM/(R)/

^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. To
establish this service, you must register 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.


20

^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.

- Social Security or employer identification number.

- Fund name and account number, if applicable.

- Other information relating to the account.

^SUBJECT TO REVISION. We reserve the right to revise or
terminate Vanguard's telephone transaction service for any or all shareholders
at any time, without notice.

GOOD ORDER
We reserve the right to reject any transaction instructions that are not in
"good order." The requirements vary among types of accounts and transactions.
Good order means that your instructions must include:

- The fund name and account number.

- The amount of the transaction (stated in dollars, shares, or percent).

Written instructions also must include:

- Authorized signatures of all registered owners.

- Signature guarantees, if required for the type of transaction.*

- Any supporting legal documentation that may be required.

*Call Vanguard for specific signature-guarantee requirements.

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 Buying Shares, Converting Shares, and Redeeming
Shares. Vanguard reserves the right to return future-dated 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.


                                                                              21

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 send 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 Investor Shares of most Vanguard funds through a
financial intermediary, such as a bank, broker, or investment advisor.

 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.

CUSTODIAL FEES

Vanguard charges a custodial fee of $10 a year for each IRA fund account with a
balance of less than $5,000. The fee can be waived if you have assets totaling
$50,000 or more at Vanguard in any combination of accounts under your taxpayer
identification number, including IRAs, employer-sponsored retirement plans,
brokerage accounts, annuities, and non-IRA accounts.

LOW-BALANCE ACCOUNTS

All Vanguard funds reserve the right to liquidate any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment. If a fund has a redemption fee, that fee will
apply to shares redeemed upon closure of the account.

 For most nonretirement accounts, Vanguard deducts a $10 fee in June if the fund
account balance is below $2,500. This fee can be waived if the total Vanguard
account assets under your taxpayer identification number are $50,000 or more.

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, redemption, service, or privilege at any time without notice;
(2) accept initial purchases by telephone; (3) freeze any account and suspend
account


22

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) alter, impose, discontinue, or waive any
redemption fee, low-balance account fee, account maintenance fee, or other fees
charged to a group of shareholders; and (5) 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 all investors or only those
in certain classes or groups. These actions will be taken when, in the sole
discretion of Vanguard management, we reasonably believe they are deemed to be
in the best interest of a fund.

FUND AND ACCOUNT UPDATES

CONFIRMATION STATEMENTS

We will send (or provide online, whichever you prefer) a confirmation statement
to verify your trade date and the amount of your transaction when you buy, sell,
exchange, or convert shares. However, we will not send such statements if they
reflect only money market checkwriting or the reinvestment of dividends or
capital gains distributions. Promptly review each confirmation statement that we
send to you. It is important that you contact Vanguard immediately with any
questions you may have about any transaction reflected on the confirmation
statement.

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 send to you. It is important that you contact Vanguard
immediately with any questions you may have about any transaction reflected on
the summary.

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.


                                                                              23

AVERAGE-COST REVIEW STATEMENTS
For most taxable accounts, average-cost review statements will accompany annual
1099B tax statements. These statements 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 you (online or by mail, whichever you prefer) financial reports
about Vanguard Dividend Appreciation Index Fund twice a year, in March and
September. 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 detailed listings of the Fund's holdings.

 Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one report when two or more shareholders have the same last name
and address. You may request individual reports by contacting our Client
Services Department in writing, by telephone, or by e-mail.

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 10
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. These postings generally remain until
replaced by new postings as previously described. 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.

CONTACTING VANGUARD

ONLINE

VANGUARD.COM

- For the most complete source of Vanguard news

- For fund, account, and service information

- For most account transactions

- For literature requests

- 24 hours a day, 7 days a week


24

VANGUARD TELE-ACCOUNT/(R)/
800-662-6273
(ON-BOARD)

- For automated fund and account information

- For redemptions by check, exchange (subject to certain limitations), or wire

- Toll-free, 24 hours a day, 7 days a week

INVESTOR INFORMATION
800-662-7447 (SHIP)
(Text telephone at
800-952-3335)

- For fund and service information

- For literature requests

- Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday,
 9 a.m. to 4 p.m., Eastern time

CLIENT SERVICES
800-662-2739 (CREW)
(Text telephone at
800-749-7273)

- For account information

- For most account 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
888-809-8102

- For information and services for large institutional investors

- Business hours only

INTERMEDIARY SALES SUPPORT
800-997-2798

- For information and services for financial intermediaries including
 broker-dealers, trust institutions, insurance
 companies, and financial advisors

- Business hours only: Monday-Friday, 8:30 a.m. to 8 p.m., Eastern time

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 MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815

FUND NUMBER
Please use the specific fund number when contacting us: Vanguard Dividend
Appreciation Index Fund--602.


Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Vanguard
Tele-Account, Tele-Account, VIPER, VIPERs, Vanguard Small Business Online,
Vanguard Brokerage Services, and the ship logo are trademarks of The Vanguard
Group, Inc. All other marks are the exclusive property of their respective
owners.


                                                                              25

VIPER SHARES

In addition to Investor Shares, certain Vanguard funds offer a class of shares,
known as Vanguard Index Participation Equity Receipts (VIPER) Shares, that are
listed for trading on the American Stock Exchange (AMEX). If you own Investor
Shares of one of these funds, you may convert those shares into VIPER* Shares of
the same fund.

Note: Vanguard reserves the right to modify or terminate the conversion
 privilege in the future.

 Although VIPER Shares represent an investment in the same portfolio of
securities as Investor 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 VIPER Shares.

 The following material summarizes key information about VIPER Shares. A
separate prospectus with more complete information about VIPER Shares is also
available. Investors should review that prospectus before deciding whether to
convert.

DIFFERENCES BETWEEN VIPER SHARES AND CONVENTIONAL MUTUAL FUND SHARES

Investor 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. VIPER Shares, by contrast, cannot be purchased from
or redeemed with the issuing fund, except as noted in the following manner.

 An organized trading market is expected to exist for VIPER Shares, unlike
conventional mutual fund shares, because VIPER Shares are listed for trading on
the AMEX. Investors can purchase and sell VIPER Shares on the secondary market
through a broker. Secondary-market transactions will occur not at NAV, but at
market prices that change throughout the day based on changes in the prices of
the fund's portfolio securities and the supply of and demand for VIPER Shares.
The market price of a fund's VIPER 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 VIPER SHARES

VIPER Shares must be held in a brokerage account. Therefore, before acquiring
VIPER Shares, whether through a conversion or an open-market purchase, you must
have an account with a broker.

 You buy and sell VIPER 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 VIPER Shares you must purchase. Because open-market
transactions occur at market prices, you may pay more than NAV when you buy
VIPER Shares and receive less than NAV when you sell those shares.

 If you own conventional shares (Investor Shares) of a Vanguard fund that issues
VIPER Shares, you can convert those shares into VIPER Shares of equivalent
value--but you cannot convert back. See "Conversion Privilege" for a discussion
of the conversion process.


*U.S. Pat. No. 6,879,964 B2.


26

 There is one other way to buy and sell VIPER Shares. Investors can purchase and
redeem VIPER Shares directly from the issuing fund at NAV if they do so (1)
through certain authorized broker-dealers, (2) in large blocks of 50,000 or
100,000 VIPER Shares (depending on the fund), know 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 VIPER Shares this
way.

RISKS

VIPER Shares issued by a fund are subject to the same risks as conventional
shares of the same fund. VIPER Shares also are subject to the following risks: n
The market price of a fund's VIPER Shares will vary somewhat from the NAV of
 those shares. Therefore, you may pay more than NAV when buying VIPER Shares,
 and you may receive less than NAV when selling them.

- VIPER Shares cannot be redeemed with the Fund, except in Creation Unit
 aggregations. Therefore, if you no longer wish to own VIPER Shares, you must
 sell them on the open market. Although VIPER 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 VIPER 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 VIPER 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 VIPER 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 estimated total annual operating expenses (the expense ratio) for the
Fund's VIPER Shares is x.xx%.

ACCOUNT SERVICES

Because you hold VIPER Shares through a brokerage account, Vanguard will have no
record of your ownership unless you hold the shares through Vanguard Brokerage
Services(R). Your broker will service your account. For example, the broker
will provide account statements, confirmations of your purchases and sales of
VIPER 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 VIPER 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 (Investor Shares) issued by the Fund may convert
those shares into VIPER 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
VIPER Shares. Vanguard will



                                                                              27

impose 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.
VIPER Shares, whether acquired through a conversion or purchased on the
secondary market, cannot be converted into shares of another class of the same
fund.

 Unless you are an Authorized Participant, you must hold VIPER Shares in a
brokerage account. Thus, before converting conventional shares into VIPER
Shares, you must have an existing, or open a new, brokerage account. To initiate
a conversion of conventional shares into VIPER Shares, please contact your
broker.

 Converting conventional shares into VIPER 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 VIPER Shares of equivalent value. These shares will be held
at Vanguard in an account in the name of the Depository Trust Company (DTC).
(The DTC will keep track of which VIPER Shares belong to your broker, and your
broker, in turn, will keep track of which VIPER 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 VIPER Shares, the DTC account would receive 90
VIPER Shares. Conventional shares worth 0.750 VIPER 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 VIPER 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 VIPER Shares through Vanguard
Brokerage Services (Vanguard Brokerage), all conventional shares for which your
request conversion will be converted into VIPER 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 VIPER Shares:

- The conversion transaction is nontaxable except, as applicable, to the limited
extent 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 VIPER
 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 VIPER share class into which the shares will be converted.


28

- Until the conversion process is complete, you will remain fully invested in
 the 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 VIPER Shares.

- VIPER Shares, whether acquired through a conversion or purchased on the open
 market, cannot be converted into conventional shares of the same fund.
 Similarly, VIPER Shares of one fund cannot be exchanged for VIPER Shares of
 another fund.


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, 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.

INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.

INVESTMENT ADVISOR
An organization that makes 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.

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 particular stock or bond market index; also known as
indexing.

PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its
per-share earnings (profits). 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.

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.


                                                       {SHIP GRAPHIC}VANGUARD(R)
                                                                   P.O. Box 2600
                                                     Valley Forge, PA 19482-2600

CONNECT WITH VANGUARD(TM) www.vanguard.com

FOR MORE INFORMATION
If you would like more information about Vanguard Dividend Appreciation Index
Fund, the following documents are available free upon request:

ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the Fund's investments will be 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 SAI is incorporated by reference into
(and is thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report (once
available) or the SAI, or to request additional information about the Fund or
other Vanguard funds, please contact us as follows:

THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600

TELEPHONE: 800-662-7447 (SHIP)
TEXT TELEPHONE: 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: 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: 811-3916

(C) 2005 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.




P0xx 042006



Vanguard(R) Precious Metals and
Mining Fund

>  Prospectus



Investor Shares

April 15, 2006




This prospectus contains financial data for the Fund through the fiscal period
ended July 31, 2005.

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.




VANGUARD PRECIOUS METALS AND MINING FUND

Prospectus
April 15, 2006


An Aggressive Stock Mutual Fund

  1 FUND PROFILE
  4 ADDITIONAL INFORMATION
  4 MORE ON THE FUND
 11 THE FUND AND VANGUARD
 12 INVESTMENT ADVISOR
 13 DIVIDENDS, CAPITAL GAINS, AND TAXES
 15 SHARE PRICE
 15 FINANCIAL HIGHLIGHTS
 17 INVESTING WITH VANGUARD
   17 Buying Shares
   19 Redeeming Shares
   23 Exchanging Shares

   23 Frequent-Trading Limits

   25 Other Rules You Should Know
   28 Fund and Account Updates
   29 Contacting Vanguard
 GLOSSARY OF INVESTMENT TERMS

--------------------------------------------------------------------------------
 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.
-------------------------------------------------------------------------------



1

FUND PROFILE

INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital appreciation.

PRIMARY INVESTMENT STRATEGIES
The Fund  invests at least 80% of its  assets in the stocks of foreign  and U.S.
companies   principally  engaged  in  the  exploration,   mining,   development,
fabrication,  processing,  marketing,  or distribution  of (or other  activities
related  to)  metals  or  minerals.  The  majority  of these  companies  will be
principally engaged in activities related to gold, silver,  platinum,  diamonds,
or other precious and rare metals or minerals.  The remaining  companies will be
principally engaged in activities related to nickel, copper, zinc, or other base
and common  metals or  minerals.  Precious  and rare metals or minerals  include
those which are valued primarily for their use in nonindustrial or noncommercial
applications.  Base and common metals or minerals include those which are valued
primarily for their use in ordinary industrial or commercial  activities.  Up to
100% of the Fund's  assets may be invested in foreign  securities.  The Fund may
also invest up to 20% of its assets directly in gold,  silver, or other precious
metal bullion and coins. For more  information,  see "Security  Selection" under
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:

-    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 high  percentage  of assets in its ten
     largest  holdings,  and in its single largest  holding,  nondiversification
     risk is very high for the Fund.
-    Industry concentration risk, which is the chance that there will be overall
     problems affecting a particular industry. Because the Fund normally invests
     at least 80% of its assets in the metals or minerals industries, the Fund's
     performance  largely  depends--for  better  or for  worse--on  the  overall
     condition of those industries.  The metals or minerals  industries could be
     affected by sharp price volatility  caused by global  economic,  financial,
     and political factors.  Resource availability,  government regulation,  and
     economic cycles could also adversely affect the industries.
-    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.
-    Manager risk,  which is the chance that poor  selection of  securities  and
     other investments will cause the Fund to underperform  relevant  benchmarks
     or other funds with a similar investment objective.
-    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.



                                                                               2

-    Emerging  markets  risk,  which is the chance that,  to the extent the Fund
     invests in them,  stocks of emerging  markets could be  substantially  more
     volatile,  and substantially less liquid, than the stocks of more developed
     foreign markets.
-    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.


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 has varied from one calendar  year to another over the periods  shown.  The
table shows how the average  annual total returns of the Fund compare with those
of relevant  market  indexes.  Keep in mind that the Fund's past returns (before
and after taxes) do not indicate how the Fund will perform in the future.




            ----------------------------------------------------
                        ANNUAL TOTAL RETURNS
            ----------------------------------------------------
                                
                         1995          -4.48
                         1996          -0.75
                         1997         -38.92
                         1998          -3.91
                         1999          28.82
                         2000          -7.34
                         2001          18.33
                         2002          33.35
                         2003          59.45
                         2004           8.09
            ----------------------------------------------------
     The year-to-date return as of the most recent calendar quarter, which
     ended March 31, 2005, was 4.37%.
            ----------------------------------------------------


 During the periods shown in the bar chart, the highest return for a calendar
quarter was 25.93% (quarter ended March 31, 2002), and the lowest return for a
quarter was -28.74% (quarter ended December 31, 1997).





-------------------------------------------------------------------------------------------
      AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2004
-------------------------------------------------------------------------------------------
                                                               1 YEAR     5 YEARS  10 YEARS
-------------------------------------------------------------------------------------------
                                                                          
VANGUARD PRECIOUS METALS AND MINING FUND
Return Before Taxes                                             8.09%      20.31%     6.09%
Return After Taxes on Distributions                             7.16       18.58      5.03
Return After Taxes on Distributions and Sale of Fund Shares     6.48       16.91      4.64

COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes)
Standard & Poor's 500 Index                                    10.88%      -2.30%    12.07%
S&P/Citigroup World Equity Gold Index1                         -6.31       16.35      3.64
-------------------------------------------------------------------------------------------
1    The  Salomon  Smith  Barney  World  Equity Gold Index  became  known as the
     Citigroup  World Equity Gold Index on April 7, 2003,  and then known as the
     S&P/Citigroup World Equity Gold Index on November 12, 2003.
-------------------------------------------------------------------------------------------




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. State and local income taxes are not reflected in the
calculations. Please note that actual after-tax returns are not relevant for a
shareholder who holds fund shares in a tax-deferred account, such as an
individual retirement





3


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 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, although such costs are reflected in the investment performance figures
included in this prospectus. The expenses shown under Annual Fund Operating
Expenses are based on estimated amounts for the current fiscal year, adjusted to
account for a new advisory fee schedule effective February 1, 2006.





      SHAREHOLDER FEES (fees paid directly from your investment)
                                                                      
      Sales Charge (Load) Imposed on Purchases:                           None
      Purchase Fee:                                                       None
      Sales Charge (Load) Imposed on Reinvested                           None
      Dividends:
      Redemption Fee:                                                      1%1

      ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
      assets)
      Management Expenses:                                               0.42%
      12b-1 Distribution Fee:                                             None
      Other Expenses:                                                    0.03%
       TOTAL ANNUAL FUND OPERATING EXPENSES:                             0.45%

     1    The 1% fee applies to 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 retained by the Fund. Shares held for one year
          or more are not subject to the 1% fee.




 The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's shares. This example assumes that the Fund provides a
return of 5% a year and that operating expenses match our estimates. 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
--------------------------------------------------
                              
    $46         $144       $252         $567
--------------------------------------------------




 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

--------------------------------------------------------------------------------
                               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 Precious Metals and Mining Fund's expense ratio in
 fiscal year 2005 was 0.48%, or $4.80 per $1,000 of average net assets. The
 average gold-oriented mutual fund had expenses in 2004 of 1.76%, or $17.60
 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
DIVIDENDS AND CAPITAL GAINS         MINIMUM INITIAL INVESTMENT
Distributed annually in December.   $10,000, for regular accouts, IRAs, and
                                    custodial accounts for minors
INVESTMENT ADVISOR
M&G Investment Management Limited,  NEWSPAPER ABBREVIATION
London, England, since inception    PrecMtls

INCEPTION DATE                      VANGUARD FUND NUMBER
May 23, 1984                        53

NET ASSETS AS OF JULY 31, 2005      CUSIP NUMBER
$1,464 million                      921908208

SUITABLE FOR IRAS                   TICKER SYMBOL
Yes                                 VGPMX
--------------------------------------------------------------------------------


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



5

shareholders without a shareholder vote, unless those strategies or policies are
designated as fundamental.

MARKET EXPOSURE
The Fund invests at least 80% of its assets in the stocks of foreign and U.S.
companies principally engaged in the exploration, mining, development,
fabrication, processing, marketing, or distribution of (or other activities
related to) metals or minerals. This policy may be changed only upon 60 days'
notice to shareholders. The majority of these companies will be principally
engaged in activities related to gold, silver, platinum, diamonds, or other
precious and rare metals or minerals. The remaining companies will be
principally engaged in activities related to nickel, copper, zinc, or other base
and common metals or minerals. Up to 100% of the Fund's assets may be invested
in foreign securities. The Fund may also invest up to 20% of its assets directly
in gold, silver, or other precious metal bullion and coins.
 Precious and rare metals or minerals include those which are valued primarily
for their use in nonindustrial or noncommercial applications. Base and common
metals or minerals include those which are valued primarily for their use in
ordinary industrial or commercial activities.
     The Fund is  subject  to the risk of sharp  price  volatility  of metals or
minerals,  and of shares of companies  principally engaged in activities related
to metals or  minerals.  This risk  applies  whether  the  particular  metals or
minerals are  precious  and rare (such as gold and  diamonds) or base and common
(such as nickel  and  zinc).  Investments  related  to metals  or  minerals  are
considered  speculative,  and  prices  may  fluctuate  significantly  over short
periods  because of a variety of worldwide  economic,  financial,  and political
factors.  These  factors  include:  economic  cycles;  changes in  inflation  or
expectations  about inflation in various  countries;  interest  rates;  currency
fluctuations;  metal  sales by  governments,  central  banks,  or  international
agencies;  investment  speculation;  resource  availability;  commodity  prices;
fluctuations  in  industrial  and  commercial  supply  and  demand;   government
regulation of the metals and materials industries;  and government  prohibitions
or restrictions on the private ownership of certain precious and rare metals and
minerals.

[FLAG] THE FUND IS SUBJECT TO INDUSTRY  CONCENTRATION  RISK, WHICH IS THE CHANCE
     THAT  THERE WILL BE  OVERALL  PROBLEMS  AFFECTING  A  PARTICULAR  INDUSTRY.
     BECAUSE THE FUND NORMALLY  INVESTS AT LEAST 80% OF ITS ASSETS IN THE METALS
     OR MINERALS INDUSTRIES,  THE FUND'S PERFORMANCE LARGELY DEPENDS--FOR BETTER
     OR FOR WORSE--ON THE OVERALL CONDITION OF THOSE INDUSTRIES.

 In addition, political and economic conditions in gold-producing countries may
have a direct effect on the mining and distribution of gold, and consequently,
on its price. The vast majority of gold producers are domiciled in just five
countries. In order of magnitude, they are: South Africa, the United States,
Australia, Canada, and Russia.




                                                                               6

[FLAG] THE 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.  THE FUND IS
     CONSIDERED  NONDIVERSIFIED,  WHICH MEANS 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 HIGH  PERCENTAGE OF
     ASSETS IN ITS TEN  LARGEST  HOLDINGS,  AND IN ITS SINGLE  LARGEST  HOLDING,
     NONDIVERSIFICATION RISK IS VERY HIGH FOR THE FUND.

--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                             FUND DIVERSIFICATION

 In general, the more diversified a fund's stock or bond holdings, the less
 likely that a specific security's poor performance will hurt the fund. Two
 measures of a fund's diversification are the percentage of its assets
 represented by its ten largest holdings and the percentage of its assets
 represented by its single largest holding. As of July 31, 2005, the Fund held
 50.8% of its net assets invested in its ten largest holdings and 6.2%
 invested in its single largest holding.
--------------------------------------------------------------------------------


 Most of the stocks held by the Fund are small- and mid-capitalization stocks,
because such stocks tend to be dominant in the metals and minerals industries.

 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 July 31, 2005, was $3.6 billion.

 There is the chance that returns from the types of stocks in which the Fund
invests will trail returns from the overall stock market. As a group, mid- and
large-cap 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.

U.S. STOCKS
 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 (1926-2005)
----------------------------------------------------------
              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      11.2      11.4
----------------------------------------------------------







7


 The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
2005. 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 on common stocks; you
should not regard them as an indication of future returns from either the stock
market as a whole or the Fund in particular.

 Keep in mind that the S&P 500 Index tracks mainly large-cap stocks.
Historically, industry-specific mid- and small-cap stocks such as those held by
the Fund have been more volatile than--and at times have performed quite
differently from--the large-cap stocks found in the S&P 500 Index. This
volatility is due to several factors, including special industry risks and
less-certain growth and dividend prospects for smaller companies.

[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.  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.


FOREIGN STOCKS
The Fund may invest up to 100% of its assets in foreign securities.
 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 (1970-2005)
----------------------------------------------------------
              1 YEAR   5 YEARS  10 YEARS  20 YEARS
----------------------------------------------------------
                              
Best           69.4%     36.1%     22.0%     15.5%
Worst         -23.4      -2.9       4.0       9.7
Average        12.5      10.7      11.9      12.9
----------------------------------------------------------





 The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through
2005. These average returns reflect past performance on international stocks;
you should not regard them as an indication of future returns from 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 1996 through 2005, as measured by their
respective indexes.





                                                                               8





-------------------------------------------------------------------------------------------
                          RETURNS FOR VARIOUS STOCK MARKETS1
-------------------------------------------------------------------------------------------
                           EUROPEAN           PACIFIC          EMERGING                U.S.
                             MARKET            MARKET           MARKETS              MARKET
-------------------------------------------------------------------------------------------
                                                                        
1996                         21.09%            -8.30%            15.22%              22.96%
1997                         23.80            -25.87            -16.36               33.36
1998                         28.53              2.72            -18.39               28.58
1999                         15.89             56.65             60.88               21.04
2000                         -8.39            -25.78            -27.94               -9.10
2001                        -19.90            -25.40             -2.80              -11.89
2002                        -18.38             -9.29             -7.04              -22.10
2003                         38.54             38.48             58.81               28.68
2004                         20.88             18.98             26.68               10.88
2005                          9.42             22.64             32.85                4.91
-------------------------------------------------------------------------------------------
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
 Select Emerging Markets Index (formerly known as the Select Emerging Markets Free
 Index); and U.S. market returns are measured by the Standard & Poor's 500 Index.
-------------------------------------------------------------------------------------------



 Keep in mind that these returns reflect past performance of the various
indexes; you should not consider them as an indication of future returns from
the indexes, or from the Fund in particular.

[FLAG] THE FUND IS SUBJECT TO COUNTRY  RISK AND CURRENCY  RISK.  COUNTRY RISK IS
     THE CHANCE THAT  DOMESTIC  EVENTS--SUCH  AS POLITICAL  UPHEAVAL,  FINANCIAL
     TROUBLES, OR NATURAL DISASTERS--WILL WEAKEN A COUNTRY'S SECURITIES 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.



--------------------------------------------------------------------------------
                               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  investment  strategy of the Fund is designed  to provide  returns  that are
broadly  representative  of the precious  metals and mining  sector.  To achieve
this, the Fund focuses on stocks of foreign and domestic  companies  principally
engaged  in  the  exploration,  mining,  development,  fabrication,  processing,
marketing,  or distribution of (or other  activities  related to) gold,  silver,
platinum, diamonds, or other precious and rare metals or minerals. The Fund also
will invest in stocks of foreign and domestic companies  principally  engaged in
activities related to nickel,  copper,  zinc, or other base and common metals or
minerals.




9

Up to 20% of the Fund's  assets may be invested  directly in gold,  silver,  and
other precious metal bullion and coins. Bullion and coins for the Fund will only
be bought from and sold to banks  (both U.S.  and  foreign)  and dealers who are
members--or  affiliated with members--of a regulated U.S. commodities  exchange.
Gold,  silver, or other precious metal bullion will not be purchased in any form
that is not readily  marketable.  Coins will not be bought for their  numismatic
value, and will not be considered for the Fund if they cannot be bought and sold
in an active  market.  Any bullion or coins bought by the Fund will be delivered
to and stored with a qualified custodian bank in the United States. Keep in mind
that bullion and coins do not generate income--they offer only the potential for
capital appreciation or depreciation, and may subject the Fund to higher custody
and  transaction  costs than those  normally  associated  with the  ownership of
stocks.  Investments  relating  to metals or minerals  (such as gold,  diamonds,
nickel, or zinc) are considered speculative.

[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.

 In selecting stocks for the Fund, M&G Investment Management Limited (M&G),
advisor to the Fund, emphasizes quality companies with attractive reserve
positions and sound operations. The advisor considers, among other things, the
ability of a company to mine or, in a cost-effective way, to find and establish
new reserves, and to increase production
relative to competitors. The advisor also seeks to maintain geographic diversity
in the Fund.
 The advisor determines that a security is generally appropriate for the Fund if
at least 50% of the issuer's assets, revenues, or net income is related to, or
derived from, the metals or minerals industries. A security will be sold when
the advisor believes that an alternative investment provides more attractive
risk/return characteristics or that a sale is otherwise appropriate.
 The Fund is generally managed without regard to tax ramifications.

OTHER INVESTMENT POLICIES AND RISKS

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
traditional security (such as a stock or bond), an asset (such as a commodity
like 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.
 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 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. Note that the Fund will not enter into such
contracts for speculative purposes. Under normal circumstances, the Fund will
not commit more than 20% of its assets to forward foreign currency exchange
contracts.





                                                                              10

CASH MANAGEMENT


Vanguard may invest the Fund's daily cash balance in one or more Vanguard CMT
Funds, which are very low-cost money market funds. The Fund is permitted to
invest in the CMT Funds under the terms of an exemption granted by the
Securities and Exchange Commission (SEC). When investing in a CMT Fund, the Fund
bears its proportionate share of the at-cost expenses of the Vanguard CMT Fund
in which it invests.


TEMPORARY INVESTMENT MEASURES

The Fund may temporarily depart from its normal investment policies--for
instance, by allocating substantial assets to cash investments--in response to
extraordinary 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.

REDEMPTION AND CUSTODIAL FEES


The Fund charges a 1% fee on shares that are redeemed before they have been held
for one year. This 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 load paid to a broker or 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.
 A custodial fee of $10 per year applies to certain retirement fund accounts
whose balances are less than $5,000.
 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 that hold 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. Frequent trading may also 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
VIPER(R) 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





11


 request could be rejected if Vanguard determines that such purchase may disrupt
 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
 VIPER Shares) generally prohibits, except as otherwise provided 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 precious metals funds was approximately 116%, as
reported by Morningstar, Inc., on January 31, 2005.

--------------------------------------------------------------------------------
                               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 36 investment companies
with more than 130 funds holding assets in excess of $910 billion. 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.




                                                                              12



--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                     VANGUARD'S UNIQUE CORPORATE STRUCTURE

 The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
 by the funds it oversees and thus indirectly by the shareholders in those
 funds. Most other mutual funds are operated by for-profit management
 companies that may be owned by one person, by a group of individuals, or by
 investors who own the management company's stock. 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

M&G Investment Management Limited, Laurence Pountney Hill, London EC4H 0HH,
England, is an advisory firm and wholly owned subsidiary of the Prudential plc.
M&G, a separate business unit within the Prudential group, launched Great
Britain's first unit trust (mutual fund) in 1931. As of January 31, 2005, M&G
managed approximately $208 billion in assets.
 M&G's advisory fee is paid quarterly, and is based on certain annual percentage
rates applied to the Fund's average month-end assets for each quarter.
 For the fiscal period ended July 31, 2005, the advisory fee represented an
effective annual rate of 0.14% of the Fund's average net assets.
 The advisor, when trading securities on behalf of a Fund, must seek total costs
or total proceeds that are the most favorable under the circumstances applicable
to each transaction (best execution). The advisor selects broker-dealers based
on its assessment of their ability to provide best execution. At the direction
of the Fund's board of trustees, some portion of Fund transactions may be
directed to a broker that has previously agreed to rebate a portion of the
commissions it receives directly to the Fund, so long as the advisor reasonably
believes that the broker can provide best execution.
 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 agreement, see the Fund's most recent semiannual report to shareholders
covering the fiscal period that ends on July 31 each year.




13


--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                         THE FUND'S PORTFOLIO MANAGER

 The manager primarily responsible for the day-to-day management of the Fund's
 portfolio is:
 GRAHAM E. FRENCH, Manager at M&G Investment Management Limited. He has worked
 in investment management since 1988; has been with M&G since 1989; was
 Assistant Fund Manager from 1991 through 1996; and has managed the Fund since
 1996. Education: B.Sc., University of Durham.
--------------------------------------------------------------------------------

 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 in December. In addition,
the Fund may occasionally be required to make supplemental distributions at some
other time during the year.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.




                                                                              14

-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 it receives on foreign
 securities. You may qualify for an offsetting credit or deduction under U.S.
 tax laws for any amount 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.


--------------------------------------------------------------------------------
                               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 of the Fund by the number of Fund shares outstanding. 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 VIPERs(R)).

 When reliable market quotations are not readily available, securities are
priced at their fair value; a security's fair value is the amount that the owner
might reasonably expect to receive upon the current sale of the 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. Although rare, fair-value pricing also 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
Fund's financial performance for the periods shown, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each 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.





                                                                              16



--------------------------------------------------------------------------------
                               PLAIN TALK ABOUT
                  HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

 The Fund began fiscal year 2005 with a net asset value (price) of $16.46 per
 share. During the period, the Fund earned $0.20 per share from investment
 income (interest and dividends) and $2.27 per share from investments that had
 appreciated in value or that were sold for higher prices than the Fund paid
 for them.

 During the period, shareholders received no 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 period was $18.93, reflecting earnings of
 $2.47 per share and no distributions. This was an increase of $2.47 per share
 (from $16.46 at the beginning of the period to $18.93 at the end of the
 period). The total return was 15.01% for the period.

 As of July 31, 2005, the Fund had approximately $1,464 billion in net assets.
 For the period, its annualized expense ratio was 0.42% ($4.20 per $1,000 of
 net assets), and its annualized net investment income amounted to 2.32% of
 its average net assets. The Fund sold and replaced securities valued at an
 annualized rate of 26% of its net assets.
--------------------------------------------------------------------------------








PRECIOUS METALS AND MINING FUND
-----------------------------------------------------------------------------------------------------------------------------------
                                                  Six Months Ended                        YEAR ENDED JANUARY 31,
                                                          July 31,     ------------------------------------------------------------
                                                              2005         2005         2004         2003         2002        2001
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                                           
NET ASSET VALUE, BEGINNING OF PERIOD                        $16.46       $15.29       $11.25       $ 9.31        $7.51       $7.67
-----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
 Net Investment Income                                         .20 1       .185 1       .194          .25          .28         .22
 Net Realized and Unrealized Gain (Loss) on Investments 2     2.27        1.988        4.780         2.18         1.91        (.18)
-----------------------------------------------------------------------------------------------------------------------------------
 Total from Investment Operations                             2.47        2.173        4.974         2.43         2.19         .04
-----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
 Dividends from Net Investment Income                           --        (.144)       (.934)        (.49)        (.39)       (.20)
 Distributions from Realized Capital Gains                      --        (.859)          --           --           --          --
-----------------------------------------------------------------------------------------------------------------------------------
 Total Distributions                                            --       (1.003)       (.934)        (.49)        (.39)       (.20)
-----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD                              $18.93       $16.46       $15.29       $11.25        $9.31       $7.51
===================================================================================================================================
TOTAL RETURN 3                                              15.01%       14.20%       44.07%       26.51%       30.05%       0.67%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
 Net Assets, End of Period (Millions)                       $1,464         $921         $608         $537         $410        $307
 Ratio of Total Expenses to Average Net Assets               0.42% 4      0.48%        0.55%        0.60%        0.63%       0.65%
 Ratio of Net Investment Income to Average Net Assets        2.32% 4      1.32%        1.61%        2.14%        3.45%       2.94%
 Turnover Rate                                                 26% 4        36%          15%          43%          52%         17%
===================================================================================================================================
 1 Calculated based on average shares outstanding.
 2 Includes increases from redemption fees of $.01, $.01, $.00, $.02, $.00, and $.00.
 3 Total returns do not reflect the 1% fee assessed on redemptions of shares held for less than one year.
 4 Annualized







17



--------------------------------------------------------------------------------
 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 these
 policies, without prior notice to shareholders.

                                 BUYING SHARES
                               REDEEMING SHARES
                               EXCHANGING SHARES
                            FREQUENT-TRADING LIMITS
                          OTHER RULES YOU SHOULD KNOW
                           FUND AND ACCOUNT UPDATES
                              CONTACTING VANGUARD
--------------------------------------------------------------------------------


BUYING SHARES

ACCOUNT MINIMUMS
TO OPEN AND MAINTAIN AN ACCOUNT. $10,000, for regular accouts, IRAs, and
custodial accounts for minors.
TO ADD TO AN EXISTING ACCOUNT. $50 by Automatic Investment Plan; $100 by check,
exchange, or electronic bank transfer (other than Automatic Investment Plan);
$1,000 by wire.

 Vanguard reserves the right, without prior notice, to increase or decrease the
minimum amount required to open or maintain an account, or to add to an existing
account.
 Investment minimums may differ for certain categories
of investors.


HOW TO BUY SHARES

ONLINE TRANSACTIONS. You may open certain types of accounts, request electronic
bank transfers, and exchange the proceeds of a redemption from one fund to
purchase shares in a new or existing fund account through our website at
www.vanguard.com.
BY TELEPHONE. You may call Vanguard to request a purchase of shares by wire or
by an exchange (using the proceeds from the sale of shares in another Vanguard
fund). You may also request the forms needed to open a new account.
BY MAIL. You may send your check and account registration form to open a new
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 under "Buy, by check"), or you may send
written purchase instructions. All must be in good order.
BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must
designate a bank account online, or by completing a special form or the
appropriate section of your account registration form. You can then make
purchases on a regular schedule (Automatic Investment Plan) or whenever you wish
by electronic bank transfer. Your transaction can





                                                                              18


be accomplished online, by telephone, or by mail if your request is in good
order. For further information about these options, consult our website at
www.vanguard.com or see Contacting Vanguard.

GOOD ORDER. You must include complete and accurate required information on your
purchase request. See Other Rules You Should Know--Good Order. The requirements
vary among types of accounts and transactions.

TYPES OF PURCHASES
BY CHECK. You may mail your check and a completed account registration form to
Vanguard to open a new account. When adding to an existing account, send your
check with an Invest-by-Mail form, written purchase instructions, or a printed
deposit slip. Make your check payable to: Vanguard--53. For addresses, see
Contacting Vanguard.
BY EXCHANGE. You may purchase shares with the proceeds of a redemption from
another Vanguard fund. See Exchanging Shares, Frequent-Trading Limits, and Other
Rules You Should Know.
BY AUTOMATIC INVESTMENT PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make
purchases on a regular schedule (Automatic Investment Plan) or whenever you wish
by electronic bank transfer. Your transaction can be accomplished online, by
telephone, or by mail if your request is in good order.
BY WIRE. Call Vanguard to purchase shares by wire. See Contacting Vanguard.


YOUR PURCHASE PRICE
BY CHECK (TO PURCHASE ALL FUNDS OTHER THAN MONEY MARKET FUNDS), BY EXCHANGE, OR
BY WIRE. You buy shares at a fund's NAV determined as of your trade date. A
purchase request received by Vanguard before the close of regular trading on the
New York Stock Exchange (generally 4 p.m., Eastern time) receives a trade date
of the same day, and a purchase request received after that time receives a
trade date of the first business day following the date of receipt.
BY CHECK (TO PURCHASE MONEY MARKET FUNDS ONLY). For a check purchase request
received by Vanguard before the close of regular trading on the New York Stock
Exchange (generally 4 p.m., Eastern time), the trade date is the first business
day following the date of receipt. For a purchase request received after that
time, the trade date is the second business day following the date of receipt.
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 is always one day later than for other funds.

BY ELECTRONIC BANK TRANSFER (OTHER THAN AUTOMATIC INVESTMENT PLAN). For all
Vanguard funds, a purchase request received by Vanguard on a business day before
10 p.m.,





19


Eastern time, will receive a trade date of the following
business day.

BY ELECTRONIC BANK TRANSFER (WITH AUTOMATIC INVESTMENT PLAN). Your Vanguard
account's trade date will be one business day before the date you designated for
withdrawal from your bank account.

For further information about these options, consult our
website at www.vanguard.com or see Contacting Vanguard.

PURCHASE RULES YOU SHOULD KNOW

^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn
on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money
orders. In addition, to protect the funds from fraud, 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 to close your account or take such
other steps as we deem reasonable.

^FUTURE PURCHASES. Vanguard reserves the right to reject any purchase request at
any time and without notice, including 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 disrupt a fund's
operation or performance. In addition, all Vanguard funds reserve the right to
stop selling shares.
^LARGE PURCHASES. Please call Vanguard before attempting to invest a large
dollar amount.
^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will not
cancel any transaction request received by telephone or through Vanguard.com
once it has been confirmed. In the case of written transaction requests,
Vanguard will not cancel any transaction once it has been processed.


REDEEMING SHARES

HOW TO REDEEM SHARES
Be sure to check Other Rules You Should Know before
initiating your request.

ONLINE TRANSACTIONS. You may redeem shares, initiate electronic bank transfers,
and exchange the proceeds of a redemption from one fund to purchase shares of
another fund through our website at www.vanguard.com.
BY TELEPHONE. You may call Vanguard to request a redemption. See Contacting
Vanguard.
BY MAIL. You may send your written redemption instructions in good order to
Vanguard. See Contacting Vanguard.





                                                                              20


BY ELECTRONIC BANK TRANSFER. To perform electronic bank transfers, you must
designate a bank account online, or by completing a special form or the
appropriate section of your account registration form. You can then make
redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you
wish by electronic bank transfer. Your transaction can be accomplished online,
by telephone, or by mail if your request is in good order. For further
information about these options, consult our website at www.vanguard.com or see
Contacting Vanguard.

GOOD ORDER. You must include complete and accurate required information on your
redemption request. See Other Rules You Should Know--Good Order. The
requirements vary among types of accounts and transactions.

TYPES OF REDEMPTIONS
BY CHECK. Unless instructed otherwise, Vanguard will mail you a check, normally
within two business days of your
trade date.
BY EXCHANGE. You may instruct Vanguard to apply the
proceeds of your redemption to purchase shares of another Vanguard fund. See
Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know.
BY AUTOMATIC WITHDRAWAL PLAN OR BY OTHER ELECTRONIC BANK TRANSFER. You may make
redemptions on a regular schedule (Automatic Withdrawal Plan) or whenever you
wish by electronic bank transfer. Proceeds of redeemed shares will be credited
to your bank account two business days after your trade date. The minimum
electronic redemption is $100.
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 establish it either online or by completing a special form
or the appropriate section of your account registration form. Vanguard charges a
$5 fee for wire redemptions under $5,000.
Money Market Funds: For telephone requests received by Vanguard before 10:45
a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund),
the redemption proceeds will leave Vanguard by the close of business that same
day. For other requests received before 4 p.m., Eastern time, the redemption
proceeds will leave Vanguard by the close of business on the following business
day.
Bond Funds: For requests received by Vanguard before 4 p.m., Eastern time, the
redemption proceeds will leave Vanguard by the close of business on the
following business day.





21

YOUR REDEMPTION PRICE

You redeem shares at a fund's next-determined NAV after Vanguard receives your
redemption request, including any special documentation required under the
circumstances. For example, if your request is received by Vanguard before the
close of regular trading on the New York Stock Exchange (generally 4 p.m.,
Eastern time), your shares are redeemed at that day's NAV. This is known as your
trade date. The trade date for Automatic Withdrawal Plan redemptions is two
business days prior to the date you designated for the proceeds to be in your
bank account.


REDEMPTION FEES

The Fund charges a 1% 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 retained by the Fund. Shares held for one year or more are not subject to
the 1% fee.
 After redeeming shares that are exempt from redemption fees, shares you have
held the longest will be redeemed first.

 Redemption fees do 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.
-Distributions by shareholders age 70 1/2 or older from the following:
 - Traditional IRAs.
 - Inherited IRAs (traditional and Roth).
 - Rollover IRAs.
 - SEP-IRAs.
 - Section 403(b)(7) plans served by the Vanguard Small Business Services
   Department.
 - SIMPLE IRAs.
 - Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves
   as trustee.
- 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).

 For participants in employer-sponsored defined contribution plans (other than
those served by the Vanguard Small Business Services Department), redemption
fees will apply to shares exchanged out of a fund into which they had been





                                                                              22



exchanged, rolled over, or transferred by a participant within the fund's
redemption-fee period.
 In addition to the exclusions previously listed, redemption fees will not apply
to:
- Exchanges of shares purchased with participant payroll or employer
  contributions.
- Distributions, loans, and in-service withdrawals from
  a plan.
- Direct rollovers into IRAs.
- Redemptions or transfers of shares as part of a plan termination or at the
  direction of the plan.
 In plans for which Vanguard is recordkeeper, redemption fees will apply to
participants, effective after the close of business on December 30, 2005.
 If Vanguard does not serve as recordkeeper for your plan, redemption fees may
be applied differently. Please read that firm's materials carefully to learn of
any other rules or fees that may apply.
 See Frequent-Trading Limits--Accounts Held by Intermediaries for information
about the assessment of redemption fees by intermediaries.


REDEMPTION RULES YOU SHOULD KNOW
^SPECIAL 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 disrupt 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 balance.

^SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.



23



^ADDRESS CHANGE. If you change your address online or by telephone, there may be
a 15-day hold on online and telephone redemptions. Address-change confirmations
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
cancel any transaction request received by telephone or through Vanguard.com
once it has been confirmed. In the case of written transaction requests,
Vanguard will not cancel any transaction once it has been processed.
^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 New York Stock Exchange is closed or during
emergency circumstances, as determined by the SEC.



EXCHANGING SHARES


An exchange occurs when the assets redeemed from one Vanguard fund are used to
purchase shares in another
Vanguard fund. All open Vanguard funds accept exchange requests online (through
your account registered with
Vanguard.com), by telephone, or by mail.
 Please note that Vanguard reserves the right 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 VIPER 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.





                                                                              24


 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. (Transactions submitted by fax or wire
  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 Vanguard mutual funds that invest in other Vanguard mutual funds.

 For participants in employer-sponsored defined contribution plans (other than
those served by the Vanguard Small Business Services Department), 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.





25


ACCOUNTS HELD BY INTERMEDIARIES
When intermediaries establish accounts in Vanguard funds for their clients, 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 seek to 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 or 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 or redemption fees or administer frequent-trading policies.
 For funds to which fees apply, intermediaries will be expected to begin to
assess purchase and redemption fees within the next year. Intermediaries may be
provided additional time if needed to address systems issues. 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

VANGUARD.COM(R)

^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. To
establish this service, you must register 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).




                                                                              26

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.
- Social Security or employer identification number.
- Fund name and account number, if applicable.

- Other information relating to the account.
^SUBJECT TO REVISION. We reserve the right to revise or
terminate Vanguard's telephone transaction service for any or all shareholders
at any time, without notice.


GOOD ORDER
We reserve the right to reject any transaction instructions that are not in
"good order." The requirements vary among types of accounts and transactions.
Good order means that your instructions must include:
- The fund name and account number.
- The amount of the transaction (stated in dollars, shares, or percent).
 Written instructions also must include:
- Authorized signatures of all registered owners.
- Signature guarantees, if required for the type of transaction.*
- Any supporting legal documentation that may
 be required.
*Call Vanguard for specific signature-guarantee requirements.

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 Buying Shares, Converting Shares, and Redeeming
Shares. Vanguard reserves the right to return future-dated 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





27


account statements that we send 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 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.


CUSTODIAL FEES

Vanguard charges a custodial fee of $10 a year for each
IRA fund account with a balance of less than $5,000. The
fee can be waived if you have assets totaling $50,000 or more at Vanguard in any
combination of accounts under your taxpayer identification number, including
IRAs, employer-sponsored retirement plans, brokerage accounts, annuities, and
non-IRA accounts.


LOW-BALANCE ACCOUNTS
All Vanguard funds reserve the right to liquidate any investment-only
retirement-plan account or any nonretirement account whose balance falls below
the minimum initial investment. If a fund has a redemption fee, that fee will
apply to shares redeemed upon closure of the account.

 For most nonretirement accounts, Vanguard deducts a $10 fee in June if the fund
account balance is below $2,500.
This fee can be waived if the total Vanguard account assets under your taxpayer
identification number are $50,000
or more.


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,  redemption,  service,  or privilege at any time without  notice;  (2)
accept  initial  purchases  by  telephone;  (3) freeze any  account  and 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) alter,




                                                                              28


impose,  discontinue,  or waive any  redemption  fee,  low-balance  account fee,
account  maintenance fee, or other fees charged to a group of shareholders;  and
(5) 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 all investors or only those in certain  classes or groups.  These actions
will be taken when, in the sole discretion of Vanguard management, we reasonably
believe they are deemed to be in the best interest of a fund.



FUND AND ACCOUNT UPDATES

CONFIRMATION STATEMENTS

We will send (or provide online, whichever you prefer) a
confirmation statement to verify your trade date and the amount of your
transaction when you buy, sell, or exchange shares. However, we will not send
such statements if they reflect only money market checkwriting or the
reinvestment of dividends or capital gains distributions. Promptly review each
confirmation statement that we send to you. It is important that you contact
Vanguard immediately with any questions you may have about any transaction
reflected on the confirmation statement.


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, and transfers for the
current calendar year. Promptly review each summary that we send to you. It is
important that you contact Vanguard immediately with any questions you may have
about any transaction reflected on the summary.


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 statements. These statements 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.




29

ANNUAL AND SEMIANNUAL REPORTS

We will send (or provide online, whichever you prefer) financial reports about
Vanguard Precious Metals and Mining Fund twice a year, in March and September.
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 advisor.
- Financial statements with detailed listings of the Fund's holdings.
 Vanguard attempts to eliminate the unnecessary expense of duplicate mailings by
sending just one report when two or more shareholders have the same last name
and address. You may request individual reports by contacting our Client
Services Department in writing, by telephone, or by e-mail.

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 10
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. These postings generally remain until replaced by new postings as
previously described. 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.



CONTACTING VANGUARD


ONLINE
VANGUARD.COM
- For the most complete source of Vanguard news
- For fund, account, and service information
- For most account transactions
- For literature requests
- 24 hours a day, 7 days a week

VANGUARD TELE-ACCOUNT(R)
800-662-6273
(ON-BOARD)

- For automated fund and account information
- For redemptions by check, exchange (subject to certain limitations), or wire
- Toll-free, 24 hours a day, 7 days a week



                                                                              30


INVESTOR INFORMATION
800-662-7447 (SHIP)
(Text telephone at
800-952-3335)

- For fund and service information
- For literature requests

- Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday,
 9 a.m. to 4 p.m., Eastern time

CLIENT SERVICES
800-662-2739 (CREW)
(Text telephone at
800-749-7273)

- For account information
- For most account 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
888-809-8102

- For information and services for large institutional investors
- Business hours only

INTERMEDIARY SALES SUPPORT
800-997-2798

- For information and services for financial intermediaries including
 broker-dealers, trust institutions, insurance
 companies, and financial advisors

- Business hours only: Monday-Friday, 8:30 a.m. to 8 p.m., Eastern time


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 MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815

FUND NUMBER
Please use the specific fund number when contacting us: Vanguard Precious Metals
and Mining Fund--53.







Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Vanguard
Tele-Account, Tele-Account, VIPER, VIPERs, Vanguard Small Business Online, and
the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the
exclusive property of their respective owners.

















                     (THIS PAGE INTENTIONALLY LEFT BLANK.)













                     (THIS PAGE INTENTIONALLY LEFT BLANK.)






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 RISK
The chance that domestic events--such as political upheaval, financial troubles,
or natural disasters--will weaken a country's securities 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.


INDUSTRY CONCENTRATION
Focusing on the securities of a specific industry (such as energy, precious
metals, health care, or real estate).

INVESTMENT ADVISOR
An organization that makes 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.

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.




[VANGUARD SHIP LOGO]
P.O. Box 2600
Valley Forge, PA 19482-2600


CONNECT WITH VANGUARD/TM > www.vanguard.com

For More Information
If you would like more information about Vanguard
Precious Metals and Mining 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
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: 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: 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: 811-3916
(C) 2006 The Vanguard Group, Inc. All rights reserved.
Vanguard Marketing Corporation, Distributor.


P053 042006






                                     PART B

                        VANGUARD(R) SPECIALIZED FUNDS

                      STATEMENT OF ADDITIONAL INFORMATION

                                 APRIL 15, 2005


This Statement is not a prospectus but should be read in conjunction with the
Funds' current prospectuses (for Vanguard Dividend Appreciation Index Fund and
Vanguard Precious Metals and Mining Fund, dated April 15, 2006; for Energy Fund
dated August 8, 2005; for Vanguard Dividend Growth Fund, Vanguard Health Care
Fund, and Vanguard REIT Index Fund dated May 31, 2005). To obtain, without
charge, a prospectus or the most recent Annual Report to Shareholders, which
contains the Funds' financial statements as hereby incorporated by reference,
please call:



                        INVESTOR INFORMATION DEPARTMENT:
                                  800-662-7447


                               TABLE OF CONTENTS

DESCRIPTION OF THE TRUST...............................................B-1
INVESTMENT POLICIES....................................................B-3
INVESTMENT LIMITATIONS................................................B-17
SHARE PRICE...........................................................B-18
PURCHASE AND REDEMPTION OF SHARES.....................................B-19
MANAGEMENT OF THE FUNDS ..............................................B-21
INVESTMENT ADVISORY SERVICES..........................................B-32
PORTFOLIO TRANSACTIONS................................................B-38
PROXY VOTING GUIDELINES ..............................................B-39
INFORMATION ABOUT THE VIPER SHARE CLASS...............................B-44
FINANCIAL STATEMENTS..................................................B-50

                            DESCRIPTION OF THE TRUST

ORGANIZATION


Vanguard Specialized Funds (the Trust) was organized as a Pennsylvania business
trust in 1983, was reorganized as a Maryland corporation in 1986 and then was
reorganized as a Delaware statutory trust in June 1998. Prior to its
reorganization as a Delaware statutory trust, the Trust was known as Vanguard
Specialized Portfolios, Inc. The Trust is registered with the United States
Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940 (the 1940 Act). Each Fund, other than the Vanguard Precious Metals and
Mining and REIT Index Funds, is registered as a diversified open-end management
investment company. The Precious Metals and Mining and REIT Index Funds are
registered as nondiversified open-end management investment companies. As the
market values of the Precious Metals and Mining and REIT Index Funds' largest
holdings rise and fall, there may be times when the Funds are diversified under
SEC standards and other times when they are not. The Trust currently offers the
following funds (and classes thereof):




                                                                 SHARE CLASSES*
                                                                 -------------
FUND**                                        INVESTOR     ADMIRAL     INSTITUTIONAL     VIPERS
------                                        --------     -------     -------------     ------
                                                                             
Vanguard Dividend Growth Fund+                     Yes          No                No         No
Vanguard Energy Fund                               Yes         Yes                No         No
Vanguard Health Care Fund                          Yes         Yes                No         No
Vanguard Precious Metals and Mining Fund           Yes          No                No         No
Vanguard REIT Index Fund                           Yes         Yes               Yes        Yes
Vanguard Dividend Appreciation Index Fund          Yes          No                No        Yes
 *Individually, a class; collectively, the classes.
**Individually, a Fund; collectively, the Funds.
 +Prior to December 6, 2002, Vanguard Dividend Growth Fund was known as Vanguard Utilities Income Fund.




                                      B-1


 The Trust has the ability to offer additional funds, which in turn may issue
classes of shares. There is no limit on the number of full and fractional shares
that may be issued for a single fund or class of shares.

 Throughout this document, any references to "class" apply only to the extent
the Fund issues multiple classes.


 Each Fund described in this Statement of Additional Information is a member
fund. There are two types of "Vanguard funds," member funds and non-member
funds. Member funds jointly own The Vanguard Group, Inc. (Vanguard), contribute
to Vanguard's capital, and receive services at cost from Vanguard pursuant to a
Funds' Service Agreement. Non-member funds do not contribute to Vanguard's
capital, but they do receive services pursuant to special services agreements.
See "Management of the Funds" for more information.


SERVICE PROVIDERS


 CUSTODIANS. JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017-2070 (for
the Health Care, Precious Metals and Mining, and REIT Index Funds), and
Citibank, N.A., 111 Wall Street, New York, NY 10005 (for the Energy and Dividend
Growth Funds), serve as the Funds' custodians. The custodians are responsible
for maintaining the Funds' assets, keeping all necessary accounts and records of
Fund assets, and appointing any foreign sub-custodians or foreign securities
depositories.


 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PricewaterhouseCoopers LLP, Two
Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA, 19103-7042,
serves as the Funds' independent registered public accounting firm. The
independent registered public accounting firm audits the Funds' annual financial
statements and provides other related services.


 TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355.


CHARACTERISTICS OF THE FUNDS' SHARES


 RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on
the right of shareholders to retain or dispose of the Funds' shares, other than
the possible future termination of a Fund or share class. Each Fund or class may
be terminated by reorganization into another mutual fund or class or by
liquidation and distribution of the assets of the Fund or class. Unless
terminated by reorganization or liquidation, each Fund and share class will
continue indefinitely.


 SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a statutory trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of a Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss as a result of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.


 DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any
dividends or other distributions declared by the Fund. No shares of a Fund have
priority or preference over any other shares of the Fund with respect to
distributions. Distributions will be made from the assets of the Fund and will
be paid ratably to all shareholders of the Fund (or class) according to the
number of shares of the Fund (or class) held by shareholders on the record date.
The amount of dividends per share may vary between separate share classes of the
Fund based upon differences in the way that expenses are allocated between share
classes pursuant to a multiple class plan.


 VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (1) a
shareholder vote is required under the 1940 Act; (2) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of a Fund or any class; (3) the
trustees determine that it is necessary or desirable to obtain a shareholder
vote; or (4) a certain type of merger or consolidation, share conversion, share
exchange, or sale of assets is proposed. The 1940 Act requires a shareholder
vote under various circumstances, including to elect or remove trustees upon the
written request of shareholders representing 10% or more of a Fund's net assets
and to change any fundamental policy of a Fund. Unless otherwise required by
applicable law, shareholders of a Fund receive one vote for each dollar of net
asset value owned on the record date, and a fractional vote for each fractional
dollar of net asset value owned on the record date. However, only the shares of
the Fund or class affected by a particular matter are entitled to vote on that
matter. In addition, each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to that class, and each class has
separate voting rights on any matter submitted to shareholders in which

                                      B-2


the interests of one class differ from the interests of another. Voting rights
are noncumulative and cannot be modified without a majority vote.


 LIQUIDATION RIGHTS. In the event that a Fund is liquidated, shareholders will
be entitled to receive a pro rata share of the Fund's net assets. In the event
that a class of shares is liquidated, shareholders of that class will be
entitled to receive a pro rata share of the Fund's net assets that are allocated
to that class. Shareholders may receive cash, securities, or a combination of
the two.


 PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Funds'
shares.


 CONVERSION RIGHTS. Shareholders of each Fund (except the Precious Metals and
Mining and Dividend Growth Funds) may convert their shares into another class of
shares of the same Fund upon satisfaction of any then applicable eligibility
requirements. There are no conversion rights associated with the Precious Metals
and Mining and Dividend Growth Funds.


 REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in its
current prospectus and elsewhere in this Statement of Additional Information.


 SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.


 CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and
non-assessable.


TAX STATUS OF THE FUNDS


Each Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC).
This special tax status means that the Fund will not be liable for federal tax
on income and capital gains distributed to shareholders. In order to preserve
its tax status, each Fund must comply with certain requirements. If a Fund fails
to meet these requirements in any taxable year, it will be subject to tax on its
taxable income at corporate rates, and all distributions from earnings and
profits, including any distributions of net tax-exempt income and net long-term
capital gains, will be taxable to shareholders as ordinary income. In addition,
a Fund could be required to recognize unrealized gains, pay substantial taxes
and interest, and make substantial distributions before regaining its tax status
as a regulated investment company.


 Dividends received and distributed by each Fund on shares of stock of domestic
corporations may be eligible for the dividends-received deduction applicable to
corporate shareholders. Corporations must satisfy certain requirements in order
to claim the deduction. Capital gains distributed by the Funds are not eligible
for the dividends-received deduction.


 Each Fund may invest in passive foreign investment companies (PFICs). A foreign
company is a PFIC if 75% or more of its gross income is passive or if 50% or
more of its assets produce passive income. Capital gains on the sale of a PFIC
will be deemed ordinary income regardless of how long the Fund held it. Also,
the Fund may be subject to corporate income tax and an interest charge on
certain dividends and capital gains earned from PFICs, whether or not they are
distributed to shareholders. To avoid such tax and interest, the Fund may elect
to treat PFICs as sold on the last day of the Fund's fiscal year and mark to
market the gains (or losses, to the extent of previously recognized gains) and
recognize ordinary income each year. Distributions from the Fund that are
attributable to PFICs are characterized as ordinary income.


                              INVESTMENT POLICIES


Some of the investment policies described below and in each Fund's prospectus
set forth percentage limitations on a Fund's investment in, or holdings of,
certain securities or other assets. Unless otherwise required by law, compliance
with these policies will be determined immediately after the acquisition of such
securities or assets. Subsequent changes in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations.


 The following policies and explanations supplement each Fund's investment
objective and policies set forth in the prospectus. With respect to the
different investments discussed below, a Fund may acquire such investments to
the extent consistent with its investment objective and policies.


 80% POLICY. Each Fund (except the Dividend Growth Fund and the REIT Index Fund)
will invest at least 80% of its assets in stocks of a particular industry. In
applying this 80% policy, each Fund's assets will include its net assets and
borrowings for investment purposes.


                                      B-3


 BORROWING. A fund's ability to borrow money is limited by its investment
policies and limitations, by the 1940 Act, and by applicable exemptions,
no-action letters, interpretations, and other pronouncements by the SEC and its
staff, and any other regulatory authority having jurisdiction, from time to
time. Under the 1940 Act, a fund is required to maintain continuous asset
coverage (that is, total assets including borrowings, less liabilities exclusive
of borrowings) of 300% of the amount borrowed, with an exception for borrowings
not in excess of 5% of the fund's total assets made for temporary or emergency
purposes. Any borrowings for temporary purposes in excess of 5% of the fund's
total assets must maintain continuous asset coverage. If the 300% asset coverage
should decline as a result of market fluctuations or for other reasons, a fund
may be required to sell some of its portfolio holdings within three days
(excluding Sundays and holidays) to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time.


 Borrowing will tend to exaggerate the effect on net asset value of any increase
or decrease in the market value of a fund's portfolio. Money borrowed will be
subject to interest costs which may or may not be recovered by earnings on
the securities purchased. A fund also may be required to maintain minimum
average balances in connection with a borrowing or to pay a commitment or other
fee to maintain a line of credit; either of these requirements would increase
the cost of borrowing over the stated interest rate.


 The SEC takes the position that other transactions that have a leveraging
effect on the capital structure of a fund or are economically equivalent to
borrowing can be viewed as constituting a form of borrowing by the fund for
purposes of the 1940 Act. These transactions can include entering into reverse
repurchase agreements, engaging in mortgage-dollar-roll transactions, selling
securities short (other than short sales "against-the-box"), buying and selling
certain derivatives (such as futures contracts), selling (or writing) put and
call options, engaging in sale-buybacks, entering into firm-commitment and
standby-commitment agreements, engaging in when-issued, delayed-delivery, or
forward-commitment transactions, and other trading practices that have a
leveraging effect on the capital structure of a fund or are economically
equivalent to borrowing (additional discussion about a number of these
transactions can be found below). A borrowing transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and therefore such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund (1) maintains an offsetting
financial position, (2) segregates liquid assets (with such liquidity determined
by the advisor in accordance with procedures established by the board of
trustees) equal (as determined on a daily mark-to-market basis) in value to the
fund's potential economic exposure under the borrowing transaction, or (3)
otherwise "covers" the transaction in accordance with applicable SEC guidance
(collectively, "covers" the transaction). A fund may have to buy or sell a
security at a disadvantageous time or price in order to cover a borrowing
transaction. In addition, segregated assets may not be available to satisfy
redemptions or for other purposes.


 COMMON STOCK. Common stock represents an equity or ownership interest in an
issuer. Common stock typically entitles the owner to vote on the election of
directors and other important matters as well as to receive dividends on such
stock. In the event an issuer is liquidated or declares bankruptcy, the claims
of owners of bonds, other debt holders, and owners of preferred stock take
precedence over the claims of those who own common stock.


 CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that
combine the investment characteristics of bonds and common stocks. Convertible
securities typically consist of debt securities or preferred stock that may be
converted (on a voluntary or mandatory basis) within a specified period of time
(normally for the entire life of the security) into a certain amount of common
stock or other equity security of the same or a different issuer at a
predetermined price. Convertible securities also include debt securities with
warrants or common stock attached and derivatives combining the features of debt
securities and equity securities. Other convertible securities with features and
risks not specifically referred to herein may become available in the future.
Convertible securities involve risks similar to those of both fixed income and
equity securities.


 The market value of a convertible security is a function of its "investment
value" and its "conversion value." A security's "investment value" represents
the value of the security without its conversion feature (i.e., a nonconvertible
fixed income security). The investment value may be determined by reference to
its credit quality and the current value of its yield to maturity or probable
call date. At any given time, investment value is dependent upon such factors as
the general level of interest rates, the yield of similar nonconvertible
securities, the financial strength of the issuer, and the seniority of the
security in the issuer's capital structure. A security's "conversion value" is
determined by multiplying the number of shares the holder is entitled to receive
upon conversion or exchange by the current price of the underlying security. If
the conversion value of a convertible security is significantly below its
investment value, the convertible security will trade like nonconvertible debt
or preferred stock and its market value will not be influenced greatly by

                                      B-4


fluctuations in the market price of the underlying security. In that
circumstance, the convertible security takes on the characteristics of a bond,
and its price moves in the opposite direction from interest rates. Conversely,
if the conversion value of a convertible security is near or above its
investment value, the market value of the convertible security will be more
heavily influenced by fluctuations in the market price of the underlying
security. In that case, the convertible security's price may be as volatile as
that of common stock. Because both interest rate and market movements can
influence its value, a convertible security generally is not as sensitive to
interest rates as a similar fixed income security, nor is it as sensitive to
changes in share price as its underlying equity security. Convertible securities
are often rated below investment-grade or are not rated, and are generally
subject to a high degree of credit risk.


 While all markets are prone to change over time, the generally high rate at
which convertible securities are retired (through mandatory or scheduled
conversions by issuers or voluntary redemptions by holders) and replaced with
newly issued convertibles may cause the convertible securities market to change
more rapidly than other markets. For example, a concentration of available
convertible securities in a few economic sectors could elevate the sensitivity
of the convertible securities market to the volatility of the equity markets and
to the specific risks of those sectors. Moreover, convertible securities with
innovative structures, such as mandatory conversion securities and equity-linked
securities, have increased the sensitivity of the convertible securities market
to the volatility of the equity markets and to the special risks of those
innovations, which may include risks different from, and possibly greater than,
those associated with traditional convertible securities.


 DEBT SECURITIES. A debt security is a security consisting of a certificate or
other evidence of a debt (secured or unsecured) on which the issuing company or
governmental body promises to pay the holder thereof a fixed, variable, or
floating rate of interest for a specified length of time, and to repay the debt
on the specified maturity date. Some debt securities, such as zero coupon bonds,
do not make regular interest payments but are issued at a discount to their
principal or maturity value. Debt securities include a variety of fixed income
obligations, including, but not limited to, corporate bonds, government
securities, municipal securities, convertible securities, mortgage-backed
securities, and asset-backed securities. Debt securities include
investment-grade securities, non-investment-grade securities, and unrated
securities. Debt securities are subject to a variety of risks, such as interest
rate risk, income risk, call/ prepayment risk, inflation risk, credit risk, and
(in the case of foreign securities) country risk and currency risk.


 DEBT SECURITIES -- NON-INVESTMENT-GRADE SECURITIES. Non-investment-grade
securities, also referred to as "high-yield securities" or "junk bonds," are
debt securities that are rated lower than the four highest rating categories by
a nationally recognized statistical rating organization (for example, lower than
Baa3 by Moody's Investors Service, Inc. or lower than BBB- by Standard & Poor's)
or are determined to be of comparable quality by the fund's advisor. These
securities are generally considered to be, on balance, predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and will generally involve more credit risk than
securities in the investment-grade categories. Investment in these securities
generally provides greater income and increased opportunity for capital
appreciation than investments in higher quality securities, but they also
typically entail greater price volatility and principal and income risk.


 Analysis of the creditworthiness of issuers of high yield securities may be
more complex than for issuers of investment-grade securities. Thus, reliance on
credit ratings in making investment decisions entails greater risks for
high-yield securities than for investment-grade debt securities. The success of
a fund's advisor in managing high-yield securities is more dependent upon its
own credit analysis than is the case with investment-grade securities.


 Some high-yield securities are issued by smaller, less-seasoned companies,
while others are issued as part of a corporate restructuring, such as an
acquisition, merger, or leveraged buyout. Companies that issue high-yield
securities are often highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with
investment-grade securities. Some high-yield securities were once rated as
investment-grade but have been downgraded to junk bond status because of
financial difficulties experienced by their issuers.


 The market values of high-yield securities tend to reflect individual issuer
developments to a greater extent than do investment-grade securities, which in
general react to fluctuations in the general level of interest rates. High-yield
securities also tend to be more sensitive to economic conditions than are
investment-grade securities. A projection of an economic downturn or of a
sustained period of rising interest rates, for example, could cause a decline in
junk bond prices because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and

                                      B-5


interest payments on its debt securities. If an issuer of high-yield securities
defaults, in addition to risking payment of all or a portion of interest and
principal, a fund investing in such securities may incur additional expenses to
seek recovery.


 The secondary market on which high-yield securities are traded may be less
liquid than the market for investment-grade securities. Less liquidity in the
secondary trading market could adversely affect the ability of a fund to sell a
high-yield security or the price at which a fund could sell a high-yield
security, and could adversely affect the daily net asset value of fund shares.
When secondary markets for high-yield securities are less liquid than the market
for investment-grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available.


 Except as otherwise provided in a fund's prospectus, if a credit-rating agency
changes the rating of a portfolio security held by a fund, the fund may retain
the portfolio security if the advisor deems it in the best interests of
shareholders.


 DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership
interests in a security or a pool of securities that have been deposited with a
"depository." Depositary receipts may be sponsored or unsponsored and include
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and
Global Depositary Receipts (GDRs). For ADRs, the depository is typically a U.S.
financial institution and the underlying securities are issued by a foreign
issuer. For other depositary receipts, the depository may be a foreign or a U.S.
entity, and the underlying securities may have a foreign or a U.S. issuer.
Depositary receipts will not necessarily be denominated in the same currency as
their underlying securities. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and designed for use in the U.S. securities
markets. Other depositary receipts, such as GDRs and EDRs, may be issued in
bearer form and denominated in other currencies, and are generally designed for
use in securities markets outside the U.S. Although the two types of depositary
receipt facilities (unsponsored or sponsored) are similar, there are differences
regarding a holder's rights and obligations and the practices of market
participants. A depository may establish an unsponsored facility without
participation by (or acquiescence of) the underlying issuer; typically, however,
the depository requests a letter of non-objection from the underlying issuer
prior to establishing the facility. Holders of unsponsored depositary receipts
generally bear all the costs of the facility. The depository usually charges
fees upon the deposit and withdrawal of the underlying securities, the
conversion of dividends into U.S. dollars or other currency, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through voting rights to depositary receipt holders with respect to the
underlying securities.


 Sponsored depositary receipt facilities are created in generally the same
manner as unsponsored facilities, except that sponsored depositary receipts are
established jointly by a depository and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities of the
underlying issuer, the depository, and the depositary receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs of
the depositary receipts (such as dividend payment fees of the depository),
although most sponsored depositary receipts holders may bear costs such as
deposit and withdrawal fees. Depositories of most sponsored depositary receipts
agree to distribute notices of shareholder meetings, voting instructions, and
other shareholder communications and information to the depositary receipt
holders at the underlying issuer's request. The depositary of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through, to the holders of the receipts, voting rights with respect to the
deposited securities.


 For purposes of a fund's investment policies, investments in depositary
receipts will be deemed to be investments in the underlying securities. Thus, a
depositary receipt representing ownership of common stock will be treated as
common stock. Depository receipts do not eliminate all of the risks associated
with directly investing in the securities of foreign issuers.


 DERIVATIVES. A derivative is a financial instrument which has a value that is
based on--or "derived from"--the values of other assets, reference rates, or
indexes. Derivatives may relate to a wide variety of underlying references, such
as commodities, stocks, bonds, interest rates, currency exchange rates, and
related indexes. Derivatives include futures contracts and options on futures
contracts (see additional discussion below), forward-commitment transactions
(see additional discussion below), options on securities (see additional
discussion below), caps, floors, collars, swap agreements (see additional
discussion below), and other financial instruments. Some derivatives, such as
futures contracts and certain options, are traded on U.S. commodity and
securities exchanges, while other derivatives, such as swap agreements, are
privately negotiated and entered into in the over-the-counter (OTC) market. The
risks associated with the use of derivatives are different from, and possibly
greater than, the risks associated with investing directly in the

                                      B-6


securities, assets, or market indexes on which the derivatives are based.
Derivatives are used by some investors for speculative purposes. Derivatives
also may be used for a variety of purposes that do not constitute speculation,
such as hedging, risk management, seeking to stay fully invested, seeking to
reduce transaction costs, seeking to simulate an investment in equity or debt
securities or other investments, seeking to add value by using derivatives to
more efficiently implement portfolio positions when derivatives are favorably
priced relative to equity or debt securities or other investments, and for other
purposes. A fund will not use derivatives for speculation or for the purpose of
leveraging (magnifying) investment returns. There is no assurance that any
derivatives strategy used by a fund's advisor will succeed.


 Derivative products are highly specialized instruments that require investment
techniques and risk analyses different from those associated with stocks, bonds,
and other traditional investments. The use of a derivative requires an
understanding not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions.


 The use of a derivative involves the risk that a loss may be sustained as a
result of the insolvency or bankruptcy of the other party to the contract
(usually referred to as a "counterparty") or the failure of the counterparty to
make required payments or otherwise comply with the terms of the contract.
Additionally, the use of credit derivatives can result in losses if a fund's
advisor does not correctly evaluate the creditworthiness of the issuer on which
the credit derivative is based.


 Derivatives may be subject to liquidity risk, which exists when a particular
derivative is difficult to purchase or sell. If a derivative transaction is
particularly large or if the relevant market is illiquid (as is the case with
many OTC derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous time or price.


 Derivatives may be subject to pricing or "basis" risk, which exists when a
particular derivative becomes extraordinarily expensive relative to historical
prices or the prices of corresponding cash market instruments. Under certain
market conditions, it may not be economically feasible to initiate a transaction
or liquidate a position in time to avoid a loss or take advantage of an
opportunity.


 Because many derivatives have a leverage component, adverse changes in the
value or level of the underlying asset, reference rate, or index can result in a
loss substantially greater than the amount invested in the derivative itself.
Certain derivatives have the potential for unlimited loss, regardless of the
size of the initial investment. A derivative transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and therefore such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund covers the transaction in
accordance with the requirements, and subject to the risks, described above
under the heading "Borrowing."


 Like most other investments, derivative instruments are subject to the risk
that the market value of the instrument will change in a way detrimental to a
fund's interest. A fund bears the risk that its advisor will incorrectly
forecast future market trends or the values of assets, reference rates, indexes,
or other financial or economic factors in establishing derivative positions for
the fund. If the advisor attempts to use a derivative as a hedge against, or as
a substitute for, a portfolio investment, the fund will be exposed to the risk
that the derivative will have or will develop imperfect or no correlation with
the portfolio investment. This could cause substantial losses for the fund.
While hedging strategies involving derivative instruments can reduce the risk of
loss, they can also reduce the opportunity for gain or even result in losses by
offsetting favorable price movements in other fund investments. Many
derivatives, in particular OTC derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to a fund.


 EXCHANGE-TRADED FUNDS. The funds may purchase shares of exchange-traded funds
(ETFs), including ETF shares issued by other Vanguard funds. Typically, the
funds would purchase ETF shares for the same reason it would purchase (and as an
alternative to purchasing) futures contracts: to obtain exposure to all or a
portion of the stock or bond market. ETF shares enjoy several advantages over
futures. Depending on the market, the holding period, and other factors, ETF
shares can be less costly and more tax-efficient than futures. In addition, ETF
shares can be purchased for smaller
sums, offer exposure to market sectors and styles for which there is no suitable
or liquid futures contract, and do not involve leverage.


 Most ETFs are investment companies. Therefore, each fund's purchases of ETF
shares generally are subject to the limitations on, and the risks of, a fund's
investments in other investment companies, which are described below under the
heading "Other Investment Companies."


 An investment in an ETF generally presents the same primary risks as an
investment in a conventional fund (i.e., one that is not exchange traded) that
has the same investment objectives, strategies, and policies. The price of an
ETF can

                                      B-7


fluctuate within a wide range, and a fund could lose money investing in an ETF
if the prices of the securities owned by the ETF go down. In addition, ETFs are
subject to the following risks that do not apply to conventional funds: (1) the
market price of the ETF's shares may trade at a discount to their net asset
value; (2) an active trading market for an ETF's shares may not develop or be
maintained; or (3) trading of an ETF's shares may be halted if the listing
exchange's officials deem such action appropriate, the shares are de-listed from
the exchange, or the activation of market-wide "circuit breakers" (which are
tied to large decreases in stock prices) halts stock trading generally.


 Funds may repurchase VIPER(R) Shares, which are exchange-traded shares that
represent an interest in a portfolio of stocks held by certain Vanguard index
funds. "VIPER" stands for Vanguard Index Participation Equity Receipts. Any fund
that issues VIPER Shares may repurchase those shares on the open market at the
current market price if doing so would be advantageous for the fund. A
repurchase might be advantageous, for example, because the VIPER Shares are more
cost-effective than alternative investments, are selling at a discount to net
asset value, will cause the fund to more closely track its index than
alternative investments, or some combination of the three. Each fund that
repurchases its VIPER Shares also may lend those shares to qualified
institutional borrowers as part of the fund's securities lending activities.
Each fund's investments in VIPER Shares are also subject to the descriptions,
limitations and risks described above under the headings "Exchange-Traded Funds"
and "Other Investment Companies."


 FOREIGN SECURITIES. Foreign securities are equity or debt securities issued by
entities organized, domiciled, or with a principal place of business outside the
United States, such as foreign corporations and governments. Foreign securities
may trade in U.S. or foreign securities markets. A fund may make foreign
investments either directly by purchasing foreign securities or indirectly by
purchasing depositary receipts or depositary shares of similar instruments
(depositary receipts) for foreign securities (see discussion above). Depositary
receipts are securities that are listed on exchanges or quoted in OTC markets in
one country but represent shares of issuers domiciled in another country. Direct
investments in foreign securities may be made either on foreign securities
exchanges or in the OTC markets. Investing in foreign securities involves
certain special risk considerations that are not typically associated with
investing in securities of U.S. companies or governments.


 Because foreign issuers are not generally subject to uniform accounting,
auditing, and financial reporting standards and practices comparable to those
applicable to U.S. issuers, there may be less publicly available information
about certain foreign issuers than about U.S. issuers. Evidence of securities
ownership may be uncertain in many foreign countries. As a result, there is a
risk that a fund's trade details could be incorrectly or fraudulently entered at
the time of the transaction, resulting in a loss to the fund. Securities of
foreign issuers are generally less liquid than securities of comparable U.S.
issuers. In certain countries, there is less government supervision and
regulation of stock exchanges, brokers, and listed companies than in the U.S. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, war,
terrorism, nationalization, limitations on the removal of funds or other assets,
or diplomatic developments which could affect U.S. investments in those
countries. Although an advisor will endeavor to achieve most favorable execution
costs for a fund's portfolio transactions in foreign securities under the
circumstances, commissions (and other transaction costs) are generally higher
than those on U.S. securities. In addition, it is expected that the expenses for
custodian arrangements of the fund's foreign securities will be somewhat greater
than the expenses for a fund that invests primarily in domestic securities.
Certain foreign governments levy withholding taxes against dividend and interest
income from foreign securities. Although in some countries a portion of these
taxes is recoverable by the fund, the non-recovered portion of foreign
withholding taxes will reduce the income received from the companies making up a
fund.


 The value of the foreign securities held by a fund that are not U.S.
dollar-denominated may be significantly affected by changes in currency exchange
rates. The U.S. dollar value of a foreign security generally decreases when the
value of the U.S. dollar rises against the foreign currency in which the
security is denominated and tends to increase when the value of the U.S. dollar
falls against such currency (as discussed below, a fund may attempt to hedge its
currency risks). In addition, the value of fund assets may be affected by losses
and other expenses incurred in converting between various currencies in order to
purchase and sell foreign securities, and by currency restrictions, exchange
control regulation, currency devaluations, and political and economic
developments.


 FOREIGN SECURITIES -- EMERGING MARKET RISK. Investing in emerging market
countries involves certain risks not typically associated with investing in the
United States, and imposes risks greater than, or in addition to, risks of
investing in more developed foreign countries. These risks include, but are not
limited to, the following: greater risks of nationalization or expropriation of
assets or confiscatory taxation; currency devaluations and other currency
exchange rate fluctuations; greater social, economic, and political uncertainty
and instability (including amplified risk of war and

                                      B-8


terrorism); more substantial government involvement in the economy; less
government supervision and regulation of the securities markets and participants
in those markets; controls on foreign investment and limitations on repatriation
of invested capital and on the fund's ability to exchange local currencies for
U.S. dollars; unavailability of currency hedging techniques in certain emerging
market countries; the fact that companies in emerging market countries may be
smaller, less seasoned, and newly organized companies; the difference in, or
lack of, auditing and financial reporting standards, which may result in
unavailability of material information about issuers; the risk that it may be
more difficult to obtain and/or enforce a judgment in a court outside the United
States; and greater price volatility, substantially less liquidity, and
significantly smaller market capitalization of securities markets. Also, any
change in the leadership or politics of emerging market countries, or the
countries that exercise a significant influence over those countries, may halt
the expansion of or reverse the liberalization of foreign investment policies
now occurring and adversely affect existing investment opportunities.
Furthermore, high rates of inflation and rapid fluctuations in inflation rates
have had, and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries.


 FOREIGN SECURITIES -- FOREIGN CURRENCY TRANSACTIONS. The value in U.S. dollars
of a fund's non-dollar-denominated foreign securities may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations, and the fund may incur costs in connection with conversions
between various currencies. To seek to minimize the impact of such factors on
net asset values, a fund may engage in foreign currency transactions in
connection with its investments in foreign securities. A fund will not speculate
in foreign currency exchange and will enter into foreign currency transactions
only to attempt to "hedge" the currency risk associated with investing in
foreign securities. Although such transactions tend to minimize the risk of loss
that would result from a decline in the value of the hedged currency, they also
may limit any potential gain that might result should the value of such currency
increase.


 Currency exchange transactions may be conducted either on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, or through forward
contracts to purchase or sell foreign currencies. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
entered into with large commercial banks or other currency traders who are
participants in the interbank market. Currency exchange transactions also may be
effected through the use of swap agreements or other derivatives. Currency
exchange transactions may be considered borrowings. A currency exchange
transaction will not be considered to constitute the issuance of a "senior
security" by a fund for purposes of the 1940 Act, and therefore such transaction
will not be subject to the 300% asset coverage requirement otherwise applicable
to borrowings by a fund, if the fund covers the transaction in accordance with
the requirements, and subject to the risks, described above under the heading
"Borrowing."


 By entering into a forward contract for the purchase or sale of foreign
currency involved in underlying security transactions, a fund may be able to
protect itself against part or all of the possible loss between trade and
settlement dates for that purchase or sale resulting from an adverse change in
the relationship between the U.S. dollar and such foreign currency. This
practice is sometimes referred to as "transaction hedging." In addition, when
the advisor reasonably believes that a particular foreign currency may suffer a
substantial decline against the U.S. dollar, a fund may enter into a forward
contract to sell an amount of foreign currency approximating the value of some
or all of its portfolio securities denominated in such foreign currency. This
practice is sometimes referred to as "portfolio hedging." Similarly, when the
advisor reasonably believes that the U.S. dollar may suffer a substantial
decline against a foreign currency, a fund may enter into a forward contract to
buy that foreign currency for a fixed dollar amount.


 A fund may also attempt to hedge its foreign currency exchange rate risk by
engaging in currency futures, options, and "cross-hedge" transactions. In
cross-hedge transactions, a fund holding securities denominated in one foreign
currency will enter into a forward currency contract to buy or sell a different
foreign currency (one that the advisor reasonably believes generally tracks the
currency being hedged with regard to price movements). The advisor may select
the tracking (or substitute) currency rather than the currency in which the
security is denominated for various reasons, including in order to take
advantage of pricing or other opportunities presented by the tracking currency
or because the market for the tracking currency is more liquid or more
efficient. Such cross-hedges are expected to help protect a fund against an
increase or decrease in the value of the U.S. dollar against certain foreign
currencies.


 A fund may hold a portion of its assets in bank deposits denominated in foreign
currencies, so as to facilitate investment in foreign securities as well as
protect against currency fluctuations and the need to convert such assets into
U.S. dollars (thereby also reducing transaction costs). To the extent these
monies are converted back into U.S. dollars, the value of the assets so
maintained will be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations.

                                      B-9


 The forecasting of currency market movement is extremely difficult, and whether
any hedging strategy will be successful is highly uncertain. Moreover, it is
impossible to forecast with precision the market value of portfolio securities
at the expiration of a foreign currency forward contract. Accordingly, a fund
may be required to buy or sell additional currency on the spot market (and bear
the expense of such transaction) if its advisor's predictions regarding the
movement of foreign currency or securities markets prove inaccurate. In
addition, the use of cross-hedging transactions may involve special risks, and
may leave a fund in a less advantageous position than if such a hedge had not
been established. Because foreign currency forward contracts are privately
negotiated transactions, there can be no assurance that a fund will have
flexibility to roll-over a foreign currency forward contract upon its expiration
if it desires to do so. Additionally, there can be no assurance that the other
party to the contract will perform its services thereunder.


 FOREIGN SECURITIES -- FOREIGN INVESTMENT COMPANIES. Some of the countries in
which a fund may invest may not permit, or may place economic restrictions on,
direct investment by outside investors. Fund investments in such countries may
be permitted only through foreign government-approved or authorized investment
vehicles, which may include other investment companies. Such investments may be
made through registered or unregistered closed-end investment companies that
invest in foreign securities. Investing through such vehicles may involve
frequent or layered fees or expenses and may also be subject to the limitations
on, and the risks of, a fund's investments in other investment companies, which
are described below under the heading "Other Investment Companies."


 FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Each Fund's obligations
under futures contracts will not exceed 20% of its total assets. To the extent
that the REIT Index Fund invests in futures contracts, it will not have 98% of
its assets invested in REIT stocks. Futures contracts and options on futures
contracts are derivatives (see additional discussion above). A futures contract
is a standardized agreement between two parties to buy or sell at a specific
time in the future a specific quantity of a commodity at a specific price. The
commodity may consist of an asset, a reference rate, or an index. A security
futures contract relates to the sale of a specific quantity of shares of a
single equity security or a narrow-based securities index. The value of a
futures contract tends to increase and decrease in tandem with the value of the
underlying commodity. The buyer of a futures contract enters into an agreement
to purchase the underlying commodity on the settlement date and is said to be
"long" the contract. The seller of a futures contract enters into an agreement
to sell the underlying commodity on the settlement date and is said to be
"short" the contract. The price at which a futures contract is entered into is
established either in the electronic marketplace or by open outcry on the floor
of an exchange between exchange members acting as traders or brokers. Open
futures contracts can be liquidated or closed out by physical delivery of the
underlying commodity or payment of the cash settlement amount on the settlement
date, depending on the terms of the particular contract. Some financial futures
contracts (such as security futures) provide for physical settlement at
maturity. Other financial futures contracts (such as those relating to interest
rates, foreign currencies and broad-based securities indexes) generally provide
for cash settlement at maturity. In the case of cash settled futures contracts,
the cash settlement amount is equal to the difference between the final
settlement price on the last trading day of the contract and the price at which
the contract was entered into. Most futures contracts, however, are not held
until maturity but instead are "offset" before the settlement date through the
establishment of an opposite and equal futures position.


 The purchaser or seller of a futures contract is not required to deliver or pay
for the underlying commodity unless the contract is held until the settlement
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures commission merchant (FCM) when the futures contract is
entered into. Initial margin deposits are typically calculated as a percentage
of the contract's market value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. This process is known
as "marking-to-market."


 A futures transaction will not be considered to constitute the issuance of a
"senior security" by a fund for purposes of the 1940 Act, and such transaction
will not be subject to the 300% asset coverage requirement otherwise applicable
to borrowings by a fund, if the fund covers the transaction in accordance with
the requirements, and subject to the risks, described above under the heading
"Borrowing."


 An option on a futures contract (or futures option) conveys the right, but not
the obligation, to purchase (in the case of a call option) or sell (in the case
of a put option) a specific futures contract at a specific price (called the
"exercise" or "strike" price) any time before the option expires. The seller of
an option is called an option writer. The purchase price of an option is called
the premium. The potential loss to an option buyer is limited to the amount of
the premium plus transaction costs. This will be the case, for example, if the
option is held and not exercised prior to its expiration date. Generally, an
option writer sells options with the goal of obtaining the premium paid by the
option buyer. If an option sold

                                      B-10


by an option writer expires without being exercised, the writer retains the full
amount of the premium. The option writer, however, has unlimited economic risk
because its potential loss, except to the extent offset by the premium received
when the option was written, is equal to the amount the option is "in-the-money"
at the expiration date. A call option is in-the-money if the value of the
underlying futures contract exceeds the exercise price of the option. A put
option is in-the-money if the exercise price of the option exceeds the value of
the underlying futures contract. Generally, any profit realized by an option
buyer represents a loss for the option writer.


 A fund that takes the position of a writer of a futures option is required to
deposit and maintain initial and variation margin with respect to the option, as
described above in the case of futures contracts. A futures option transaction
will not be considered to constitute the issuance of a "senior security" by a
fund for purposes of the 1940 Act, and such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a
fund, if the fund covers the transaction in accordance with the requirements and
subject to the risks described above under the heading "Borrowing."


 Each fund intends to comply with Rule 4.5 of the Commodity Futures Trading
Commission, under which a mutual fund is conditionally excluded from the
definition of the term "commodity pool operator." A fund will only enter into
futures contracts and futures options that are standardized and traded on a U.S.
or foreign exchange, board of trade, or similar entity, or quoted on an
automated quotation system.


 FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- RISKS. The risk of loss
in trading futures contracts and in writing futures options can be substantial,
because of the low margin deposits required, the extremely high degree of
leverage involved in futures and options pricing, and the potential high
volatility of the futures markets. As a result, a relatively small price
movement in a futures position may result in immediate and substantial loss (or
gain) to the investor. For example, if at the time of purchase, 10% of the value
of the futures contract is deposited as margin, a subsequent 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit if the contract were closed out. Thus, a purchase or
sale of a futures contract, and the writing of a futures option, may result in
losses in excess of the amount invested in the position. In the event of adverse
price movements, a fund would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements (and segregation requirements, if applicable) at a time when it may
be disadvantageous to do so. In addition, on the settlement date, a fund may be
required to make delivery of the instruments underlying the futures positions it
holds.


 A fund could suffer losses if it is unable to close out a futures contract or a
futures option because of an illiquid secondary market. Futures contracts and
futures options may be closed out only on an exchange which provides a secondary
market for such products. However, there can be no assurance that a liquid
secondary market will exist for any particular futures product at any specific
time. Thus, it may not be possible to close a futures or option position.
Moreover, most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses. The inability to close futures and
options positions also could have an adverse impact on the ability to hedge a
portfolio investment or to establish a substitute for a portfolio investment.
Treasury futures are generally not subject to such daily limits.


 A fund bears the risk that its advisor will incorrectly predict future market
trends. If the advisor attempts to use a futures contract or a futures option as
a hedge against, or as a substitute for, a portfolio investment, the fund will
be exposed to the risk that the futures position will have or will develop
imperfect or no correlation with the portfolio investment. This could cause
substantial losses for the fund. While hedging strategies involving futures
products can reduce the risk of loss, they can also reduce the opportunity for
gain or even result in losses by offsetting favorable price movements in other
fund investments.

                                      B-11


 A fund could lose margin payments it has deposited with its FCM, if, for
example, the FCM breaches its agreement with the fund or becomes insolvent or
goes into bankruptcy. In that event, the fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to
the fund.


 INTERFUND BORROWING AND LENDING. The SEC has granted an exemption permitting
the Vanguard funds to participate in Vanguard's interfund lending program. This
program allows the Vanguard funds to borrow money from and lend money to each
other for temporary or emergency purposes. The program is subject to a number of
conditions, including the requirement that no fund may borrow or lend money
through the program unless it receives a more favorable interest rate than is
typically available from a bank for a comparable transaction. In addition, a
Vanguard fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The boards of trustees of the Vanguard funds are
responsible for overseeing the interfund lending program.


 OPTIONS. An option is a derivative (see additional discussion above). An option
on a security (or index) is a contract that gives the holder of the option, in
return for the payment of a "premium," the right, but not the obligation, to buy
from (in the case of a call option) or sell to (in the case of a put option) the
writer of the option the security underlying the option (or the cash value of
the index) at a specified exercise price prior to the expiration date of the
option. The writer of an option on a security has the obligation upon exercise
of the option (1) to deliver the underlying security upon payment of the
exercise price prior to the expiration date of the option. The writer of an
option on a security has the obligation upon exercise of the option (1) to
deliver the underlying security upon payment of the exercise price (in the case
of a call option) or (2) to pay the exercise price upon delivery of the
underlying security (in the case of a put option). The writer of an option on an
index has the obligation upon exercise of the option to pay an amount equal to
the cash value of the index minus the exercise price, multiplied by the
specified multiplier for the index option. The multiplier for an index option
determines the size of the investment position the option represents. Unlike
exchange-traded options, which are standardized with respect to the underlying
instrument, expiration date, contract size, and strike price, the terms of OTC
options (options not traded on exchanges) generally are established through
negotiation with the other party to the option contract. While this type of
arrangement allows the purchaser or writer greater flexibility to tailor an
option to its needs, OTC options generally involve greater credit risk than
exchange-traded options, which are guaranteed by the clearing organization of
the exchanges where they are traded.


 The buyer (or holder) of an option is said to be "long" the option, while the
seller (or writer) of an option is said to be "short" the option. A call option
grants to the holder the right to buy (and obligates the writer to sell) the
underlying security at the strike price. A put options grants to the holder the
right to sell (and obligates the writer to buy) the underlying security at the
strike price. The purchase price of an option is called the "premium." The
potential loss to an option buyer is limited to the amount of the premium plus
transaction costs. This will be the case if the option is held and not exercised
prior to its expiration date. Generally, an option writer sells options with the
goal of obtaining the premium paid by the option buyer, but that person could
also seek to profit from an anticipated rise or decline in option prices. If an
option sold by an option writer expires without being exercised, the writer
retains the full amount of the premium. The option writer, however, has
unlimited economic risk because its potential loss, except to the extent offset
by the premium received when the option was written, is equal to the amount the
option is "in-the-money" at the expiration date. A call option is in-the-money
if the value of the underlying position exceeds the exercise price of the
option. A put option is in-the-money if the exercise price of the option exceeds
the value of the underlying position. Generally, any profit realized by an
option buyer represents a loss for the option writer. The writing of an option
will not be considered to constitute the issuance of a "senior security" by a
fund for purposes of the 1940 Act, and such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a
fund, if the fund covers the transaction in accordance with the requirements,
and subject to the risks, described above under the heading "Borrowing."


 If a trading market in particular options were to become unavailable, investors
in those options (such as the funds) would be unable to close out their
positions until trading resumes, and they may be faced with substantial losses
if the value of the underlying interest moves adversely during that time. Even
if the market were to remain available, there may be times when options prices
will not maintain their customary or anticipated relationships to the prices of
the underlying interests and related interests. Lack of investor interest,
changes in volatility, or other factors or conditions might adversely affect the
liquidity, efficiency, continuity, or even the orderliness of the market for
particular options.


 A fund bears the risk that its advisor will not accurately predict future
market trends. If the advisor attempts to use an option as a hedge against, or
as a substitute for, a portfolio investment, the fund will be exposed to the
risk that the

                                      B-12


option will have or will develop imperfect or no correlation with the portfolio
investment. This could cause substantial losses for the fund. While hedging
strategies involving options can reduce the risk of loss, they can also reduce
the opportunity for gain or even result in losses by offsetting favorable price
movements in other fund investments. Many options, in particular OTC options,
are complex and often valued based on subjective factors. Improper valuations
can result in increased cash payment requirements to counterparties or a loss of
value to a fund.


 OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to
the extent permitted by applicable law or SEC exemption. Under the 1940 Act, a
fund generally may invest up to 10% of its assets in shares of investment
companies and up to 5% of its assets in any one investment company, as long as
the investment does not represent more than 3% of the voting stock of the
acquired investment company. The 1940 Act provides an exemption from these
restrictions for a fund of funds where the acquiring fund and any acquired funds
are part of the same group of investment companies and comply with various
conditions set forth in the Act. If a fund invests in other investment
companies, shareholders will bear not only their proportionate share of the
fund's expenses (including operating expenses and the fees of the advisor), but
also, indirectly, the similar expenses of the underlying investment companies.
Shareholders would also be exposed to the risks associated not only to the
investments of the fund but also to the portfolio investments of the underlying
investment companies. Certain types of investment companies, such as closed-end
investment companies, issue a fixed number of shares that typically trade on a
stock exchange or over-the-counter at a premium or discount to their net asset
value. Others are continuously offered at net asset value but also may be traded
in the secondary market.


 PREFERRED STOCK. Preferred stock represents an equity or ownership interest in
an issuer. Preferred stock normally pays dividends at a specified rate and has
precedence over common stock in the event the issuer is liquidated or declares
bankruptcy. However, in the event an issuer is liquidated or declares
bankruptcy, the claims of owners of bonds take precedence over the claims of
those who own preferred and common stock. Preferred stock, unlike common stock,
often has a stated dividend rate payable from the corporation's earnings.
Preferred stock dividends may be cumulative or non-cumulative, participating, or
auction rate. "Cumulative" dividend provisions require all or a portion of prior
unpaid dividends to be paid before dividends can be paid to the issuer's common
stock. "Participating" preferred stock may be entitled to a dividend exceeding
the stated dividend in certain cases. If interest rates rise, the fixed dividend
on preferred stocks may be less attractive, causing the price of such stocks to
decline. Preferred stock may have mandatory sinking fund provisions, as well as
provisions allowing the stock to be called or redeemed, which can limit the
benefit of a decline in interest rates. Preferred stock is subject to many of
the risks to which common stock and debt securities
are subject.


 REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to
resell such security to the seller at an agreed upon price and date (normally,
the next business day). Because the security purchased constitutes collateral
for the repurchase obligation, a repurchase agreement may be considered a loan
that is collateralized by the security purchased. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by a
fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by a fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and be held by a custodian bank until repurchased. In
addition, the investment advisor will monitor a fund's repurchase agreement
transactions generally and will evaluate the creditworthiness of any bank,
broker, or dealer party to a repurchase agreement relating to a fund. The use of
repurchase agreements involves certain risks. One risk is the seller's ability
to pay the agreed-upon repurchase price on the repurchase date. If the seller
defaults, the fund may incur costs in disposing of the collateral, which would
reduce the amount realized thereon. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or limited.
For example, if the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy or other laws, a court may
determine that the underlying security is collateral for a loan by the fund not
within its control and therefore the realization by the fund on such collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement.


 RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that
cannot be sold or disposed of in the ordinary course of business within seven
business days at approximately the value at which they are being carried on a
fund's books. Illiquid securities may include a wide variety of investments,
such as: (1) repurchase agreements maturing in more than seven days; (2) OTC
options contracts and certain other derivatives (including certain swap
agreements);

                                      B-13


(3) fixed time deposits that are not subject to prepayment or do not provide for
withdrawal penalties upon prepayment (other than overnight deposits); (4)
participation interests in loans; (5) municipal lease obligations; (6)
commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933
(the 1933 Act); and (7) securities whose disposition is restricted under the
federal securities laws. Illiquid securities include restricted, privately
placed securities that, under the federal securities laws, generally may be
resold only to qualified institutional buyers. If a substantial market develops
for a restricted security (or other illiquid investment) held by a fund, it may
be treated as a liquid security, in accordance with procedures and guidelines
approved by the board of trustees. This generally includes securities that are
unregistered, that can be sold to qualified institutional buyers in accordance
with Rule 144A under the 1933 Act, or that are exempt from registration under
the 1933 Act, such as commercial paper. While a fund's advisor monitors the
liquidity of restricted securities on a daily basis, the board of trustees
oversees and retains ultimate responsibility for the advisor's liquidity
determinations. Several factors that the trustees consider in monitoring these
decisions include the valuation of a security, the availability of qualified
institutional buyers, brokers, and dealers that trade in the security, and the
availability of information about the security's issuer.


 REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells
a security to another party, such as a bank or broker-dealer, in return for cash
and agrees to repurchase that security at an agreed-upon price and time. Under a
reverse repurchase agreement, the fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
Reverse repurchase agreements involve the risk that the market value of
securities retained by the fund may decline below the repurchase price of the
securities sold by the fund which it is obligated to repurchase. A reverse
repurchase agreement may be considered a borrowing transaction for purposes of
the 1940 Act. A reverse repurchase agreement transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund covers the transaction in
accordance with the requirements, and subject to the risks, described above
under the heading "Borrowing." A fund will enter into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and found
satisfactory by the advisor.


 SECURITIES LENDING. A fund may lend its investment securities to qualified
institutional investors (typically brokers, dealers, banks, or other financial
institutions) who may need to borrow securities in order to complete certain
transactions, such as covering short sales, avoiding failures to deliver
securities, or completing arbitrage operations. By lending its investment
securities, a fund attempts to increase its net investment income through the
receipt of interest on the securities lent. Any gain or loss in the market price
of the securities lent that might occur during the term of the loan would be for
the account of the fund. If the borrower defaults on its obligation to return
the securities lent because of insolvency or other reasons, a fund could
experience delays and costs in recovering the securities lent or in gaining
access to the collateral. These delays and costs could be greater for foreign
securities. If a fund is not able to recover the securities lent, a fund may
sell the collateral and purchase a replacement investment in the market. The
value of the collateral could decrease below the value of the replacement
investment by the time the replacement investment is purchased. Cash received as
collateral through loan transactions may be invested in other eligible
securities. Investing this cash subjects that investment to market appreciation
or depreciation.


 The terms and the structure and the aggregate amount of securities loans must
be consistent with the 1940 Act, and the rules or interpretations of the SEC
thereunder. These provisions limit the amount of securities a fund may lend to
33 1/3% of the fund's total assets, and require that; (1) the borrower pledge
and maintain with the fund collateral consisting of cash, an irrevocable letter
of credit or securities issued or guaranteed by the U.S. government having at
all times not less than 100% of the value of the securities lent; (2) the
borrower add to such collateral whenever the price of the securities lent rises
(i.e., the borrower "marks-to-market" on a daily basis); (3) the loan be made
subject to termination by the fund at any time; and (4) the fund receive
reasonable interest on the loan (which may include the fund's investing any cash
collateral in interest bearing short-term investments), any distribution on the
lent securities, and any increase in their market value. Loan arrangements made
by each fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of three business days. The advisor will consider the creditworthiness of
the borrower, among other things, in making decisions with respect to the
lending of securities, subject to oversight by the board of trustees. At the
present time, the SEC does not object if an investment company pays reasonable
negotiated fees in connection with lent securities, so long as such fees are set
forth in a written contract and approved by the investment company's trustees.
In addition, voting rights pass with the lent securities, but if a material
event occurs affecting an investment on loan, the loan must be called and the
securities voted.

                                      B-14


 SWAP AGREEMENTS. A swap agreement is a derivative (see additional discussion
above). A swap agreement is an agreement between two parties (counterparties) to
exchange payments at specified dates (periodic payment dates) on the basis of a
specified amount (notional amount) with the payments calculated with reference
to a specified asset, reference rate, or index.


 Examples of swap agreements include, but are not limited to, interest rate
swaps, credit default swaps, equity swaps, commodity swaps, foreign currency
swaps, index swaps, and total return swaps. Most swap agreements provide that
when the periodic payment dates for both parties are the same, payments are
netted, and only the net amount is paid to the counterparty entitled to receive
the net payment. Consequently, a fund's current obligations (or rights) under a
swap agreement will generally be equal only to the net amount to be paid or
received under the agreement, based on the relative values of the positions held
by each counterparty. Swap agreements allow for a wide variety of transactions.
For example, fixed rate payments may be exchanged for floating rate payments;
U.S. dollar-denominated payments may be exchanged for payments denominated in a
different currency; and payments tied to the price of one asset, reference rate,
or index may be exchanged for payments tied to the price of another asset,
reference rate, or index.


 An option on a swap agreement, also called a "swaption," is an option that
gives the buyer the right, but not the obligation, to enter into a swap on a
future date in exchange for paying a market-based "premium." A receiver swaption
gives the owner the right to receive the total return of a specified asset,
reference rate, or index. A payer swaption gives the owner the right to pay the
total return of a specified asset, reference rate, or index. Swaptions also
include options that allow an existing swap to be terminated or extended by one
of the counterparties.


 The use of swap agreements by a fund entails certain risks, which may be
different from, or possibly greater than, the risks associated with investing
directly in the securities and other investments that are the referenced asset
for the swap agreement. Swaps are highly specialized instruments that require
investment techniques, risk analyses, and tax planning different from those
associated with stocks, bonds, and other traditional investments. The use of a
swap requires an understanding not only of the referenced asset, reference rate,
or index but also of the swap itself, without the benefit of observing the
performance of the swap under all possible market conditions.


 Swap agreements may be subject to liquidity risk, which exists when a
particular swap is difficult to purchase or sell. If a swap transaction is
particularly large or if the relevant market is illiquid (as is the case with
many OTC swaps), it may not be possible to initiate a transaction or liquidate a
position at an advantageous time or price, which may result in significant
losses. In addition, swap transaction may be subject to a fund's limitation on
investments in illiquid securities.


 Swap agreements may be subject to pricing risk, which exists when a particular
swap becomes extraordinarily expensive (or cheap) relative to historical prices
or the prices of corresponding cash market instruments. Under certain market
conditions, it may not be economically feasible to initiate a transaction or
liquidate a position in time to avoid a loss or take advantage of an opportunity
or to realize the intrinsic value of the swap agreement.


 Because some swap agreements have a leverage component, adverse changes in the
value or level of the underlying asset, reference rate, or index can result in a
loss substantially greater than the amount invested in the swap itself. Certain
swaps have the potential for unlimited loss, regardless of the size of the
initial investment. A leveraged swap transaction will not be considered to
constitute the issuance of a "senior security" by a fund, and such transaction
will not be subject to the 300% asset coverage requirement otherwise applicable
to borrowings by a fund, if the fund covers the transaction in accordance with
the requirements, and subject to the risks, described above under the heading
"Borrowing."


 Like most other investments, swap agreements are subject to the risk that the
market value of the instrument will change in a way detrimental to a fund's
interest. A fund bears the risk that its advisor will not accurately forecast
future market trends or the values of assets, reference rates, indexes, or other
economic factors in establishing swap positions for the fund. If the advisor
attempts to use a swap as a hedge against, or as a substitute for, a portfolio
investment, the fund will be exposed to the risk that the swap will have or will
develop imperfect or no correlation with the portfolio investment. This could
cause substantial losses for the fund. While hedging strategies involving swap
instruments can reduce the risk of loss, they can also reduce the opportunity
for gain or even result in losses by offsetting favorable price movements in
other fund investments. Many swaps, in particular OTC swaps, are complex and
often valued subjectively. Improper valuations can result in increased cash
payment requirements to counterparties or a loss of value to a fund.


 The use of a swap agreement also involves the risk that a loss may be sustained
as a result of the insolvency or bankruptcy of the counterparty or the failure
of the counterparty to make required payments or otherwise comply with the terms
of the agreement. Additionally, the use of credit default swaps can result in
losses if a fund's advisor does not correctly evaluate the creditworthiness of
the issuer on which the credit swap is based.

                                      B-15


 The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.


 TAX MATTERS -- FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required
for federal income tax purposes to recognize as income for each taxable year its
net unrealized gains and losses on certain futures contracts as of the end of
the year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term, depending on the holding period of the contract. Sales of futures
contracts that are intended to hedge against a change in the value of securities
held by a fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A fund may be required to defer the recognition of losses on one
position, such as futures contracts, to the extent of any unrecognized gains on
a related offsetting position held by
the fund.


 In order for a fund to continue to qualify for federal income tax treatment as
a regulated investment company, at least 90% of its gross income for a taxable
year must be derived from qualifying income; i.e., dividends, interest, income
derived from loans of securities, gains from the sale of securities or of
foreign currencies, or other income derived with respect to the fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.


 A fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes on futures transactions.
Such distributions will be combined with distributions of capital gains realized
on the fund's other investments and shareholders will be advised on the nature
of the distributions.


 TAX MATTERS -- FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules
govern the Federal income tax treatment of certain transactions denominated in a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (1) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (2) the accruing of
certain trade receivables and payables; and (3) the entering into or acquisition
of any forward contract, futures contract, option, or similar financial
instrument if such instrument is not marked to market. The disposition of a
currency other than the U.S. dollar by a taxpayer whose functional currency is
the U.S. dollar is also treated as a transaction subject to the special currency
rules. However, foreign currency-related regulated futures contracts and
non-equity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts, and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the IRC and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the IRC. Any gain or loss attributable to the foreign currency
component of a transaction engaged in by a fund which is not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stocks) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction. It is
anticipated that some of the non-U.S. dollar-denominated investments and foreign
currency contracts a fund may make or enter into will be subject to the special
currency rules described above.


 TAX MATTERS -- FOREIGN TAX CREDIT. Foreign governments may withhold taxes on
dividends and interest paid with respect to foreign securities held by a fund.
Foreign governments may also impose taxes on other payments or gains with
respect to foreign securities. If, at the close of its fiscal year, more than
50% of a fund's total assets are invested in securities of foreign issuers, the
fund may elect to pass through foreign taxes paid, and thereby allow
shareholders to take a deduction or, if they meet certain holding period
requirements, a tax credit on their tax returns. If shareholders do not meet the
holding period requirements, they may still be entitled to a deduction for
certain gains that were actually distributed by the fund, but will also show the
amount of the available offsetting credit or deduction.

                                      B-16


 TEMPORARY INVESTMENTS. A fund may take temporary defensive measures that are
inconsistent with the fund's normal fundamental or non-fundamental investment
policies and strategies in response to adverse market, economic, political, or
other conditions as determined by the advisor. Such measures could include, but
are not limited to, investments in (1) highly liquid short-term fixed income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. government and its agencies, commercial paper, and bank certificates
of deposit; (2) shares of other investment companies which have investment
objectives consistent with those of the fund; (3) repurchase agreements
involving any such securities; and (4) other money market instruments. There is
no limit on the extent to which the fund may take temporary defensive measures.
In taking such measures, the fund may fail to achieve its investment objective.


 WARRANTS. Warrants are instruments that give the holder the right, but not the
obligation, to buy an equity security at a specific price for a specific period
of time. Changes in the value of a warrant do not necessarily correspond to
changes in the value of its underlying security. The price of a warrant may be
more volatile than the price of its underlying security, and a warrant may offer
greater potential for capital appreciation as well as capital loss. Warrants do
not entitle a holder to dividends or voting rights with respect to the
underlying security and do not represent any rights in the assets of the issuing
company. A warrant ceases to have value if it is not exercised prior to its
expiration date. These factors can make warrants more speculative than other
types of investments.


 WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS.
When-issued, delayed-delivery, and forward-commitment transactions involve a
commitment to purchase or sell specific securities at a predetermined price or
yield in which payment and delivery take place after the customary settlement
period for that type of security. Typically, no interest accrues to the
purchaser until the security is delivered. When purchasing securities pursuant
to one of these transactions, payment for the securities is not required until
the delivery date. However, the purchaser assumes the rights and risks of
ownership, including the risks of price and yield fluctuations and the risk that
the security will not be issued as anticipated. When a fund has sold a security
pursuant to one of these transactions, the fund does not participate in further
gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
fund could miss a favorable price or yield opportunity or suffer a loss. A fund
may renegotiate a when-issued or forward-commitment transaction and may sell the
underlying securities before delivery, which may result in capital gains or
losses for the fund. When-issued, delayed-delivery, and forward-commitment
transactions will not be considered to constitute the issuance of a "senior
security" by a fund, and such transaction will not be subject to the 300% asset
coverage requirement otherwise applicable to borrowings by the fund, if the fund
covers the transaction in accordance with the requirements, and subject to the
risks, described above under the heading "Borrowing."


INVESTMENT POLICY RELATING TO THE SALES OF VANGUARD REIT INDEX FUND IN JAPAN.
Vanguard REIT Index Fund may not borrow money, except for temporary or emergency
purposes, in an amount exceeding 10 percent of the Fund's net assets. Vanguard
REIT Index Fund may borrow money through banks, reverse repurchase agreements,
or Vanguard's interfund lending program only, and must comply with all
applicable regulatory conditions. Vanguard REIT Index Fund may not make any
additional investments whenever its outstanding borrowings exceed 5% of net
assets.


                             INVESTMENT LIMITATIONS


Each Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of shares means
shares representing the lesser of: (1) 67% or more of the Fund's net assets
voted, so long as shares representing more than 50% of the Fund's net assets are
present or represented by proxy; or (2) more than 50% of the Fund's net assets.


 BORROWING. Each Fund may borrow money for temporary or emergency purposes only
in an amount not to exceed 15% of the Fund's net assets. The Fund may borrow
money through banks, reverse repurchase agreements, or Vanguard's interfund
lending program only, and must comply with all applicable regulatory conditions.
The Fund may not make any additional investments whenever its outstanding
borrowings exceed 5% of net assets.


 COMMODITIES. Each Fund may not invest in commodities or commodity contracts,
except that it may invest in forward foreign currency exchange transaction, and
each Fund may invest in futures contracts and options on futures and securities.
No more than 5% of each Fund's total assets may be used as initial margin
deposit for futures contracts, and no more than 20% of each Fund's total assets
may be obligated under stock futures contracts or options at any time. The
Precious Metals and Mining Fund may also invest in bullion as described in the
prospectus.

                                      B-17


 DIVERSIFICATION. With respect to 75% of its total assets, each Fund (except for
the Precious Metals and Mining and REIT Index Funds) may not: (1) purchase more
than 10% of the outstanding voting securities of any one issuer; or (2) purchase
securities of any issuer if, as a result, more than 5% of the Fund's total
assets would be invested in that issuer's securities. This limitation does not
apply to obligations of the U.S. government, its agencies, or instrumentalities.
For the Precious Metals and Mining and REIT Index Funds, each Fund will limit
the aggregate value of its holdings (except U.S. government securities, cash,
and cash items, as defined under subchapter M of the IRC, each of which exceeds
5% of the Fund's total assets or 10% of the issuer's outstanding voting
securities, to an aggregate of 50% of the Fund's total assets as of the end of
each quarter of the taxable year. Additionally, each Fund will limit the
aggregate value of holdings of a single issuer (other than U.S. government
securities, as defined in the IRC) to a maximum of 25% of the Fund's total
assets as of the end of each quarter of the taxable year.


 ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.


 INDUSTRY CONCENTRATION. Each Fund (with the exception of the Dividend Growth
Fund) will concentrate its assets in securities of issuers in a particular
industry or group of industries denoted by the Fund's name. That is, Vanguard
Energy Fund will concentrate in energy-industry securities, Vanguard Health Care
Fund will concentrate in health care-industry securities, Vanguard Precious
Metals and Mining Fund will concentrate in precious metals-industry securities,
and Vanguard REIT Index Fund will concentrate in REIT securities. The Dividend
Growth Fund will concentrate no more than 25% of its assets in any single
industry.


 INVESTING FOR CONTROL. Each Fund may not invest in a company for purposes of
controlling its management.


 INVESTMENT OBJECTIVE. Unless stated otherwise in the "More on the Fund" section
of the prospectuses, the investment objective of each Fund may not be materially
changed without a shareholder vote.


 LOANS. Each Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by lending its portfolio securities, or through
Vanguard's interfund lending program.


 MARGIN. Each Fund may not purchase securities on margin or sell securities
short (unless by virtue of its ownership of other securities it has a right to
obtain, at no added cost, securities equivalent in kind and amount to the
securities sold), except as permitted by the Fund's investment policies relating
to commodities.


 PLEDGING ASSETS. Each Fund may not pledge, mortgage, or hypothecate more than
15% of its net assets.


 PUTS AND CALLS. Each Fund may not invest in puts or calls or combinations
thereof, except as permitted by the Fund's investment policies relating to
commodities.


 REAL ESTATE. Each Fund (with the exception of the REIT Index Fund, which may
invest 100% of its assets in real estate investment trusts) may not invest
directly in real estate, although it may invest in securities of companies that
deal in real estate, or interests therein.


 SENIOR SECURITIES. Each Fund may not issue senior securities, except in
compliance with the 1940 Act.


 UNDERWRITING. Each Fund may not engage in the business of underwriting
securities issued by other persons. A Fund will not be considered an underwriter
when disposing of its investment securities.


 Compliance with the investment limitations set forth above is measured at the
time the securities are purchased. If a percentage restriction is adhered to at
the time the investment is made, a later change in percentage resulting from a
change in the market value of assets will not constitute a violation of such
restriction.


 None of these limitations prevents a Fund from having an ownership interest in
Vanguard. As part owner of Vanguard, each Fund may own securities issued by
Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other
financial requirements. See "Management of the Funds" for more information.


                                  SHARE PRICE


Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the Exchange), generally 4 p.m., Eastern time. NAV per share for the Energy,
Health Care, REIT Index, and Dividend Appreciation Index Funds is computed by
dividing the net assets allocated to each share class by the number of Fund
shares outstanding for that class. NAV per share for the Dividend Growth and


                                      B-18


Precious Metals and Mining Funds is computed by dividing the net assets of the
Fund by the number of Fund shares outstanding.


 The Exchange typically observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. Although each Fund expects
the same holidays to be observed in the future, the Exchange may modify its
holiday schedule or hours of operation at any time.


                       PURCHASE AND REDEMPTION OF SHARES


PURCHASE OF SHARES


The purchase price of shares of each Fund is the NAV per share next determined
after the purchase request is received in good order, as defined in the Funds'
prospectuses. The NAV per share is calculated as of the close of regular trading
on the Exchange on each day the Exchange is open for business. A purchase order
received before the close of regular trading on the Exchange will be executed at
the NAV computed on the date of receipt; a purchase order received after the
close of regular trading on the Exchange will be executed at the NAV computed on
the first business day following the date of receipt.


 EXCHANGE OF SECURITIES FOR SHARES OF A FUND (OTHER THAN VIPER SHARES). In
certain circumstances, shares of a fund may be purchased "in kind" (i.e., in
exchange for securities, rather than for cash). The securities tendered as part
of an in-kind purchase must be included in the index tracked by an index fund
and must have a total market value of $1 million or more. In addition, each
position must have a market value of $10,000 or more. Such securities also must
be liquid securities that are not restricted as to transfer and have a value
that is readily ascertainable as evidenced by a listing on the American Stock
Exchange, the New York Stock Exchange, or Nasdaq. Securities accepted by the
fund will be valued, as set forth in the fund's prospectus, as of the time of
the next determination of NAV after such acceptance. Shares of each fund are
issued at the NAV determined as of the same time. All dividend, subscription, or
other rights that are reflected in the market price of accepted securities at
the time of valuation become the property of the fund and must be delivered to
the fund by the investor upon receipt from the issuer. A gain or loss for
federal income tax purposes would be realized by the investor upon the exchange,
depending upon the cost of the securities tendered.


 A fund will not accept securities in exchange for its shares unless: (1) such
securities are, at the time of the exchange, eligible to be held by the fund;
(2) the transaction will not cause the fund's weightings to become imbalanced
with respect to the weightings of the securities included in the target index
for the index fund; (3) the investor represents and agrees that all securities
offered to the fund are not subject to any restrictions upon their sale by the
fund under the 1933 Act, or otherwise; (4) such securities are traded in an
unrelated transaction with a quoted sales price on the same day the exchange
valuation is made; (5) the quoted sales price used as a basis of valuation is
representative (e.g., one that does not involve a trade of substantial size that
artificially influences the price of the security); and (6) the value of any
such security being exchanged will not exceed 5% of the fund's net assets
immediately prior to the transaction.


 Investors interested in purchasing fund shares in kind should contact Vanguard.


REDEMPTION OF SHARES (OTHER THAN VIPER SHARES)


Each Fund may suspend redemption privileges or postpone the date of payment for
redeemed shares (1) during any period that the Exchange is closed or trading on
the Exchange is restricted as determined by the SEC; (2) during any period when
an emergency exists, as defined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of securities it owns or to
fairly determine the value of its assets; and (3) for such other periods as the
SEC may permit.


 Each Fund has filed a notice of election with the SEC to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.


 If Vanguard determines that it would be detrimental to the best interests of
the remaining shareholders of a Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price in whole or in part by a distribution in
kind of readily marketable securities held by the Fund in lieu of cash in
conformity with applicable rules of the SEC. Investors may incur brokerage
charges on the sale of such securities received in payment of redemptions.

                                      B-19



 The Dividend Growth and the Dividend Appreciation Fund do not charge a
redemption fee. The Energy, Health Care, Precious Metals and Mining, and REIT
Index Funds charge a redemption fee of 1% of the value of shares that were held
for less than one year. The fee is withheld from redemption proceeds and
retained by the Funds. Shares redeemed may be worth more or less than what was
paid for them, depending on the market value of the securities held by the
Funds.

 We will redeem your oldest shares first. In addition, in the event that you
transfer your Energy, Health Care, Precious Metals and Mining, and REIT Index
Funds shares to a different account registration, or convert them to a different
share class, the shares will retain their redemption fee status. If you transfer
or convert less than 100% of these shares, the redemption fee status of your
shares will be carried over on a proportionate basis.

 After redeeming shares that are exempt from redemption fees, shares you have
held the longest will be redeemed first.

 Redemption fees do 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.
- Distributions by shareholders age 701/2 or older from the following:
 -  Traditional IRAs.
 -  Inherited IRAs (traditional and Roth).
 -  Rollover IRAs.
 -  SEP-IRAs.
 -  Section 403(b)(7) plans served by the Vanguard Small Business Services
    Department.
 -  SIMPLE IRAs.
 - Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves
   as trustee.
- 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).

 For participants in employer-sponsored defined contribution plans (other than
those served by the Vanguard Small Business Services Department), redemption
fees will apply to shares exchanged out of a fund into which they had been
exchanged, rolled over, or transferred by a participant within the fund's
redemption-fee period.
 In addition to the exclusions previously listed, redemption fees will not apply
to:
- Exchanges of shares purchased with participant payroll or employer
  contributions.
- Distributions, loans, and in-service withdrawals from a plan.
- Direct rollovers into IRAs.
- Redemptions or transfers of shares as part of a plan termination or at the
  direction of the plan.
 If Vanguard does not serve as recordkeeper for a plan, redemption fees may be
applied differently.



RIGHT TO CHANGE POLICIES

Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase, service, or privilege at any time without notice; (2) accept initial
purchases by telephone; (3) freeze any account and suspend account services when
Vanguard has received reasonable 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) alter, impose, discontinue, or waive any
redemption, low-balance account, account maintenance, or other fees charged to a
group of shareholders; and (5) 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 all investors or only those in certain classes or
groups. These actions will be taken when, in the sole discretion of Vanguard
management, we reasonably believe they are deemed to be in the best interest of
a fund.

                                      B-20


INVESTING WITH VANGUARD THROUGH OTHER FIRMS

Each Fund has authorized certain agents to accept on its behalf purchase and
redemption orders, and those agents
are authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf (collectively, Authorized Agents). A Fund
will be deemed to have received a purchase or redemption order when an
Authorized Agent accepts the order in accordance with the Fund's instructions.
In most instances, a customer order that is properly transmitted to an
Authorized Agent will be priced at the Fund's NAV next determined after the
order is received by the Authorized Agent. If you invest with Vanguard through
another firm, you should review that firm's policies relating to trading in the
Vanguard funds.


                            MANAGEMENT OF THE FUNDS


VANGUARD

Each Fund is a member of Vanguard, which consists of more than 130 funds.
Through their jointly-owned subsidiary, Vanguard, the funds obtain at cost
virtually all of their corporate management, administrative, and distribution
services. Vanguard also provides investment advisory services on an at-cost
basis to several of the Vanguard funds, including
the Funds.

 Vanguard employs a supporting staff of management and administrative personnel
needed to provide the requisite services to the funds and also furnishes the
funds with necessary office space, furnishings, and equipment. Each fund pays
its share of Vanguard's total expenses, which are allocated among the funds
under methods approved by the board of trustees of each fund. In addition, each
fund bears its own direct expenses, such as legal, auditing, and custodian fees.

 The funds' officers are also officers and employees of Vanguard.

 Vanguard, Vanguard Marketing Corporation, the funds' advisors, and the funds
have adopted Codes of Ethics designed to prevent employees who may have access
to nonpublic information about the trading activities of the funds (access
persons) from profiting from that information. The Codes permit access persons
to invest in securities for their own accounts, including securities that may be
held by a fund, but place substantive and procedural restrictions on the trading
activities of access persons. For example, the Codes require that access persons
receive advance approval for most securities trades to ensure that there is no
conflict with the trading activities of the funds. The Codes also limit the
ability of Vanguard employees to engage in short-term trading of Vanguard funds.

 Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement, which was approved by the shareholders of each of the funds.
The Amended and Restated Funds' Service Agreement provides as follows: (1) each
Vanguard fund may be called upon to invest up to 0.40% of its current net assets
in Vanguard, and (2) there is no other limitation on the dollar amount that each
Vanguard fund may contribute to Vanguard's capitalization. The amounts that each
fund has invested are adjusted from time to time in order to maintain the
proportionate relationship between each fund's relative net assets and its
contribution to Vanguard's capital.

 As of January 31, 2005, the Funds contributed $3,955,000 to Vanguard, which
represented 0.01% of each Fund's net assets and was 4.65% of Vanguard's
capitalization.

 MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.


 DISTRIBUTION. Vanguard Marketing Corporation (VMC), a wholly-owned subsidiary
of Vanguard, is the principal underwriter for the funds and in that capacity
performs and finances marketing, promotional, and distribution activities
(collectively, marketing and distribution activities) that are primarily
intended to result in the sale of the funds' shares. VMC performs marketing and
distribution activities at cost in accordance with the terms and conditions of a
1981 SEC exemptive order that permits the Vanguard funds to internalize and
jointly finance the marketing, promotion, and distribution of their shares.
Under the terms of the SEC order, the funds' trustees review and approve the
marketing and distribution expenses incurred on their behalf, including the
nature and cost of the activities and the desirability of each fund's continued
participation in the joint arrangement.



                                      B-21




 To ensure that each fund's participation in the joint arrangement falls within
a reasonable range of fairness, each fund contributes to VMC's marketing and
distribution expenses in accordance with an SEC-approved formula. Under that
formula, one half of the marketing and distribution expenses are allocated among
the funds based upon their relative net assets. The remaining half of those
expenses is allocated among the funds based upon each fund's sales for the
preceding 24 months relative to the total sales of the funds as a group;
provided, however, that no fund's aggregate quarterly rate of contribution for
marketing and distribution expenses shall exceed 125% of the average marketing
and distribution expense rate for Vanguard, and that no fund shall incur annual
marketing and distribution expenses in excess of 0.20 of 1% of its average
month-end net assets. As of September 30, 2005, none of the Vanguard funds'
allocated share of VMC's marketing and distribution expenses was greater than
0.02% of the fund's average month-end net assets. Each fund's contribution to
these marketing and distribution expenses helps to maintain and enhance the
attractiveness and viability of the Vanguard complex as a whole, which benefits
all of the funds and their shareholders.

 VMC's principal marketing and distribution expenses are for advertising,
promotional materials, and marketing personnel. Other marketing and distribution
activities that VMC undertakes on behalf of the funds may include, but are not
limited to:

- Conducting or publishing Vanguard-generated research and analysis concerning
 the funds, other investments, the financial markets, or the economy;

- Providing views, opinions, advice, or commentary concerning the funds, other
 investments, the financial markets, or the economy;

- Providing analytical, statistical, performance, or other information
 concerning the funds, other investments, the financial markets, or the economy;

- Providing administrative services in connection with investments in the funds
 or other investments, including, but not limited to, shareholder services,
 recordkeeping services, and educational services;

- Providing products or services that assist investors or financial service
 providers (as defined below) in the investment decision-making process;


- Providing promotional discounts, commission-free trading, fee waivers, and
 other benefits to clients of Vanguard Brokerage Services(R) who maintain
 qualifying investments in the funds; and

- Sponsoring, jointly sponsoring, financially supporting, or participating in
 conferences, programs, seminars, presentations, meetings, or other events
 involving fund shareholders, financial service providers, or others concerning
 the funds, other investments, the financial markets, or the economy, such as
 industry conferences, prospecting trips, due diligence visits, training or
 education meetings, and sales presentations.


 VMC performs most marketing and distribution activities itself. Some activities
may be conducted by third parties pursuant to shared marketing arrangements
under which VMC agrees to share the costs and performance of marketing and
distribution activities in concert with a financial service provider. Financial
service providers include, but are not limited to, investment advisors,
broker-dealers, financial planners, financial consultants, banks, and insurance
companies. Under these cost- and performance-sharing arrangements, VMC may pay
or reimburse a financial service provider (or a third party it retains) for
marketing and distribution activities that VMC would otherwise perform. VMC's
cost- and performance-sharing arrangements may be established in connection with
Vanguard investment products or services offered or provided to or through the
financial service providers. VMC's arrangements for shared marketing and
distribution activities may vary among financial service providers, and its
payments or reimbursements to financial service providers in connection with
shared marketing and distribution activities may be significant. VMC does not
participate in the offshore arrangement Vanguard has established for qualifying
Vanguard funds to be distributed in certain foreign countries on a
private-placement basis to government-sponsored and other institutional
investors through a third-party asesor de inversiones" (investment adviser),
which includes incentive-based remuneration.


 In connection with its marketing and distribution activities, VMC may give
financial service providers (or their representatives): (1) promotional items of
nominal value that display Vanguard's logo, such as golf balls, shirts, towels,
pens, and mouse pads; (2) gifts that do not exceed $100 per person annually and
are not preconditioned on achievement of a sales target; (3) an occasional meal,
a ticket to a sporting event or the theater, or comparable entertainment which
is neither so frequent nor so extensive as to raise any question of propriety
and is not preconditioned on achievement of a sales target; and (4) reasonable
travel and lodging accommodations to facilitate participation in marketing and
distribution activities.


                                      B-22



 VMC, as a matter of policy, does not pay asset-based fees, sales-based fees, or
account-based fees to financial service providers in connection with its
marketing and distribution activities for the Vanguard funds. VMC policy also
prohibits marketing and distribution activities that are intended, designed, or
likely to compromise suitability determinations by, or the fulfillment of any
fiduciary duties or other obligations that apply to, financial service
providers. Nonetheless, VMC's marketing and distribution activities are
primarily intended to result in the sale of the funds' shares, and as such its
activities, including shared marketing activities, may influence participating
financial service providers (or their representatives) to recommend, promote,
include, or invest in a Vanguard fund or share class. In addition, Vanguard or
any of its subsidiaries may retain a financial service provider to provide
consulting or other services, and that financial service provider also may
provide services to investors. Investors should consider the possibility that
any of these activities or relationships may influence a financial service
provider's (or its representatives') decision to recommend, promote, include, or
invest in a Vanguard fund or share class. Each financial service provider should
consider its suitability determinations, fiduciary duties, and other legal
obligations (or those of its representatives) in connection with any decision to
consider, recommend, promote, include, or invest in a Vanguard fund or share
class.


  The following table describes the expenses of Vanguard and VMC that are
shared by the funds on an at-cost basis under the terms of two SEC exemptive
orders. Amounts under the heading "Management and Administrative Expenses"
include a fund's allocated share of expenses associated with the management,
administrative and transfer agency services Vanguard provides to the funds.
Amounts under the heading "Marketing and Distribution Expenses" include a fund's
allocated share of expenses associated with the marketing and distribution
activities that VMC conducts on behalf of the Vanguard funds.

  As is the case with all mutual funds, transaction costs incurred by the Funds
for buying and selling securities are not reflected in the table. Annual Shared
Fund Operating Expenses are based on expenses incurred in the fiscal years ended
2003, 2004, and 2005, and are presented as a percentage of each Fund's average
[month-end] net assets.





                                            Annual Shared Fund Operating Expenses
                                        (Shared Expenses Deducted from Fund Assets)
                                        -------------------------------------------

                                         Fiscal Year Ended      Fiscal Year Ended      Fiscal Year Ended
FUND                                                  2003                   2004                   2005
----                                                  ----                   ----                   ----
                                                                              
Vanguard Dividend Growth Fund
  Management and Administrative Expenses               xx%                    xx%                    xx%
  Marketing and Distribution Expenses                  xx                     xx                     xx
Vanguard Energy Fund
  Management and Administrative Expenses               xx%                    xx%                    xx%
  Marketing and Distribution Expenses                  xx                     xx                     xx
Vanguard Health Care Fund
  Management and Administrative Expenses               xx%                    xx%                    xx%
  Marketing and Distribution Expenses                  xx                     xx                     xx
Vanguard Precious Metals and Mining Fund
  Management and Administrative Expenses               xx%                    xx%                    xx%
  Marketing and Distribution Expenses                  xx                     xx                     xx
Vanguard REIT Index Fund
  Management and Administrative Expenses               xx%                    xx%                    xx%
  Marketing and Distribution Expenses                  xx                     xx                     xx

Vanguard Dividend Appreciation Index Fund did not commence operations until April, 2006.





 INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory services to
the Funds and several other Vanguard funds. These services are provided on an
at-cost basis from an experienced investment management staff employed directly
by Vanguard.


OFFICERS AND TRUSTEES


The officers of the Funds manage the day-to-day operations of the Funds under
the direction of the Funds' board of trustees. The trustees set broad policies
for the Funds; select investment advisors; monitor fund operations,

                                      B-23




performance, and costs; nominate and select new trustees; and elect fund
officers. Each trustee serves a Fund until its termination; until the trustee's
retirement, resignation, or death; or as otherwise specified in the Trust's
organizational documents. Any trustee may be removed at a meeting of
shareholders by a vote representing two-thirds of the total net asset value of
all shares of the Funds. Each trustee also serves as a director of Vanguard.


 The following chart shows information for each trustee and executive officer of
the Funds. The mailing address of the trustees and officers is P.O. Box 876,
Valley Forge, PA 19482.




                                                                                                                           NUMBER OF
                                              VANGUARD                                                                VANGUARD FUNDS
                         POSITION(S)          FUNDS' TRUSTEE/     PRINCIPAL OCCUPATION(S) AND OUTSIDE DIRECTORSHIPS      OVERSEEN BY
NAME, YEAR OF BIRTH      HELD WITH FUNDS      OFFICER SINCE       DURING THE PAST FIVE YEARS                         TRUSTEE/OFFICER
-------------------      ---------------      --------------      --------------------------                         ---------------
                                                                                                         
INTERESTED TRUSTEE
John J. Brennan*         Chairman of the      May 1987            Chairman of the Board, Chief                                   133
(1954)                   Board, Chief                             Executive Officer, and Director
                         Executive Officer,                       (Trustee) of Vanguard, and each of
                         and Trustee                              the investment companies served by
                                                                  Vanguard.
-----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Charles D. Ellis         Trustee              January 2001        Applecore Partners (pro bono ventures in                       133
(1937)                                                            education); Senior Advisor to Greenwich
                                                                  Associates (international business strategy
                                                                  consulting); Successor Trustee of Yale
                                                                  University; Overseer of the Stern School of
                                                                  Business at New York University; Trustee of
                                                                  the Whitehead Institute for Biomedical
                                                                  Research.

Rajiv L. Gupta           Trustee              December 2001       Chairman and Chief Executive Officer                           133
(1945)                                                            of Rohm and Haas Co. (chemicals) since
                                                                  October 1999; Board Member of American
                                                                  Chemistry Council; Director of Tyco International, Ltd.
                                                                  (diversified manufacturing and services) since
                                                                  2005; Trustee of Drexel University and Chemical
                                                                  Heritage Foundation.

JoAnn Heffernan Heisen   Trustee              July 1998           Corporate Vice President and Global Diversity Officer          133
(1950)                                                            (since January 2006); Vice President and Chief Information
                                                                  Officer (1997-2005), and Member of the Executive Committee
                                                                  of Johnson & Johnson (pharmaceuticals/consumer products);
                                                                  Director of the University Medical Center at Princeton
                                                                  and Women's Research and Education Institute.

Andre F. Perold          Trustee              December 2004       George Gund Professor of Finance and Banking, Harvard Business 133
(1952)                                                            School since 2000; Senior Associate Dean, Director of Faculty
                                                                  Recruiting, and Chair of Finance Faculty, Harvard Business
                                                                  School; Director and Chairman of Unx, Inc. (equities trading
                                                                  firm) since 2003; Director of registered investement companies
                                                                  advised by Merril Lynch Investment Managers and affiliates
                                                                  (1985-2004), Genbel Securities Limited (South African financial
                                                                  services firm) (1999-2003), Gensec Bank (199-2003), Sanlam Ltd.
                                                                  (South African insurance company)(2001-2003), and Stockback, Inc.
                                                                  (credit card firm)(2000-2002).

Alfred M. Rankin, Jr.    Trustee              January 1993        Chairman, President, Chief Executive Officer,                  133
(1941)                                                            and Director of NACCO Industries, Inc.(forklift
                                                                  trucks/housewares/lignite); Director of
                                                                  Goodrich Corporation (industrial products/
                                                                  aircraft systems and services). Director of
                                                                  Standard Products Company (supplier for
                                                                  automotive industry) until 1998.

*Officers of the Fund are "interested persons" as defined in the 1940 Act.




                                      B-24





                                                                                                                           NUMBER OF
                                              VANGUARD                                                                VANGUARD FUNDS
                         POSITION(S)          FUNDS' TRUSTEE/     PRINCIPAL OCCUPATION(S) AND OUTSIDE DIRECTORSHIPS      OVERSEEN BY
NAME, YEAR OF BIRTH      HELD WITH FUNDS      OFFICER SINCE       DURING THE PAST FIVE YEARS                         TRUSTEE/OFFICER
-------------------      ---------------      --------------      --------------------------                         ---------------
                                                                                                         
J. Lawrence Wilson       Trustee              April 1985          Retired Chairman and Chief Executive Officer                   133
(1936)                                                            of Rohm and Haas Co. (chemicals); Director of
                                                                  Cummins Inc. (diesel engines), MeadWestvaco
                                                                  Corp. (packaging products), and Amerisource
                                                                  Bergen Corp. (pharmaceutical distribution);
                                                                  Trustee of Vanderbilt University and Culver
                                                                  Educational Foundation.
-----------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
Heidi Stam*              Secretary            July 2005           Principal of Vanguard since November 1997; and General         133
(1956)                                                            Counsel of Vanguard since July 2005; Secretary of
                                                                  Vanguard, and of each of the investment companies
                                                                  served by Vanguard since July 2005.

Thomas J. Higgins*       Treasurer            July 1998           Principal of Vanguard; Treasurer of each of the                133
(1957)                                                            investment companies served by Vanguard since July 1998.

*Officers of the Fund are "interested persons" as defined in the 1940 Act.




 Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on
business strategy to professional financial services organizations in markets
around the world. A large number of financial service providers, including
Vanguard, subscribe to programs of research-based consulting. During 2003 and
2004, Vanguard paid Greenwich subscription fees amounting to less than $350,000.
Vanguard's subscription rates are similar to those of other subscribers.

 Board Committees: Each Fund's board has the following committees:

-Audit Committee: This committee oversees the accounting and financial
 reporting policies, the systems of internal controls, and the independent
 audits of each Fund and Vanguard. All independent trustees serve as members of
 the committee. The committee held three meetings during each Fund's last fiscal
 year.

-Compensation Committee: This committee oversees the compensation programs
 established by each Fund and Vanguard for the benefit of their employees,
 officers, and trustees/directors. All independent trustees serve as members of
 the committee. The committee held three meetings during each Fund's last fiscal
 year.

-Nominating Committee: This committee nominates candidates for election to
 Vanguard's board of directors and the board of trustees of each fund
 (collectively, the Vanguard boards). The committee also has the authority to
 recommend the removal of any director or trustee from the Vanguard boards. All
 independent trustees serve as members of the committee. The committee held four
 meetings during each Fund's last fiscal year.


 The Nominating Committee will consider shareholder recommendations for trustee
nominees. Shareholders may send recommendations to Mr. Wilson, Chairman of the
Committee.


TRUSTEE COMPENSATION


The same individuals serve as trustees of all Vanguard funds and each fund pays
a proportionate share of the trustees' compensation. The funds also employ their
officers on a shared basis; however, officers are compensated by Vanguard, not
the funds.


 INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e.,
the ones who are not also officers of the funds) in three ways:

-The independent trustees receive an annual fee for their service to the funds,
 which is subject to reduction based on absences from scheduled board meetings.

-The independent trustees are reimbursed for the travel and other expenses that
 they incur in attending board meetings.

-Upon retirement (after attaining age 65 and completing five years of service),
 the independent trustees who began their service prior to January 1, 2001,
 receive a retirement benefit under a separate account arrangement. As of
 January 1, 2001, the opening balance of each eligible trustee's separate
 account was generally equal to the net present value of the benefits he or she
 had accrued under the trustees' former retirement plan. Each eligible trustee's



                                      B-25




 separate account will be credited annually with interest at a rate of 7.5%
 until the trustee receives his or her final distribution. Those independent
 trustees who began their service on or after January 1, 2001, are not eligible
 to participate in the plan.


 "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this
capacity. He is, however, paid in his role as officer of Vanguard.


COMPENSATION TABLE. The following table provides compensation details for each
of the trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Funds for each trustee. In addition, the table shows
the total amount of benefits that we expect each trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each trustee by all Vanguard funds.


                           VANGUARD SPECIALIZED FUNDS
                          TRUSTEES' COMPENSATION TABLE





                                       PENSION OR RETIREMENT
                            AGGREGATE        BENEFITS ACCRUED       ACCRUED ANNUAL  TOTAL COMPENSATION
                         COMPENSATION              AS PART OF           RETIREMENT   FROM ALL VANGUARD
                                 FROM                   THESE           BENEFIT AT          FUNDS PAID
TRUSTEE                 THESE FUNDS(1)      FUNDS' EXPENSES(1)   JANUARY 1, 2004(2)      TO TRUSTEES(3)
-------                --------------      ------------------   ------------------      --------------
                                                                        
John J. Brennan                  None                    None                 None                None
Charles D. Ellis               $6,578                     N/A                  N/A            $112,700
Rajiv L. Gupta                  6,578                     N/A                  N/A             112,700
JoAnn Heffernan Heisen          6,578                    $212               $3,900             112,700
Burton G. Malkiel(4)            6,578                     348               11,200             112,700
Andre F. Perold(5)              1,121                     N/A                  N/A              19,200
Alfred M. Rankin, Jr.           6,578                     256                6,070             112,700
J. Lawrence Wilson              7,590                     270                8,400             130,000
(1)The amounts shown in this column are based on the Funds' fiscal year ended January 31, 2005. Each Fund within the Trust is
   responsible for a proportionate share of these amounts.
(2)Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60 consecutive months) of service
   as a trustee for the Vanguard funds. The annual retirement benefit will be paid in monthly installments, beginning with the month
   following the trustee's retirement from service, and will cease after 10 years of payments (120 monthly installments). Trustees
   who began their service on or after January 1, 2001, are not eligible to participate in the retirement benefit plan.
(3)The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 132
   Vanguard funds (129 in the case of Mr. Malkiel) for the 2004 calendar year.
(4)Mr. Malkiel retired from the Funds' board effective June 30, 2005.
(5)Mr. Perold became a member of the board effective December 2004.




OWNERSHIP OF FUND SHARES

All trustees allocate their investments among the various Vanguard funds based
on their own investment needs. The following table shows each trustee's
ownership of shares of each Fund and of all Vanguard funds served by the trustee
as of December 31, 2004.





                                                                    AGGREGATE DOLLAR
                                                  DOLLAR RANGE OF   RANGE OF VANGUARD
                                                      FUND SHARES        FUND SHARES
FUND                                   TRUSTEE   OWNED BY TRUSTEE   OWNED BY TRUSTEE
----                                   -------   ----------------  -----------------
                                                          
VANGUARD DIVIDEND GROWTH FUND  John J. Brennan               None       Over $100,000
                              Charles D. Ellis               None       Over $100,000
                                Rajiv L. Gupta               None       Over $100,000
                        JoAnn Heffernan Heisen               None       Over $100,000
                             Burton G. Malkiel               None       Over $100,000
                         Alfred M. Rankin, Jr.               None       Over $100,000
                               Andre F. Perold               None       Over $100,000
                            J. Lawrence Wilson               None       Over $100,000


VANGUARD ENERGY FUND           John J. Brennan               None       Over $100,000
                              Charles D. Ellis               None       Over $100,000
                                Rajiv L. Gupta               None       Over $100,000
                        JoAnn Heffernan Heisen               None       Over $100,000
                             Burton G. Malkiel               None       Over $100,000
                               Andre F. Perold               None       Over $100,000
                         Alfred M. Rankin, Jr.               None       Over $100,000
                            J. Lawrence Wilson      Over $100,000       Over $100,000



                                      B-26






                                                                    AGGREGATE DOLLAR
                                                 DOLLAR RANGE OF   RANGE OF VANGUARD
                                                     FUND SHARES         FUND SHARES
FUND                                   TRUSTEE   OWNED BY TRUSTEE   OWNED BY TRUSTEE
----                                   -------   ----------------  -----------------
                                                          
VANGUARD HEALTH CARE FUND      John J. Brennan               None       Over $100,000
                              Charles D. Ellis               None       Over $100,000
                                Rajiv L. Gupta               None       Over $100,000
                        JoAnn Heffernan Heisen   $10,001- $50,000       Over $100,000
                             Burton G. Malkiel               None       Over $100,000
                               Andre F. Perold               None       Over $100,000
                         Alfred M. Rankin, Jr.  $50,001- $100,000       Over $100,000
                            J. Lawrence Wilson      Over $100,000       Over $100,000


 VANGUARD PRECIOUS
METALS AND MINING FUND         John J. Brennan               None       Over $100,000
                              Charles D. Ellis               None       Over $100,000
                                Rajiv L. Gupta               None       Over $100,000
                        JoAnn Heffernan Heisen               None       Over $100,000
                             Burton G. Malkiel               None       Over $100,000
                               Andre F. Perold               None       Over $100,000
                         Alfred M. Rankin, Jr.               None       Over $100,000
                            J. Lawrence Wilson      Over $100,000       Over $100,000


VANGUARD REIT INDEX
FUND                           John J. Brennan               None       Over $100,000
                              Charles D. Ellis               None       Over $100,000
                                Rajiv L. Gupta               None       Over $100,000
                        JoAnn Heffernan Heisen               None       Over $100,000
                             Burton G. Malkiel   $10,001- $50,000       Over $100,000
                         Alfred M. Rankin, Jr.               None       Over $100,000
                               Andre F. Perold               None       Over $100,000
                            J. Lawrence Wilson               None       Over $100,000
*Vanguard Dividend Appreciation Index Fund did not commence operations until April, 2006.



PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES


INTRODUCTION


The Vanguard Group, Inc. (Vanguard) and the Boards of Trustees of the Vanguard
funds (Boards) have adopted Portfolio Holdings Disclosure Policies and
Procedures (Polices and Procedures) to govern the disclosure of the portfolio
holdings of a Vanguard fund. Vanguard and the Boards considered each of the
circumstances under which Vanguard fund portfolio holdings may be disclosed to
different categories of persons under the Policies and Procedures. Vanguard and
the Boards also considered actual and potential material conflicts that could
arise in such circumstances between the interests of Vanguard fund shareholders,
on the one hand, and those of the fund's investment advisor, distributor, or any
affiliated person of the fund, its investment advisor, or its distributor, on
the other. After giving due consideration to such matters and after the exercise
of their fiduciary duties and reasonable business judgment, Vanguard and the
Boards determined that the Vanguard funds have a legitimate business purpose for
disclosing portfolio holdings to the persons described in each of the
circumstances set forth in the Policies and Procedures and that the Policies and
Procedures are reasonably designed to ensure that disclosure of portfolio
holdings and information about portfolio holdings is in the best interests of
fund shareholders and appropriately addresses the potential for material
conflicts of interest.
 The Boards exercise continuing oversight of the disclosure of Vanguard fund
portfolio holdings by (1) overseeing the implementation and enforcement of the
Policies and Procedures, the Code of Ethics, and the Policies and Procedures
Designed to Prevent the Misuse of Inside Information (collectively, the
portfolio holdings governing policies) by the Chief Compliance Officer of
Vanguard and the Vanguard funds; (2) considering reports and recommendations by
the Chief Compliance Officer concerning any material compliance matters (as
defined in Rule 38a-1 under the Investment



                                      B-27





Company Act and Rule 206(4)-7 under the Investment Advisers Act of 1940) that
may arise in connection with any portfolio holdings governing policies; and (3)
considering whether to approve or ratify any amendment to any portfolio holdings
governing policies. Vanguard and the Boards reserve the right to amend the
Policies and Procedures at any time and from time to time without prior notice
in their sole discretion. For purposes of the Policies and Procedures, the term
"portfolio holdings" means the equity and debt securities (e.g., stocks and
bonds) held by a Vanguard fund and does not mean the cash investments,
derivatives, and other investment positions (collectively, other investment
positions) held by the fund.


ONLINE DISCLOSURE OF TEN LARGEST STOCK HOLDINGS

Each of the Vanguard equity funds and Vanguard balanced funds generally will
seek to disclose the fund's ten largest stock portfolio holdings and the
percentages that each of these ten largest stock portfolio holdings represent of
the fund's total assets (collectively, largest stock holdings) as of the most
recent calendar-quarter-end online at www.vanguard.com in the "Holdings" section
of the fund's Profile page, 15 calendar days after the end of the calendar
quarter. Online disclosure of the ten largest stock holdings is made to all
categories of persons, including individual investors, institutional investors,
intermediaries, third-party service providers, rating and ranking organizations,
affiliated persons of a Vanguard fund, and all other persons.


ONLINE DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS


Each of the Vanguard funds, excluding Vanguard money market funds, generally
will seek to disclose the fund's complete portfolio holdings (complete portfolio
holdings) as of the most recent calendar-quarter-end online at www.vanguard.com
in the "Holdings" section of the fund's Profile page, 30 calendar days after the
end of the calendar quarter. Online disclosure of complete portfolio holdings is
made to all categories of persons, including individual investors, institutional
investors, intermediaries, third-party service providers, rating and ranking
organizations, affiliated persons of a Vanguard fund, and all other persons.
Vanguard's Portfolio Review Department will review complete portfolio holdings
before online disclosure is made as described above and, after consultation with
a Vanguard fund's investment advisor, may withhold any portion of the fund's
complete portfolio holdings from online disclosure as described above when
deemed to be in the best interests of the fund.


DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO SERVICE PROVIDERS SUBJECT TO
CONFIDENTIALITY AND TRADING RESTRICTIONS


Vanguard, for legitimate business purposes, may disclose Vanguard fund complete
portfolio holdings at times it deems necessary and appropriate to rating and
ranking organizations, financial printers, proxy voting service providers,
pricing information vendors, third-parties that deliver analytical, statistical,
or consulting services, and other third parties that provide services
(collectively, Service Providers) to Vanguard, Vanguard subsidiaries, and/or the
Vanguard funds. Disclosure of complete portfolio holdings to a Service Provider
is conditioned on the Service Provider being subject
to a written agreement imposing a duty of confidentiality, including a duty not
to trade on the basis of any material nonpublic information.


 The frequency with which complete portfolio holdings may be disclosed to a
Service Provider, and the length of the lag, if any, between the date of the
information and the date on which the information is disclosed to the Service
Provider, is determined based on the facts and circumstances, including, without
limitation, the nature of the portfolio holdings information to be disclosed,
the risk of harm to the funds and their shareholders, and the legitimate
business purposes served by such disclosure. The frequency of disclosure to a
Service Provider varies and may be as frequent as daily, with no lag. Disclosure
of Vanguard fund complete portfolio holdings by Vanguard to a Service Provider
must be authorized by a Vanguard fund officer or a Principal in Vanguard's
Portfolio Review or Legal Department. Any disclosure of Vanguard fund
complete portfolio holdings to a Service Provider as described
previously may also include a list of the other investment positions comprising
the fund, such as cash investments and derivatives.


 As of December 31, 2005, Vanguard fund complete portfolio holdings are
disclosed to the following Service Providers as part of ongoing arrangements
that serve legitimate business purposes: Alcom Printing Group Inc., Apple Press,
L.C., Automatic Data Processing, Inc., Brown Brothers Harriman & Co., FactSet
Research Systems Inc., Intelligencer Printing Company, Investment Technology
Group, Inc., McMunn Associates Inc., Moore Wallace Inc., Pitney Bowes Management
Services, Reuters America Inc., Triune Color Corporation, and Tursack Printing
Inc.



                                      B-28





DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO VANGUARD AFFILIATES AND CERTAIN
FIDUCIARIES SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS


Vanguard fund complete portfolio holdings may be disclosed between and among the
following persons (collectively, Affiliates and Fiduciaries) for legitimate
business purposes within the scope of their official duties and
responsibilities, subject to such persons' continuing legal duty of
confidentiality and legal duty not to trade on the basis of any material
nonpublic information, as such duties are imposed under the Code of Ethics, the
Policies and Procedures Designed to Prevent the Misuse of Inside Information, by
agreement, or under applicable laws, rules, and regulations: (1) persons who are
subject to the Code of Ethics or the Policies and Procedures Designed to Prevent
the Misuse of Inside Information; (2) an investment advisor, distributor,
administrator, transfer agent, or custodian to a Vanguard fund; (3) an
accounting firm, an auditing firm or outside legal counsel retained by Vanguard,
a Vanguard subsidiary, or a Vanguard fund; (4) an investment advisor to whom
complete portfolio holdings are disclosed for due diligence purposes when the
advisor is in merger or acquisition talks with a Vanguard fund's current
advisor; and (5) a newly hired investment advisor or sub-advisor to whom
complete portfolio holdings are disclosed prior to the time it commences its
duties.


 The frequency with which complete portfolio holdings may be disclosed between
and among Affiliates and Fiduciaries, and the length of the lag, if any, between
the date of the information and the date on which the information is disclosed
between and among the Affiliates and Fiduciaries, is determined by such
Affiliates and Fiduciaries based on the facts and circumstances, including,
without limitation, the nature of the portfolio holdings information to be
disclosed, the risk of harm to the funds and their shareholders, and the
legitimate business purposes served by such disclosure. The frequency of
disclosure between and among Affiliates and Fiduciaries varies and may be as
frequent as daily, with no lag. Any disclosure of Vanguard fund complete
portfolio holdings to any Affiliates and Fiduciaries as previously described
above may also include a list of the other investment positions comprising the
fund, such as cash investments and derivatives. Disclosure of Vanguard fund
complete portfolio holdings or other investment positions by Vanguard, Vanguard
Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries must be
authorized by a Vanguard fund officer or a Principal of Vanguard.


 As of December 31, 2005, Vanguard fund complete portfolio holdings are
disclosed to the following Affiliates and Fiduciaries as part of ongoing
arrangements that serve legitimate business purposes: The Vanguard Group, Inc.
and each investment advisor, custodian, and independent registered public
accounting firm for a Fund identified in this Statement of Additional
Information.


DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS IN THE NORMAL COURSE OF
MANAGING A FUND'S ASSETS


An investment advisor, administrator, or custodian for a Vanguard fund may, for
legitimate business purposes within the scope of its official duties and
responsibilities, disclose portfolio holdings (whether partial portfolio
holdings or complete portfolio holdings) and other investment positions
comprising the fund to one or more broker-dealers during the course of, or in
connection with, normal day-to-day securities and derivatives transactions with
or through such broker-dealers subject to the broker-dealer's legal obligation
not to use or disclose material nonpublic information concerning the fund's
portfolio holdings, other investment positions, securities transactions, or
derivatives transactions without the consent of the fund or its agents. The
Vanguard funds have not given their consent to any such use or disclosure and no
person or agent of Vanguard is authorized to give such consent except as
approved in writing by the Boards of the Vanguard funds. Disclosure of portfolio
holdings or other investment positions by Vanguard to broker-dealers must be
authorized by a Vanguard fund officer or a Principal of Vanguard.

DISCLOSURE OF NON-MATERIAL INFORMATION

The Policies and Procedures permit Vanguard fund officers, Vanguard fund
portfolio managers, and other Vanguard representatives (collectively, Approved
Vanguard Representatives) to disclose any views, opinions, judgments, advice or
commentary, or any analytical, statistical, performance, or other information,
in connection with or relating to a Vanguard fund or its portfolio holdings
and/or other investment positions (collectively, commentary and analysis) or any
changes in the portfolio holdings of a Vanguard fund that occurred after the
most recent calendar-quarter end (recent portfolio changes) to any person if (1)
such disclosure serves a legitimate business purpose, (2) such disclosure does
not effectively result in the disclosure of the complete portfolio holdings of
any Vanguard fund (which can be disclosed only in accordance with the Policies
and Procedures), and (3) such information does not constitute material nonpublic



                                      B-29



information. Disclosure of commentary and analysis or recent portfolio changes
by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund must be
authorized by a Vanguard fund officer or a Principal of Vanguard.

 An Approved Vanguard Representative must make a good faith determination
whether the information constitutes material nonpublic information, which
involves an assessment of the particular facts and circumstances. Vanguard
believes that in most cases recent portfolio changes that involve a few or even
several securities in a diversified portfolio or commentary and analysis would
be immaterial and would not convey any advantage to a recipient in making an
investment decision concerning a Vanguard fund. Nonexclusive examples of
commentary and analysis about a Vanguard fund include (1) the allocation of the
fund's portfolio holdings and other investment positions among various asset
classes, sectors, industries, and countries; (2) the characteristics of the
stock and bond components of the fund's portfolio holdings and other investment
positions; (3) the attribution of fund returns by asset class, sector, industry,
and country; and (4) the volatility characteristics of the fund. An Approved
Vanguard Representative may in its sole discretion determine whether to deny any
request for information made by any person, and may do so for any reason or for
no reason. "Approved Vanguard Representatives" include, for purposes of the
Policies and Procedures, persons employed by or associated with Vanguard or a
subsidiary of Vanguard who have been authorized by Vanguard's Portfolio Review
Department to disclose recent portfolio changes and/or commentary and analysis
in accordance with the Policies
and Procedures.



DISCLOSURE OF PORTFOLIO HOLDINGS IN ACCORDANCE WITH SEC EXEMPTIVE ORDERS

Vanguard's Fund Financial Services unit may disclose to the National Securities
Clearing Corporation (NSCC) the daily portfolio composition files (PCFs) that
identify a basket of specified securities which may overlap with the actual or
expected portfolio holdings of the Vanguard index funds (VIPER Funds) that offer
a class of shares known as Vanguard(R) Index Participation Equity Receipts
(VIPER) Shares in accordance with the terms and conditions of related exemptive
orders (VIPER Exemptive Orders) issued by the Securities and Exchange Commission
(SEC), as described further below.

 Unlike the conventional classes of shares issued by VIPER Funds, the VIPER
Shares are listed for trading on the American Stock Exchange (AMEX). Each VIPER
Fund issues VIPER Shares in large blocks, known as "Creation Units." To purchase
or redeem a Creation Unit, an investor must be an "Authorized Participant" or it
must do so through a broker-dealer that is an Authorized Participant. An
Authorized Participant is a participant in the Depository Trust Company (DTC)
that has executed a Participant Agreement with Vanguard Marketing Corporation.
Each VIPER Fund issues Creation Units in exchange for a "portfolio deposit"
consisting of a basket of specified securities (Deposit Securities) and a cash
payment (the Balancing Amount). Each VIPER Fund also redeems Creation Units in
kind; an investor who tenders a Creation Unit will receive, as redemption
proceeds, a basket of specified securities together with a Balancing Amount.


 In connection with the creation and redemption process, and in accordance with
the terms and conditions of the VIPER Exemptive Orders, Vanguard makes available
to the NSCC, for dissemination to NSCC participants on each business day prior
to the opening of trading on the AMEX, a PCF containing a list of the names and
the required number of shares of each Deposit Security for each VIPER Fund. (The
NSCC is a clearing agency registered with the SEC and affiliated with DTC.) In
addition, the AMEX disseminates (1) continuously throughout the trading day,
through the facilities of the consolidated tape, the market value of a VIPER
Share, and (2) every 15 seconds throughout the trading day, separately from the
consolidated tape, a calculation of the estimated net asset value (NAV) of a
VIPER Share (which estimate is expected to be accurate to within a few basis
points). Comparing these two figures allows an investor to determine whether,
and to what extent, VIPER Shares are selling at a premium or at a discount to
NAV. VIPER Shares are listed on the AMEX and traded in the secondary market in
the same manner as other equity securities. The price of VIPER Shares trading on
the secondary market is based on a current bid/offer market.

 As contemplated by the VIPER Exemptive Orders, Vanguard and the VIPER Funds
expect that only institutional arbitrageurs and institutional investors with
large indexed portfolios will buy and sell VIPER Shares in Creation Unit-sized
aggregations because Creation Units can be purchased only in exchange for
securities likely to cost millions of dollars. An AMEX specialist, in providing
for a fair and orderly secondary market for VIPER Shares, also may purchase
Creation Units for use in its market-making activities on the AMEX. Vanguard and
the VIPER Funds expect secondary market purchasers of VIPER Shares will include
both institutional and retail investors. Vanguard and the VIPER Funds believe
that arbitrageurs will purchase or redeem Creation Units to take advantage of
discrepancies between the VIPER Shares' market price and the VIPER Shares'
underlying NAV. Vanguard and the VIPER Funds expect that this arbitrage activity
will provide a market "discipline" that will result in a close correspondence
between the price at which the VIPER Shares



                                      B-30




trade and their NAV. In other words, Vanguard and the VIPER Funds do not expect
the VIPER Shares to trade at a significant premium or discount to their NAV.

 In addition to making PCFs available to the NSCC, as previously described,
Vanguard's Fund Financial Services unit may disclose the PCF for any VIPER Fund
to any person, or online at www.vanguard.com to all categories of persons, if
(1) such disclosure serves a legitimate business purpose and (2) such disclosure
does not constitute material nonpublic information. Vanguard's Fund Financial
Services unit must make a good faith determination whether the PCF for any VIPER
Fund constitutes material nonpublic information, which involves an assessment of
the particular facts and circumstances. Vanguard believes that in most cases the
PCF for any VIPER Fund would be immaterial and would not convey any advantage to
the recipient in making an investment decision concerning the VIPER Fund if
sufficient time has passed between the date of the PCF and the date on which the
PCF is disclosed. Vanguard's Fund Financial Services unit may in its sole
discretion determine whether to deny any request for the PCF for any VIPER Fund
made by any person, and may do so for any reason or for no reason. Disclosure of
a PCF must be authorized by a Vanguard fund officer or a Principal in Vanguard's
Fund Financial Services unit.



DISCLOSURE OF PORTFOLIO HOLDINGS RELATED INFORMATION TO THE ISSUER OF A SECURITY
FOR LEGITIMATE BUSINESS PURPOSES


Vanguard, it its sole discretion, may disclose portfolio holdings information
concerning a security held by one or more Vanguard funds to the issuer of such
security if the issuer presents, to the satisfaction of Fund Financial Services,
convincing evidence that the issuer has a legitimate business purpose for such
information. Disclosure of this information to an issuer is conditioned on the
issuer being subject to a written agreement imposing a duty of confidentiality,
including a duty not to trade on the basis of any material nonpublic
information. The frequency with which portfolio holdings information concerning
a security may be disclosed to the issuer of such security, and the length of
the lag, if any, between the date of the information and the date on which the
information is disclosed to the issuer, is determined based on the facts and
circumstances, including, without limitation, the nature of the portfolio
holdings information to be disclosed, the risk of harm to the funds and their
shareholders, and the legitimate business purposes served by such disclosure.
The frequency of disclosure to an issuer cannot be determined in advance of a
specific request and will vary based upon the particular facts and circumstances
and the legitimate business purposes, but in unusual situations could be as
frequent as daily, with no lag. Disclosure of portfolio holdings information
concerning a security held by one or more Vanguard funds to the issuer of such
security must be authorized by a Vanguard fund officer or a Principal in
Vanguard's Portfolio Review or Legal Department.


DISCLOSURE OF PORTFOLIO HOLDINGS AS REQUIRED BY APPLICABLE LAW

Vanguard fund portfolio holdings (whether partial portfolio holdings or complete
portfolio holdings) and other investment positions comprising a fund shall be
disclosed to any person as required by applicable laws, rules, and regulations.
Examples of such required disclosure include, but are not limited to, disclosure
of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC
or another regulatory body, (2) in connection with seeking recovery on defaulted
bonds in a federal bankruptcy case, (3) in connection with a lawsuit or (4) as
required by court order. Disclosure of portfolio holdings or other investment
positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund as
required by applicable laws, rules, and regulations must be authorized by a
Vanguard fund officer or a Principal of Vanguard.

PROHIBITIONS ON DISCLOSURE OF PORTFOLIO HOLDINGS

No person is authorized to disclose Vanguard fund portfolio holdings or other
investment positions (whether online at www.vanguard.com, in writing, by fax, by
e-mail, orally, or by other means) except in accordance with the Policies and
Procedures. In addition, no person is authorized to make disclosure pursuant to
the Policies and Procedures if such disclosure is otherwise unlawful under the
antifraud provisions of the federal securities laws (as defined in Rule
38a-1under the Investment Company Act). Furthermore, Vanguard's management, in
its sole discretion, may determine not to disclose portfolio holdings or other
investment positions comprising a Vanguard fund to any person who would
otherwise be eligible to receive such information under the Policies and
Procedures, or may determine to make such disclosures publicly as provided by
the Policies and Procedures.



                                      B-31





PROHIBITIONS ON RECEIPT OF COMPENSATION OR OTHER CONSIDERATION

The Policies and Procedures prohibit a Vanguard fund, its investment advisor,
and any other person to pay or receive any compensation or other consideration
of any type for the purpose of obtaining disclosure of Vanguard fund portfolio
holdings or other investment positions. "Consideration" includes any agreement
to maintain assets in the fund or in other investment companies or accounts
managed by the investment advisor or by any affiliated person of the investment
advisor.



                          INVESTMENT ADVISORY SERVICES

The Trust currently has three investment advisors:

-Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355, provides investment
 advisory services for the Dividend Appreciation Index Fund, REIT Index Fund and
 a portion of the assets of the Energy Fund.

-M&G Investment Management Limited (M&G), Laurence Pountney Hill, London EC4H
 OHH, England, provides investment advisory services for the Precious Metals and
 Mining Fund.
-Wellington Management Company, LLP (Wellington Management), 75 State Street,
 Boston, MA 02109, provides investment advisory services for the Dividend Growth
 and Health Care Funds, and a portion of the assets of the Energy Fund.


VANGUARD


VANGUARD DIVIDEND APPRECIATION INDEX FUND

An experienced investment management staff employed directly by Vanguard
provides investment advisory services to Vanguard Dividend Appreciation Index
Fund on an at-cost basis. The Fund commenced operations in April 2006.


VANGUARD REIT INDEX FUND

An experienced investment management staff employed directly by Vanguard
provides investment advisory services to Vanguard REIT Index Fund on an at-cost
basis. During the fiscal years ended January 31, 2003, 2004, and 2005, the Fund
incurred expenses for investment advisory services of approximately $104,000,
$114,000, and $83,000, respectively.


VANGUARD ENERGY FUND

Vanguard Energy Fund uses multiple investment advisors. The Fund's advisors
discharge their responsibilities subject to the supervision and oversight of the
trustees and officers of the Fund. The proportion of the net assets of the Fund
managed by each advisor was established by the board of trustees and may be
changed in the future by the board of trustees as circumstances warrant.

 Vanguard, through its Quantitative Equity Group, provides investment advisory
services on an "internalized," at-cost basis for a portion of the Fund's assets.
Vanguard began managing a portion of the Fund in June 2005.

DISCLOSURE REGARDING OTHER ACCOUNTS MANAGED

Gerard C. O'Reilly managed the REIT Index Fund, which, as of January 31, 2005,
held assets of $5,744,000,000. As of January 31, 2005, Mr. O'Reilly also managed
six other registered investment companies with total assets of $73,975,500,000,
and one other pooled investment vehicle with total assets of $256,000,000.

Joel M. Dickson managed a portion of the Energy Fund; the Fund, as of April 30,
2005, held assets of $5,943,200,000. As of April 30, 2005, Mr. Dickson also
managed $9,866,000,000 in assets of three other registered investment companies,
and $447,000,000 in assets of two other pooled investment vehicles, including
one where the advisory firm's fee was based on account performance with assets
of $272,300,000.


MATERIAL CONFLICTS OF INTEREST


At Vanguard, individual portfolio managers may manage multiple accounts for
multiple clients. In addition to mutual funds, these other accounts may include
separate accounts, collective trusts, or offshore funds. Vanguard manages
potential conflicts between funds or with other types of accounts through
allocation policies and procedures, internal


                                      B-32


review processes and oversight by directors and independent third parties.
Vanguard has developed trade allocation procedures and controls to ensure that
no one client, regardless of type, is intentionally favored at the expense of
another. Allocation policies are designed to address potential conflicts in
situations where two or more funds or accounts participate in investment
decisions involving the same securities.


DESCRIPTION OF COMPENSATION

As of January 31, 2005, a Vanguard portfolio manager's compensation generally
consists of base salary, bonus, and payments under Vanguard's long-term
incentive compensation program. In addition, portfolio managers are eligible for
the standard retirement benefits and health and welfare benefits available to
all Vanguard employees. Also, certain portfolio managers may be eligible for
additional retirement benefits under several supplemental retirement plans that
Vanguard adopted in the 1980's to restore dollar-for-dollar the benefits of
management employees that had been cut back solely as a result of tax law
changes. These plans are structured to provide the same retirement benefits as
the standard retirement benefits.


 In the case of portfolio managers responsible for managing multiple Vanguard
funds or accounts, the method used to determine their compensation is the same
for all funds and investment accounts.


 A portfolio manager's base salary is determined by the manager's experience and
performance in the role, taking into account the ongoing compensation benchmark
analyses performed by the Vanguard Human Resources Department. A portfolio
manager's base salary is generally a fixed amount that may change as a result of
an annual review, upon assumption of new duties, or when a market adjustment of
the position occurs.


 A portfolio manager's bonus is determined by a number of factors. One factor is
gross, pre-tax performance of the fund relative to expectations for how the fund
should have performed, given its objectives and policies and the market
environment during the measurement period. This performance factor is not based
on the amount of assets held in the fund's portfolio. For the Energy Fund, the
bonus is based in part on the performance of the Vanguard-managed portion of the
fund relative to a benchmark over a trailing three-year period. The benchmark is
derived from certain energy stocks in the MSCI All Country World Index. For the
REIT Index Fund, the performance factor depends on how closely the portfolio
manager tracks the fund's benchmark index over a one-year period. Additional
factors include the portfolio manager's contributions to the investment
management functions within the sub-asset class, contributions to the
development of other investment professionals and supporting staff, and overall
contributions to strategic planning and decisions for the investment group. The
target bonus is expressed as a percentage of base salary. The actual bonus paid
may be more or less than the target bonus, based on how well the manager
satisfies the objectives stated above. The bonus is paid on an annual basis.


 Under the long-term incentive compensation program, all full-time employees
receive a payment from Vanguard's long term incentive compensation plan based on
their years of service, job level and, if applicable, management
responsibilities. Each year, Vanguard's independent directors determine the
amount of the long term incentive compensation award for that year based on the
investment performance of the Vanguard funds relative to competitors and
Vanguard's operating efficiencies in providing services to the Vanguard funds.


THIRD-PARTY INVESTMENT ADVISORS


For funds that are advised by independent third-party advisory firms
unaffiliated with Vanguard, Vanguard hires investment advisory firm, not
individual portfolio managers, to provide investment advisory services to such
funds. Vanguard negotiates each advisory agreement, which contains advisory fee
arrangements, on an arms-length basis with the advisory firm. Each advisory
agreement is reviewed annually by each fund's board of trustees, taking into
account numerous factors, which include, without limitation, the nature, extent,
and quality of the services provided, investment performance, and fair market
value of services provided. Each advisory agreement is between the fund and the
advisory firm, not between the fund and the portfolio manager. The structure of
the advisory fee paid to each unaffiliated investment advisory firm is described
in detail in the following sections. In addition, each firm has established
policies and procedures designed to address the potential for conflicts of
interest. Each firm's compensation structure and management of potential
conflicts of interest is summarized by the advisory firm in the following
sections for the period ended January 31, 2005.


                                      B-33




M&G INVESTMENT MANAGEMENT LIMITED

The Vanguard Precious Metals and Mining Fund has entered into an investment
advisory agreement with M&G Investment Management Limited. Under the agreement,
M&G is responsible for managing the investment and reinvestment of the Fund's
assets and for continuously reviewing, supervising, and administering the Fund's
investment program. M&G discharges its responsibilities subject to the
supervision and oversight of the officers and trustees of the Fund. M&G is a
wholly-owned subsidiary of Prudential plc (an English insurance company not
related to The Prudential Insurance Company of America).

 The Fund pays M&G a fee at the end of each fiscal quarter. The quarterly
asset-based payment calculated by applying a quarterly rate, based on certain
annual percentage rates, to the aggregate average month-end net assets of the
Fund for the quarter.

 The quarterly payments to M&G may be increased or decreased by applying a
performance adjustment. M&G's fee may be increased or decreased, based on the
cumulative total performance of the Fund managed by the advisor over a trailing
36-month period (subject to certain transition rules that will be in place until
36 months have elapsed from the date of the agreement, February 1, 2006) as
compared with that of the S&P/Citigroup Customized Precious Metal & Mining Index
over the same period.

 During the fiscal years ended January 31, 2004, 2005, and 2006, the Precious
Metals and Mining Fund incurred advisory fees of $1,025,000, $1,146,000, and
$x,xxx,000 respectively, to M&G.




DISCLOSURE REGARDING OTHER ACCOUNTS MANAGED


Graham French managed the Precious Metals and Mining Fund, which, as of January
31, 2005, held assets of $921,000,000. Mr. French also managed three other
pooled investment vehicles with total assets of $700,000,000, as of January 31,
2005.

MATERIAL CONFLICTS OF INTEREST

At M&G, individual portfolio managers may manage multiple accounts for multiple
clients. In addition to mutual funds, these other accounts may include non-US
collective investment schemes, insurance companies, and segregated pension
funds. M&G manages potential conflicts between funds or with other types of
accounts through allocation policies and procedures, internal review processes
and oversight by directors. M&G has developed trade allocation procedures and
controls to ensure that no one client, regardless of type, is intentionally
favored at the expense of another. Allocation policies are designed to address
potential conflicts in situations where two or more funds participate in
investment decisions involving the same securities.

DESCRIPTION OF COMPENSATION


Graham French is compensated in line with standard M&G practice, which is:


 M&G has a strong and integrated set of compensation practices designed to
reflect the logic, internally within M&G, of people's value as well as their
outputs. Each component of the remuneration package has a role to play in the
effective and appropriate reward of individuals in order to attract, retain and
motivate. M&G believes it is also important to ensure that in total the
components are coherent and relate appropriately to each other, delivering the
reward levels that M&G wants to make available for different levels of
performance. The components are as follows:

-Base pay is used to reward inputs, reflecting the values of people's
 knowledge, skills, aptitudes and track records. It progresses in line with
 personal growth, general contribution and potential.

-Bonus payment levels are closely aligned with 'outputs', chiefly investment
 performance but also other results. Bonuses are discretionary, variable year on
 year and reflect personal, team and company performance. Depending on the
 fund's objective, M&G uses either a representative index or a representative
 group of competitor funds as a benchmark against which to measure performance.
 In the case of Vanguard Precious Metals and Mining Fund, the performance factor
 of the fund manager's bonus is dependent on the Fund's performance over one-
 and three-year periods compared with a representative group of competitor
 funds. The actual bonus, which is paid on an annual basis, may be up to a
 multiple of base salary depending on the achieved percentile ranking in this
 peer group over these time periods.


                                      B-34




-M&G's long-term incentive plan, combining phantom equity and options over
 phantom equity in M&G is designed to provide a meaningful stake in the future
 growth of the value of the company to those who have a significant role to play
 in its growth.

-The method used to determine the compensation for portfolio managers who are
 responsible for the management of multiple accounts, is the same for all funds.

 In addition, the portfolio manager is eligible for the standard retirement
benefits and health benefits generally available to all M&G employees.

 M&G's remuneration package is regularly reviewed by outside consultants to
ensure that it is competitive in the London investment management market.

WELLINGTON MANAGEMENT

Wellington Management is a Massachusetts partnership owned by its 87 partners,
all of whom are active members of the firm. The managing partners of the firm
are Laurie A. Gabriel, John R. Ryan, and Perry M. Traquina.

VANGUARD ENERGY FUND

Vanguard Energy Fund has entered into a new Investment Advisory Agreement with
Wellington Management Company, LLP (Wellington Management or Advisor). Under the
investment advisory agreement, Wellington Management manages the investment and
reinvestment of a portion of the Fund's assets that the board of trustees
assigns to Wellington Management (the WM Portfolio). In this capacity,
Wellington Management continuously reviews, supervises, and administers the WM
Portfolio. Prior to June 2005, Wellington Management served as the Fund's sole
investment advisor.


 For each fiscal quarter after the first fiscal quarter in which the agreement
is in effect, the Fund shall pay to the Advisor, at the end of the quarter, a
fee calculated by applying certain annual percentage rates to the average
month-end net assets of the WM Portfolio, then dividing the result by four. For
purposes of calculating this compensation, average month-end net assets consist
of Fund assets that are managed by the Advisor (including any cash that may be
directed to Vanguard for cash management purposes).

 During the fiscal years ended January 31, 2003, 2004, and 2005, the Fund
incurred advisory fees of $837,000, $1,103,000, and $2,335,000, respectively.




VANGUARD HEALTH CARE FUND


Vanguard Health Care Fund has entered into a new investment advisory agreement
with Wellington Management. Under the investment advisory agreement, Wellington
Management manages the investment of the Fund's assets and continuously reviews,
supervises, and administers the Fund's investment program. Wellington
Management, which has advised the Fund since 1984, advises the Fund subject to
the supervision and oversight of the officers and trustees of the Fund.



 For each fiscal quarter after the first fiscal quarter in which the agreement
is in effect, the Fund shall pay to the advisor, at the end of the quarter, a
fee calculated by applying certain annual percentage rates to the average
month-end net assets of the Fund, then dividing the result by four. For purposes
of calculating this compensation, average month-end net assets consist of Fund
assets that are managed by the advisor (including any cash that may be directed
to Vanguard for cash management purposes).

 During the fiscal years ended January 31, 2003, 2004, and 2005, the Fund
incurred advisory fees of $9,585,000, $10,298,000, and $12,014,000,
respectively.


VANGUARD DIVIDEND GROWTH FUND

The Dividend Growth Fund employs Wellington Management under an investment
advisory agreement to manage the investment and reinvestment of a portion of the
assets of the Fund that the Fund's board of trustees determines in its sole
discretion to assign to the advisor from time to time (currently the entire
Fund), and to continuously review, supervise, and administer the Fund's
investment program. Wellington Management discharges its responsibilities
subject to the supervision and oversight of the officers and trustees of the
Fund. The Basic Fee for each quarter is calculated by applying a quarterly rate
based on certain annual percentage rates to the average month-end net assets of




                                      B-35



the Wellington Management Portfolio for the quarter. The adjustment amount is
based on the cumulative investment performance of the Wellington Management
Portfolio over a trailing 36-month period relative to that of the Russell 1000
Index over the same period. Subject to the transition rules described below, the
adjustment amount is equal to the product of an adjustment percentage and the
asset fee as computed over the 36-month period ending with the relevant fiscal
quarter (the Relevant 36-Month Period). The basic fee will be increased or
decreased by applying a performance fee adjustment based on the investment
performance of the Wellington Management Portfolio relative to the investment
performance of the Russell 1000 Index as determined for the relevant 36-month
period.



DISCLOSURE REGARDING OTHER ACCOUNTS MANAGED

Minerva Butler managed the Dividend Growth Fund, which, as of January 31, 2005,
held assets of $965,000,000. Ms. Butler also managed nine other accounts with
total assets of $34,300,000, as of January 31, 2005.

 Karl Bandtel managed a portion of the Energy Fund; the Fund, as of January 31,
2005, held assets of $5,371,000,000. As of January 31, 2005, Mr. Bandtel managed
three other registered investment companies with total assets of $821,800,000,
and 17 other pooled investment vehicles with total assets of $4,647,200,000,
including nine where the advisory firm's fee was based on account performance
with total assets of $3,193,100,000. As of January 31, 2005, Mr. Bandtel also
managed 23 other accounts with total assets of $811,500,000.

 James Bevilacqua managed a portion of the Energy Fund; the Fund, as of January
31, 2005, held assets of $5,371,000,000. As of January 31, 2005, Mr. Bevilacqua
managed three other registered investment companies with total assets of
$821,800,000, and 17 other pooled investment vehicles with total assets of
$4,647,200,000, including nine where the advisory firm's fee was based on
account performance with total assets of $3,193,100,000. As of January 31, 2005,
Mr. Bevilacqua also managed 19 other accounts with total assets of $797,200,000.

 Edward P. Owens managed the Health Care Fund, which, as of January 31, 2005,
held assets of $21,906,000,000. As of January 31, 2005, Mr. Owens managed 32
other pooled investment vehicles with total assets of $3,834,400,000, including
six where the advisory firm's fee was based on account performance with total
assets of $2,169,500,000. As of January 31, 2005, Mr. Owens also managed 172
other accounts with total assets of $1,693,700,000, including 17 where the
advisory firm's fee was based on account performance with total assets of
$178,700,000.

MATERIAL CONFLICTS OF INTEREST

Individual investment professionals at Wellington Management manage multiple
portfolios for multiple clients. These accounts may include mutual funds,
separate accounts (assets managed on behalf of institutions such as pension
funds, insurance companies, foundations), bank common trust accounts, and hedge
funds. The investment professionals primarily responsible for the day-to-day
management of each Fund (Portfolio Managers) generally manage portfolios in
several different investment styles. These portfolios may have investment
objectives, strategies, time horizons, tax considerations and risk profiles that
differ from those of the relevant Fund. The Portfolio Managers make investment
decisions for the relevant Fund based on the investment objectives, policies,
practices, benchmarks, cash flows, tax, and other relevant investment
considerations applicable to that portfolio. Consequently, the Portfolio
Managers may purchase or sell securities, including IPOs, for one portfolio and
not another portfolio, and the performance of securities purchased for one
portfolio may vary from the performance of securities purchased for other
portfolios. The Portfolio Managers or other investment professionals at
Wellington Management may place transactions on behalf of other accounts that
are directly or indirectly contrary to investment decisions made on behalf of
the relevant Fund, or make investment decisions that are similar to those made
for the relevant Fund, both of which have the potential to adversely impact the
Fund depending on market conditions. For example, the Portfolio Managers may
purchase a security in one portfolio while appropriately selling that same
security in another portfolio. In addition, some of these portfolios have fee
structures, including performance fees, that are or have the potential to be
higher, in some cases significantly higher, than the fees paid by the relevant
Fund to Wellington Management. Messrs. Bandtel, Bevilacqua, and Owens manage
hedge funds, which pay performance allocations to Wellington Management or its
affiliates. Because incentive payments are tied to revenues earned by Wellington
Management, and where noted, to the performance achieved by the manager in each
account, the incentives associated with any given fund may be significantly
higher or lower than those associated with other accounts managed by a given
Portfolio Manager.


 Wellington Management's goal is to meet its fiduciary obligation to treat all
clients fairly and provide high quality investment services to all of its
clients. Wellington Management has adopted and implemented policies and
procedures, including brokerage and trade allocation policies and procedures
that it believes address the conflicts associated with


                                      B-36


managing multiple accounts for multiple clients. In addition, Wellington
Management monitors a variety of areas, including compliance with primary fund
guidelines, the allocation of IPOs, and compliance with the firm's Code of
Ethics, and places additional investment restrictions on Portfolio Managers who
manage hedge funds and certain other accounts. Furthermore, senior investment
and business personnel at Wellington Management periodically review the
performance of Wellington Management's Portfolio Managers. Although Wellington
Management does not track the time a Portfolio Manager spends on a single
portfolio, Wellington Management does periodically assess whether a Portfolio
Manager has adequate time and resources to effectively manage the Portfolio
Manager's various client mandates.


DESCRIPTION OF COMPENSATION

Each Fund pays Wellington Management a fee based on the assets under management
of each Fund as set forth in the Investment Advisory Agreement between
Wellington Management and Vanguard Specialized Funds with respect to each Fund.
Wellington Management pays its investment professionals out of its total
revenues and other resources, including the advisory fees earned with respect to
each Fund. The following information relates to the period ended January 31,
2005.

 Wellington Management's compensation structure is designed to attract and
retain high-caliber investment professionals necessary to deliver high quality
investment management services to its clients. Wellington Management's
compensation of its Portfolio Managers includes a base salary and incentive
components. The base salary for each Portfolio Manager who is a partner of
Wellington Management is determined by the Managing Partners of the firm. A
partner's base salary is generally a fixed amount that may change as a result of
an annual review. The base salaries for all other Portfolio Managers are
determined by the Portfolio Manager's experience and performance in their role
as a Portfolio Manager. Base salaries for non-partners are reviewed annually and
may be adjusted based on the recommendation of the Portfolio Manager's business
manager, using guidelines established by Wellington Management's Compensation
Committee, which has final oversight responsibility for base salaries for
non-partners. Each Portfolio Manager is eligible to receive an incentive payment
based on the revenues earned by Wellington Management from the relevant Fund
managed by that Portfolio Manager and generally each other portfolio managed by
such Portfolio Manager. For the Energy Fund and the Health Care Fund, each
Portfolio Manager's incentive payment relating to the relevant Fund is linked to
the revenues received by Wellington Management Company on the relevant Fund. The
incentives are additionally linked to the performance of the Fund compared to
the benchmark identified below over two-year periods and to the performance of
the Fund compared to the peer group identified below over one-year periods. For
the Dividend Growth Fund, overall revenues to Wellington Management vary with
the performance of the Fund relative to a specified benchmark (see "Vanguard
Dividend Growth Fund" in this section). Incentive payments made to the Fund's
Portfolio Manager relating to the Dividend Growth Fund are additionally linked
to the performance of the Fund compared to the benchmark identified below over
one- and three-year periods, with an emphasis on three-year results. Wellington
Management applies similar incentive structures (although the benchmarks or peer
groups, time periods, and rates may differ) to other portfolios managed by these
Portfolio Managers, including portfolios with performance fees.






PORTFOLIO                                            BENCHMARK AND/OR PEER GROUP
---------                                            ---------------------------
                                     
Energy Portfolio                   S&P 500 Energy Sector and peer group average*
Health Care Portfolio        S&P 500 Health Care Sector and peer group average**
Dividend Growth Portfolio                                     Russell 1000 Index
 *Average of five open-end mutual funds selected by Vanguard.
**Average of three open-end mutual funds selected by Vanguard.



 The incentive compensation component across all portfolios managed by a
Portfolio Manager can, and typically does, represent a significant portion of a
Portfolio Manager's overall compensation; incentive compensation varies
significantly by individual and can vary significantly from year to year. Some
Portfolio Managers are also eligible for bonus payments based on their overall
contribution to Wellington Management's business operations. Senior management
at Wellington Management may reward individuals as it deems appropriate based on
factors other than performance.   Each partner of Wellington Management is also
eligible to participate in a partner-funded retirement plan.   Messrs. Bandtel,
Bevilacqua and Owens are partners of the firm.


                                      B-37



OWNERSHIP OF SECURITIES

Vanguard employees, including portfolio managers, allocate their investments
among the various Vanguard funds based on their own individual investment needs
and goals. Vanguard employees as a group invest a sizeable portion of their
personal assets in Vanguard funds. As of December 31, 2004, Vanguard employees
collectively invested $1.27 billion in Vanguard funds. John. J. Brennan,
Chairman and Chief Executive Officer of Vanguard and the Vanguard funds. and
George U. Sauter, Managing Director and Chief Investment Officer, invest
substantially all of their personal financial assets in Vanguard funds.

 As of January 31, 2005, Ms. Butler owned shares of the Dividend Growth Fund
within the $100,001-$500,000 range, Mr. Bandtel owned shares of the Energy Fund
within the $100,001-$500,000 range, and Mr. Owens owned shares of the Health
Care Fund within the over $1,000,000 range. Except as noted in the previous
sentence, as of January 31, 2005, the portfolio managers did not own any shares
of the Specialized Funds they managed.

 As of April 30, 2005, Mr. Dickson did not own any shares of the Energy Fund.

DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS

Each Fund's current agreement with each adviser is renewable for successive
one-year periods, only if (1) each renewal is specifically approved by a vote of
the Fund's board of trustees, including the affirmative votes of a majority of
the trustees who are not parties to the agreement or "interested persons" (as
defined in the 1940 Act) of any such party cast in person at a meeting called
for the purpose of considering such approval, or (2) each renewal is
specifically approved by a vote of a majority of the Fund's outstanding voting
securities. An agreement is automatically terminated if assigned, and may be
terminated by the Fund without penalty, at any time, (1) either by vote of the
board of trustees on sixty (60) days' written notice to the adviser, (2) by a
vote of a majority of the Fund's outstanding voting securities, or (3) by the
adviser upon ninety (90) days' written notice to the Fund.

                             PORTFOLIO TRANSACTIONS

The advisor decides which securities to buy and sell on behalf of a Fund and
then selects the brokers or dealers that will execute the trades on an agency
basis or the dealers with whom the trades will be effected on a principal basis.
For each trade, the advisor must select a broker-dealer that it believes will
provide "best execution." Best execution does not mean the lowest possible
spread or commission rate. In seeking best execution, the SEC has said that an
adviser should consider the full range of a broker-dealer's services. The
factors considered by the advisor in seeking best execution include, but are not
limited to, the broker-dealer's execution capability, clearance and settlement
services, commission rate, trading expertise, willingness and ability to commit
capital, ability to provide anonymity, financial responsibility, reputation and
integrity, responsiveness, access to underwritten offerings and secondary
markets, and access to company management, as well as the value of any research
provided by the broker-dealer. In assessing which broker--dealer can provide
best execution for a particular trade, the advisor also may consider the timing
and size of the order and available liquidity and current market conditions.

 During the fiscal years ended January 31, 2003, 2004, and 2005, the Funds paid
brokerage commissions in the following amounts:




FUND                                                2003           2004           2005
----                                                ----           ----           ----
                                                                   
Vanguard Dividend Growth Fund                 $2,120,000     $  413,000     $  236,000
Vanguard Energy Fund                             680,000      2,100,000      1,544,000
Vanguard Health Care Fund                     10,803,000      7,297,000      4,981,000
Vanguard Precious Metals and Mining Fund       1,161,000        853,000      1,509,000
Vanguard REIT Index Fund                         591,000        762,000        764,000
*Vanguard Dividend Appreciation Index Fund did not commence operations until April, 2006.



 Some securities that are considered for investment by a Fund may also be
appropriate for other Vanguard funds or for other clients served by the
advisors. If such securities are compatible with the investment policies of a
Fund and one or more of an advisor's other clients, and are considered for
purchase or sale at or about the same time, then transactions

                                      B-38


in such securities will be aggregated by the advisor and the purchased
securities or sale proceeds will be allocated among the participating Vanguard
funds and the other participating clients of the advisor in a manner deemed
equitable by the advisor. Although there may be no specified formula for
allocating such transactions, the allocation methods used, and the results of
such allocations, will be subject to periodic review by the Funds' board of
trustees.



                            PROXY VOTING GUIDELINES

The Board of Trustees (the Board) of each Vanguard fund that invests in stocks
has adopted proxy voting procedures and guidelines to govern proxy voting by the
fund. The Board has delegated oversight of proxy voting to the Proxy Oversight
Committee (the Committee), comprised of senior officers of Vanguard, a majority
of whom are also officers of each Vanguard fund, and subject to the operating
procedures and guidelines described below. The Committee reports directly to the
Board. The Vanguard Group, Inc. (Vanguard) is subject to these guidelines to the
extent the guidelines call for Vanguard to administer the voting process and
implement the resulting voting decisions, and for that purpose have been
approved by the Board of Directors of Vanguard.


 The overarching objective in voting is simple: to support proposals and
director nominees that maximize the value of a fund's investments--and those of
fund shareholders--over the long term. While the goal is simple, the proposals
the funds receive are varied and frequently complex. As such, the guidelines
adopted by the Board provide a rigorous framework for assessing each proposal.
Under the guidelines, each proposal must be evaluated on its merits, based on
the particular facts and circumstances as presented.


 For ease of reference, the procedures and guidelines often refer to all funds,
however, our processes and practices seek to ensure that proxy voting decisions
are suitable for individual funds. For most proxy proposals, particularly those
involving corporate governance, the evaluation will result in the same position
being taken across all of the funds and the funds voting as a block. In some
cases, however, a fund may vote differently, depending upon the nature and
objective of the funds, the composition of its portfolio and other factors.


 The guidelines do not permit the Board to delegate voting responsibility to a
third party that does not serve as a fiduciary for the funds. Because many
factors bear on each decision, the guidelines incorporate factors the Committee
should consider in each voting decision. A fund may refrain from voting if that
would be in the fund's and its shareholders' best interests. These circumstances
may arise, for example, when the expected cost of voting exceeds the expected
benefits of voting, or exercising the vote results in the imposition of trading
or other restrictions.

 In evaluating proxy proposals, we consider information from many sources,
including but not limited to the investment advisor for the fund, management or
shareholders of a company presenting a proposal, and independent proxy research
services. We will give substantial weight to the recommendations of the
company's board, absent guidelines or other specific facts that would support a
vote against management. In all cases, however, the ultimate decision rests with
the members of the Proxy Oversight Committee, who are accountable to the fund's
Board.

 While serving as a framework, the following guidelines cannot contemplate all
possible proposals with which a fund may be presented. In the absence of a
specific guideline for a particular proposal (e.g., in the case of a
transactional issue or contested proxy), the Committee will evaluate the issue
and cast the fund's vote in a manner that, in the Committee's view, will
maximize the value of the fund's investment, subject to the individual
circumstances of the fund.

I. THE BOARD OF DIRECTORS

A. ELECTION OF DIRECTORS

Good governance starts with a majority-independent board, whose key committees
are comprised entirely of independent directors. As such, companies should
attest to the independence of directors who serve on the Compensation,
Nominating, and Audit committees. In any instance in which a director is not
categorically independent, the basis for the independence determination should
be clearly explained in the proxy statement.



                                      B-39





 While the funds will generally support the board's nominees, the following
factors will be taken into account in determining each fund's vote:





FACTORS FOR APPROVAL                                   FACTORS AGAINST APPROVAL
--------------------                                   ------------------------
                                                    
Nominated slate results in board comprised of a        Nominated slate results in board comprised of a majority of non-
majority of independent directors.                     independent directors.

All members of Audit, Nominating, and Compensation     Audit, Nominating, and/or Compensation committees include non-
committees are independent of management.              independent members.

                                                       Incumbent board member failed to attend at least 75% of meetings in the
                                                       previous year.

                                                       Actions of committee(s) on which nominee serves are inconsistent with
                                                       other guidelines (e.g., excessive option grants, substantial non-audit fees,
                                                       lack of board independence).




B. CONTESTED DIRECTOR ELECTIONS


In the case of contested board elections, we will evaluate the nominees'
qualifications, the performance of the incumbent board, as well as the rationale
behind the dissidents' campaign, to determine the outcome that we believe will
maximize shareholder value.


C. CLASSIFIED BOARDS


The funds will generally support proposals to declassify existing boards
(whether proposed by management or shareholders), and will block efforts by
companies to adopt classified board structures, in which only part of the board
is elected each year.


II. APPROVAL OF INDEPENDENT AUDITORS

The relationship between the company and its auditors should be limited
primarily to the audit, although it may include certain closely related
activities that do not, in the aggregate, raise any appearance of impaired
independence. The funds will generally support management's recommendation for
the ratification of the auditor, except in instances where audit and
audit-related fees make up less than 50% of the total fees paid by the company
to the audit firm. We will evaluate on a case-by-case basis instances in which
the audit firm has a substantial non-audit relationship with the company
(regardless of its size relative to the audit fee) to determine whether
independence has been compromised.


III. COMPENSATION ISSUES

A. STOCK-BASED COMPENSATION PLANS

Appropriately designed stock-based compensation plans, administered by an
independent committee of the board and approved by shareholders, can be an
effective way to align the interests of long-term shareholders and the interests
of management, employees, and directors. Conversely, the funds oppose plans that
substantially dilute their ownership interest in the company, provide
participants with excessive awards, or have inherently objectionable structural
features.

 An independent compensation committee should have significant latitude to
deliver varied compensation to motivate the company's employees. However, we
will evaluate compensation proposals in the context of several factors (a
company's industry, market capitalization, competitors for talent, etc.) to
determine whether a particular plan or proposal balances the perspectives of
employees and the company's other shareholders. We will evaluate each proposal
on a case-by-case basis, taking all material facts and circumstances into
account.



                                      B-40




  The following factors will be among those considered in evaluating these
proposals.





FACTORS FOR APPROVAL                                                     FACTORS AGAINST APPROVAL
--------------------                                                     ------------------------
                                                                      
Company requires senior executives to hold a minimum amount of company   Total potential dilution (including all stock-based plans)
stock (frequently expressed as a multiple of salary).                    shares outstanding.

Company requires stock acquired through option exercise to be held for   Annual option grants have exceeded 2% of shares
a certain period of time.                                                outstanding.

Compensation program includes performance-vesting awards, indexed        Plan permits repricing or replacement of options without
options or other performance-linked grants.                              shareholder approval.

Concentration of option grants to senior executives is limited           Plan provides for the issuance of reload options.
(indicating that the plan is very broad-based).

Stock-based compensation is clearly used as a substitute for cash in     Plan contains automatic share replenishment (evergreen)fea-
delivering market-competitive total pay.                                 ture



B. BONUS PLANS

Bonus plans, which must be periodically submitted for shareholder approval to
qualify for deductibility under Section 162(m) of the Internal Revenue Code,
should have clearly defined performance criteria and maximum awards expressed in
dollars. Bonus plans with awards that are excessive, in both absolute terms and
relative to a comparative group, generally will not be supported.

C. EMPLOYEE STOCK PURCHASE PLANS

The funds will generally support the use of employee stock purchase plans to
increase company stock ownership by employees, provided that shares purchased
under the plan are acquired for no less than 85% of their market value and that
shares reserved under the plan comprise less than 5% of the outstanding shares.

D. EXECUTIVE SEVERANCE AGREEMENTS (GOLDEN PARACHUTES)

While executives' incentives for continued employment should be more significant
than severance benefits, there are instances--particularly in the event of a
change in control--in which severance arrangements may be appropriate. Severance
benefits triggered by a change in control that do not exceed three times an
executive's salary and bonus may generally be approved by the compensation
committee of the board without submission to shareholders. Any such arrangement
under which the beneficiary receives more than three times salary and bonus--or
where severance is guaranteed absent a change in control--should be submitted
for shareholder approval.


IV. CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS


The exercise of shareholder rights, in proportion to economic ownership, is a
fundamental privilege of stock ownership that should not be unnecessarily
limited. Such limits may be placed on shareholders' ability to act by corporate
charter or by-law provisions, or by the adoption of certain takeover provisions.
In general, the market for corporate control should be allowed to function
without undue interference from these artificial barriers.


 The funds' positions on a number of the most commonly presented issues in this
area are as follows:


A. SHAREHOLDER RIGHTS PLANS (POISON PILLS)

A company's adoption of a so-called poison pill effectively limits a potential
acquirer's ability to buy a controlling interest without the approval of the
target's board of directors. Such a plan, in conjunction with other takeover
defenses, may serve to entrench incumbent management and directors. However, in
other cases, a poison pill may force a suitor to negotiate with the board and
result in the payment of a higher acquisition premium.



                                      B-41



 In general, shareholders should be afforded the opportunity to approve
shareholder rights plans within a year of their adoption. This provides the
board with the ability to put a poison pill in place for legitimate defensive
purposes, subject to subsequent approval by shareholders. In evaluating the
approval of proposed shareholder rights plans, we will consider the following
factors:




                                            
FACTORS FOR APPROVAL                           FACTORS AGAINST APPROVAL
--------------------                           ------------------------
Plan is relatively short-term (3-5 years).     Plan is long term (>5 years).

Plan requires shareholder approval             Renewal of plan is automatic or does not require shareholder approval.
for renewal.

Plan incorporates review by a committee        Ownership trigger is less than 15%.
of independent directors at least
every three years (so-called TIDE
provisions).

Plan includes permitted bid/qualified offer    Classified board.
feature (chewable pill) that mandates
shareholder vote in certain situations.

Ownership trigger is reasonable (15-20%).      Board with limited independence.

Highly independent, non-classified board.




B. CUMULATIVE VOTING


The funds are generally opposed to cumulative voting under the premise that it
allows shareholders a voice in director elections that is disproportionate to
their economic investment in the corporation.

C. SUPERMAJORITY VOTE REQUIREMENTS

The funds support shareholders' ability to approve or reject matters presented
for a vote based on a simple majority. Accordingly, the funds will support
proposals to remove supermajority requirements and oppose proposals to
impose them.

D. RIGHT TO CALL MEETINGS AND ACT BY WRITTEN CONSENT

The funds support shareholders' right to call special meetings of the board (for
good cause and with ample representation) and to act by written consent. The
funds will generally vote for proposals to grant these rights to shareholders
and against proposals to abridge them.

E. CONFIDENTIAL VOTING

The integrity of the voting process is enhanced substantially when shareholders
(both institutions and individuals) can vote without fear of coercion or
retribution based on their votes. As such, the funds support proposals to
provide confidential voting.

F. DUAL CLASSES OF STOCK

We are opposed to dual class capitalization structures that provide disparate
voting rights to different groups of shareholders with similar economic
investments. We will oppose the creation of separate classes with different
voting rights and will support the dissolution of such classes.

V. CORPORATE AND SOCIAL POLICY ISSUES


Proposals in this category, initiated primarily by shareholders, typically
request that the company disclose or amend certain business practices. The Board
generally believes that these are "ordinary business matters" that are primarily
the responsibility of management and should be evaluated and approved solely by
the corporation's board of directors. Often, proposals may address concerns with
which the Board philosophically agrees, but absent a compelling economic impact
on shareholder value (e.g., proposals to require expensing of stock options),
the funds will typically abstain from voting on these proposals. This reflects
the belief that regardless of our philosophical perspective on the issue, these
decisions should be the province of company management unless they have a
significant, tangible impact on the value of a fund's investment and management
is not responsive to the matter.

VI. VOTING IN FOREIGN MARKETS

Corporate governance standards, disclosure requirements, and voting mechanics
vary greatly among the markets outside the United States in which the funds may
invest. Each fund's votes will be used, where applicable, to advocate




                                      B-42




for improvements in governance and disclosure by each fund's portfolio
companies. We will evaluate issues presented to shareholders for each fund's
foreign holdings in the context with the guidelines described above, as well as
local market standards and best practices. The funds will cast their votes in a
manner believed to be philosophically consistent with these guidelines, while
taking into account differing practices by market. In addition, there may be
instances in which the funds elect not to vote, as described below.


 Many foreign markets require that securities be "blocked" or reregistered to
vote at a company's meeting. Absent an issue of compelling economic importance,
we will generally not subject the fund to the loss of liquidity imposed by these
requirements.


 The costs of voting (e.g., custodian fees, vote agency fees) in foreign markets
may be substantially higher than for U.S. holdings. As such, the fund may limit
its voting on foreign holdings in instances where the issues presented are
unlikely to have a material impact on shareholder value.


VII. VOTING ON A FUND'S HOLDINGS OF OTHER VANGUARD FUNDS

Certain Vanguard funds (owner funds) may, from time to time, own shares of other
Vanguard funds (underlying funds). If an underlying fund submits a matter to a
vote of its shareholders, votes for and against such matters on behalf of the
owner funds will be cast in the same proportion as the votes of the other
shareholders in the underlying fund.


VIII. THE PROXY VOTING GROUP

The Board has delegated the day-to-day operations of the funds' proxy voting
process to the Proxy Voting Group, which the Committee oversees. While most
votes will be determined, subject to the individual circumstances of each fund,
by reference to the guidelines as separately adopted by each of the funds, there
may be circumstances when the Proxy Voting Group will refer proxy issues to the
Committee for consideration. In addition, at any time, the Board has the
authority to vote proxies, when, in the Board's or the Committee's discretion,
such action is warranted.


 The Proxy Voting Group performs the following functions: (1) managing proxy
voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals
using factors described in the guidelines; (4) determining and addressing
potential or actual conflicts of interest that may be presented by a particular
proxy; and (5) voting proxies. The Proxy Voting Group also prepares periodic and
special reports to the Board, and any proposed amendments to the procedures and
guidelines.


IX. THE PROXY OVERSIGHT COMMITTEE


The Board, including a majority of the independent trustees, appoints the
members of the Committee who are senior officers of Vanguard, a majority of whom
are also officers of each Vanguard fund.

 The Committee does not include anyone whose primary duties include external
client relationship management or sales. This clear separation between the proxy
voting and client relationship functions is intended to eliminate any potential
conflict of interest in the proxy voting process. In the unlikely event that a
member of the Committee believes he or she might have a conflict of interest
regarding a proxy vote, that member must recuse him or herself from the
committee meeting at which the matter is addressed, and not participate in the
voting decision.


 The Committee works with the Proxy Voting Group to provide reports and other
guidance to the Board regarding proxy voting by the funds. The Committee has an
obligation to conduct its meetings and exercise its decision-making authority
subject to the fiduciary standards of good faith, fairness and Vanguard's Code
of Ethics. The Committee shall authorize proxy votes that the Committee
determines, in its sole discretion, to be in the best interests of each fund's
shareholders. In determining how to apply the guidelines to a particular factual
situation, the Committee may not take into account any interest that would
conflict with the interest of fund shareholders in maximizing the value of their
investments.

 The Board may review these procedures and guidelines and modify them from time
to time. The procedures and guidelines are available on Vanguard's website at
www.vanguard.com.


 You may obtain a free copy of a report that details how the funds voted the
proxies relating to the portfolio securities held by the funds for the prior
12-month period ended June 30 by logging on to Vanguard's internet site, at
www.vanguard.com, or the SEC's website at www.sec.gov.



                                      B-43


                    INFORMATION ABOUT THE VIPER SHARE CLASS


The REIT Index and Dividend Appreciation Index Funds (The VIPER Funds) offers
and issues an exchange-traded class of shares called VIPER Shares. The VIPER
Funds issues VIPER Shares in large blocks, known as "Creation Units." To
purchase or redeem a Creation Unit, you must be an Authorized Participant or you
must do so through a broker that is an Authorized Participant. An Authorized
Participant is a participant in the Depository Trust Company (DTC) that has
executed a Participant Agreement with Vanguard Marketing Corporation, the Fund's
Distributor.


 The VIPER Funds issue Creation Units in kind, in exchange for a basket of
stocks that are part of--or soon to be part of--its target index (Deposit
Securities). The VIPER Funds also redeem Creation Units in kind; an investor who
tenders a Creation Unit will receive, as redemption proceeds, a basket of stocks
that are part of the Fund's portfolio holdings (Redemption Securities). The
Deposit Securities and the Redemption Securities will usually, but may not
necessarily always, be the same. As part of any creation or redemption
transaction, the investor will either pay or receive some cash in addition to
the securities, as described more fully below. The VIPER Funds reserve the right
to issue Creation Units for cash, rather than in kind, although each has no
current intention of doing so.


EXCHANGE LISTING AND TRADING


The VIPER shares have been approved for listing on the American Stock Exchange
(AMEX) and will trade on the Exchange at market prices that may differ from net
asset value.


 There can be no assurance that, in the future, VIPER Shares will continue to
meet all of the AMEX's listing requirements. The AMEX may, but is not required
to, delist a Fund's VIPER Shares from listing if: (1) following the initial
12-month period beginning upon the commencement of trading, there are fewer than
50 beneficial owners of the VIPER Shares for 30 or more consecutive trading
days; (2) the value of the target index tracked by each Fund is no longer
calculated or available; or (3) such other event shall occur or condition exist
that, in the opinion of the AMEX, makes further dealings on the AMEX
inadvisable. The AMEX will also delist a Fund's VIPER Shares upon termination of
the VIPER Share class.


 As with any stock traded on an exchange, purchases and sales of VIPER Shares
will be subject to usual and customary brokerage commissions.


CONVERSIONS AND EXCHANGES


Owners of conventional shares issued by a VIPER Fund (Investor, Admiral, or
Institutional Shares) may convert those shares into VIPER Shares of equivalent
value of the same fund. Note: Investors who own conventional shares through a
401(k) plan or other employer-sponsored retirement or benefit plan may not
convert those shares into VIPER Shares. Vanguard will impose a charge on
conversion transactions and reserves the right, in the future, to limit or
terminate the conversion privilege. VIPER Shares, whether acquired through a
conversion or purchased in the secondary market, cannot be converted into shares
of another class of the same fund.


 Investors that are not Authorized Participants must hold VIPER Shares in a
brokerage account. Thus, before converting conventional shares into VIPER
Shares, an investor must have an existing, or open a new, brokerage account. To
initiate a conversion of conventional shares into VIPER Shares, an investor must
contact his or her broker. The broker may charge a fee, over and above
Vanguard's fee, to process a conversion request.


 Converting conventional shares into VIPER Shares generally is accomplished as
follows. First, after the broker notifies Vanguard of an investor's request to
convert, Vanguard will transfer conventional shares from the investor's account
with Vanguard 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). At this point, Vanguard will no longer
have any record of the investor; his or her ownership of conventional shares and
VIPER Shares will be known only to his or her broker. Next, the broker will
instruct Vanguard to convert the appropriate amount of conventional shares in
its omnibus account into VIPER Shares of equivalent value. These shares will be
held in an account at Vanguard in the name of DTC. (DTC will keep track of which
VIPER Shares belong to the broker and the broker, in turn, will keep track of
which VIPER Shares belong to its customers.) Because DTC is unable to handle
fractional shares, only whole shares will be converted. For example, if the
investor owned 300.250 conventional shares, and this was equivalent in value to
90.750 VIPER Shares, the DTC account would receive 90 VIPER Shares. Conventional
shares worth 0.750 VIPER Shares (in this example, that would be 2.481
conventional shares) would remain in the broker's omnibus account with Vanguard.
The

                                      B-44


broker then could either (1) take certain internal actions necessary to credit
the investor's account with 0.750 VIPER Shares rather than 2.481 conventional
shares, or (2) redeem the 2.481 conventional shares at net asset value, in which
case the investor would receive cash in lieu of those shares. If the broker
chooses to redeem the conventional shares, the investor will realize a gain or
loss on the redemption that must be reported on his or her tax return (unless
she holds the shares in an IRA or other tax-deferred account). Investors should
consult their brokers for information on how the brokers will handle the
conversion process, including whether they will impose a fee to process a
conversion.


 The conversion process works differently if the investor opts to hold VIPER
Shares through an account at Vanguard Brokerage Services(R) (VBS(R)). If the
investor converts his or her conventional shares to VIPER Shares through VBS,
all conventional shares for which she requests conversion will be converted into
the equivalent amount of VIPER Shares. Because no fractional shares will have to
be sold, the transaction will be 100% tax-free.


 Here are some important points to keep in mind when converting conventional
shares of a VIPER Fund into VIPER Shares:

-The conversion transaction is nontaxable except, as applicable, to the limited
 extent described above.

-The conversion process can take anywhere from several days to several weeks,
 depending on the broker. Vanguard generally will process conversion requests,
 once received, on the same or next business day, although processing may take
 up to three business days depending on when the conversion request is received.

-During the conversion process, the investor will remain fully invested in the
 Fund's conventional shares, and his or her investment will increase or decrease
 in value in tandem with the net asset value of those shares.

-During the conversion process, the investor will be able to liquidate all or
 part of his or her investment by instructing Vanguard or his or her broker
 (depending on whether his or her shares are held in his or her own account or
 his or her broker's omnibus account) to redeem his or her conventional shares.
 After the conversion process is complete, the investor will be able to
 liquidate all or part of his or her investment by instructing his or her broker
 to sell his or her VIPER Shares.


BOOK ENTRY ONLY SYSTEM


Vanguard REIT VIPERs(R) are registered in the name of the DTC or its nominee,
Cede & Co., and deposited with, or on behalf of, DTC. DTC is a limited-purpose
trust company that was created to hold securities of its participants (the DTC
Participants) and to facilitate the clearance and settlement of securities
transactions among the DTC Participants in such securities through electronic
book-entry changes in accounts of the DTC Participants, thereby eliminating the
need for physical movement of securities certificates. DTC Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives) own
DTC. More specifically, DTC is owned by a number of its DTC Participants and by
the New York Stock Exchange (NYSE), the American Stock Exchange (AMEX) and the
National Association of Securities Dealers (NASD). Access to the DTC system is
also available to others such as banks, brokers, dealers, and trust companies
that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly (the Indirect Participants).


 Beneficial ownership of VIPER Shares is limited to DTC Participants, Indirect
Participants, and persons holding interests through DTC Participants and
Indirect Participants. Ownership of beneficial interests in VIPER Shares (owners
of such beneficial interests are referred to herein as Beneficial Owners) is
shown on, and the transfer of ownership is effected only through, records
maintained by DTC (with respect to DTC Participants) and on the records of DTC
Participants (with respect to Indirect Participants and Beneficial Owners that
are not DTC Participants). Beneficial Owners will receive from or through the
DTC Participant a written confirmation relating to their purchase of VIPER
Shares.


 The VIPER Fund recognizes DTC or its nominee as the record owner of all VIPER
Shares for all purposes. Beneficial Owners of VIPER Shares are not entitled to
have VIPER Shares registered in their names, and will not receive or be entitled
to physical delivery of share certificates. Each Beneficial Owner must rely on
the procedures of DTC and any DTC Participant and/or Indirect Participant
through which such Beneficial Owner holds its interests, to exercise any rights
of a holder of VIPER Shares.


 Conveyance of all notices, statements, and other communications to Beneficial
Owners is effected as follows. DTC will make available to the Trust upon request
and for a fee a listing of the VIPER Shares of the VIPER Fund held by each DTC
Participant. The Trust shall obtain from each such DTC Participant the number of
Beneficial Owners holding VIPER Shares, directly or indirectly, through such DTC
Participant. The Trust shall provide each such DTC Participant with copies of
such notice, statement, or other communication, in such form, number and at such
place as such DTC Participant may reasonably request, in order that such notice,
statement or communication may be transmitted by such DTC Participant,


                                      B-45


directly or indirectly, to such Beneficial Owners. In addition, the Trust shall
pay to each such DTC Participant a fair and reasonable amount as reimbursement
for the expenses attendant to such transmittal, all subject to applicable
statutory and regulatory requirements.


 Share distributions shall be made to DTC or its nominee as the registered
holder of all VIPER Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in VIPER
Shares of the VIPER Fund as shown on the records of DTC or its nominee. Payments
by DTC Participants to Indirect Participants and Beneficial Owners of VIPER
Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in a "street name,"
and will be the responsibility of such DTC Participants.


 The Trust has no responsibility or liability for any aspects of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such VIPER Shares, or for maintaining,
supervising, or reviewing any records relating to such beneficial ownership
interests, or for any other aspect of the relationship between DTC and the DTC
Participants or the relationship between such DTC Participants and the Indirect
Participants and Beneficial Owners owning through such DTC Participants.


 DTC may determine to discontinue providing its service with respect to VIPER
Shares at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such replacement is
unavailable, to issue and deliver printed certificates representing ownership of
VIPER Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the AMEX (or such other exchange on which VIPER Shares may be
listed).


PURCHASE AND ISSUANCE OF VIPER SHARES IN CREATION UNITS


The VIPER Fund issues and sells VIPER Shares only in Creation Units on a
continuous basis through the Distributor, without a sales load, at their net
asset value next determined after receipt, on any Business Day, of an order in
proper form. The VIPER Fund will not issue fractional Creation Units.


 A Business Day is any day on which the NYSE is open for business. As of the
date of the Prospectus, the NYSE observes the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.


FUND DEPOSIT


The consideration for purchase of a Creation Unit from a VIPER Fund generally
consists of the in kind deposit of a designated portfolio of equity securities
(the Deposit Securities) and an amount of cash (the Cash Component) consisting
of a Balancing Amount (described below) and a Transaction Fee (also described
below). Together, the Deposit Securities and the Cash Component constitute the
Fund Deposit.


 The Balancing Amount is an amount equal to the difference between the net asset
value (NAV) of a Creation Unit and the market value of the Deposit Securities
(the Deposit Amount). It ensures that the NAV of a Fund Deposit (not including
the Transaction Fee) is identical to the NAV of the Creation Unit it is used to
purchase. If the Balancing Amount is a positive number (i.e., the NAV per
Creation Unit exceeds the market value of the Deposit Securities), then that
amount will be paid by the purchaser to the VIPER Fund in cash. If the Balancing
Amount is a negative number (i.e., the NAV per Creation Unit is less than the
market value of the Deposit Securities), then that amount will be paid by the
VIPER Fund to the purchaser in cash (except as offset by the Transaction Fee,
described below).


 Vanguard, through the National Securities Clearing Corporation (NSCC)
(discussed below), makes available on each Business Day, immediately prior to
the opening of business on the AMEX (currently 9:30 a.m., Eastern time), a list
of the names and the required number of shares of each Deposit Security to be
included in the current Fund Deposit for each VIPER Fund (based on information
at the end of the previous Business Day). The Fund Deposit is applicable,
subject to any adjustments as described below, in order to effect purchases of
Creation Units of a VIPER Fund until such time as the next-announced Fund
Deposit composition is made available. Each VIPER Fund reserves the right to
accept a nonconforming Fund Deposit.


                                      B-46


 The identity and number of shares of the Deposit Securities required for a Fund
Deposit may change to reflect rebalancing adjustments and corporate actions by a
Fund, or in response to adjustments to the weighting or composition of the
component stocks of the relevant target index. In addition, the Trust reserves
the right to permit or require the substitution of an amount of cash--i.e., a
"cash in lieu" amount--to be added to the Cash Component to replace any Deposit
Security that may not be available in sufficient quantity for delivery, may not
be eligible for transfer through the Clearing Process (discussed below), or may
not be eligible for trading by an Authorized Participant (as defined below) or
the investor for which an Authorized Participant is acting. Brokerage
commissions incurred in connection with acquisition of Deposit Securities not
eligible for transfer through the systems of DTC and hence not eligible for
transfer through the Clearing Process (discussed below) will be an expense of
the Fund. However, Vanguard may adjust the Transaction Fee (described below) to
protect existing shareholders from this expense.


 All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility, and acceptance for deposit of
any securities to be delivered shall be determined by the appropriate VIPER
Fund, and the Fund's determination shall be final and binding.


PROCEDURES FOR PURCHASING CREATION UNITS


To be eligible to place orders with the Distributor and to purchase Creation
Units from a VIPER Fund, you must be an Authorized Participant, i.e., a DTC
Participant that has executed an agreement with the Trust's Distributor
governing the purchase and redemption of Creation Units (the Participant
Agreement). Investors who are not Authorized Participants must make appropriate
arrangements with an Authorized Participant in order to purchase or redeem a
Creation Unit. If your broker is not a DTC Participant or has not executed a
Participant Agreement, it will have to place your order through an Authorized
Participant, which may result in additional charges to you. For a current list
of Authorized Participants, contact the Distributor.


 An Authorized Participant may place an order to purchase (or redeem) Creation
Units of a VIPER Fund either (1) through the Continuous Net Settlement (CNS)
clearing processes of NSCC as such processes have been enhanced to effect
purchases (and redemptions) of Creation Units, such processes being referred to
herein as the Clearing Process, or (2) outside the Clearing Process. To purchase
or redeem through the Clearing Process, an Authorized Participant must be a
member of NSCC that is eligible to use the Continuous Net Settlement system.
Purchases (and redemptions) of Creation Units cleared through the Clearing
Process will be subject to a lower Transaction Fee than those cleared outside
the Clearing Process.


 To initiate a purchase order for a Creation Unit, whether through the Clearing
Process or outside the Clearing Process, an Authorized Participant must give
notice to the Distributor. The order must be in proper form and must be received
by the Distributor prior to the closing time of the regular trading session on
the NYSE (Closing Time) (ordinarily 4 p.m., Eastern time) to receive that day's
NAV. The date on which an order to purchase (or redeem) Creation Units is placed
is referred to as the Transmittal Date. Orders must be transmitted by an
Authorized Participant by a transmission method acceptable to the Distributor
pursuant to procedures set forth in the Participation Agreement.


 Purchase orders effected outside the Clearing Process are likely to require
transmittal by the Authorized Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those persons placing orders outside
the Clearing Process should ascertain the deadlines applicable to DTC and the
Federal Reserve Bank wire system by contacting the operations department of the
broker or depository institution effectuating such transfer of Deposit
Securities and Cash Component.


 Neither the Trust, the Distributor, nor any affiliated party will be liable to
an investor who is unable to submit a purchase (or redemption) order by Closing
Time, even if the problem is the responsibility of one of those parties (e.g.,
the Distributor's phone systems or fax machines were not operating properly.)


 If you are not an Authorized Participant, you must place your purchase order
with an Authorized Participant in a form acceptable to such Authorized
Participant. In addition, the Authorized Participant may request that you make
certain representations or enter into agreements with respect to the order,
e.g., to provide for payments of cash when required. You should afford
sufficient time to permit proper submission of the order by the Authorized
Participant to the Distributor prior to Closing Time on the Transmittal Date.

                                      B-47


PLACEMENT OF PURCHASE ORDERS USING CLEARING PROCESS


For purchase orders placed through the Clearing Process, the Authorized
Participant Agreement authorizes the Distributor to transmit through the
Transfer Agent or Index Receipt Agent to NSCC, on behalf of an Authorized
Participant, such trade instructions as are necessary to effect the Authorized
Participant's purchase order. Pursuant to such trade instructions to NSCC, the
Authorized Participant agrees to deliver the requisite Deposit Securities and
the Cash Component to the appropriate VIPER Fund, together with such additional
information as may be required by the Distributor.


 An order to purchase Creation Units through the Clearing Process is deemed
received on the Transmittal Date if (1) such order is received by the
Distributor not later than the Closing Time on such Transmittal Date, and (2)
all other procedures set forth in the Participant Agreement are properly
followed. Such order will be effected based on the NAV of the Fund next
determined on that day. An order to purchase Creation Units through the Clearing
Process made in proper form but received after Closing Time on the Transmittal
Date will be deemed received on the next Business Day immediately following the
Transmittal Date and will be effected at the NAV next determined on that day.
The Deposit Securities and the Cash Component will be transferred by the third
NSCC Business Day following the date on which the purchase request is deemed
received.


PLACEMENT OF PURCHASE ORDERS OUTSIDE CLEARING PROCESS


An Authorized Participant that wishes to place an order to purchase Creation
Units outside the Clearing Process must state that it is not using the Clearing
Process and that the purchase instead will be effected through a transfer of
securities and cash directly through DTC. An order to purchase Creation Units
outside the Clearing Process is deemed received by the Distributor on the
Transmittal Date if (1) such order is received by the Distributor not later than
the Closing Time on such Transmittal Date; and (2) all other procedures set
forth in the Participant Agreement are properly followed. If a Fund's custodian
does not receive the Deposit Securities and Cash Component by the settlement
date (T+3 unless otherwise agreed), the Fund shall be entitled to cancel the
purchase order and/or charge the purchaser for any costs (including investment
losses, attorney's fees, and interest) sustained by the Fund as a result of the
late delivery or failure to deliver.


 The VIPER Fund may issue Creation Units to a purchaser before receiving some or
all of the Deposit Securities if the purchaser deposits, in addition to the
available Deposit Securities and the Cash Component, an additional cash deposit
in an amount determined by the Fund.


REJECTION OF PURCHASE ORDERS


The VIPER Fund reserves the absolute right to reject a purchase order
transmitted to it by the Distributor. By way of example, and not limitation, the
VIPER Fund will reject a purchase order if:

- the order is not in proper form;

- the investor(s), upon obtaining the VIPER Shares ordered, would own 80% or
 more of the total combined voting power of all classes of stock issued by the
 Fund;

- the Deposit Securities delivered are not as disseminated through the
 facilities of the AMEX for that date by the Custodian, as described above;

- acceptance of the Deposit Securities would have certain adverse tax
 consequences to the VIPER Fund;

- acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful;

- acceptance of the Fund Deposit would otherwise, in the discretion of the VIPER
 Fund or Vanguard, have an adverse effect on the Fund or any of its
 shareholders; or

- circumstances outside the control of the VIPER Fund, the Transfer Agent, the
 Custodian, the Distributor, and Vanguard make it for all practical purposes
 impossible to process the order. Examples of such circumstances include acts of
 God; public service or utility problems such as fires, floods, extreme weather
 conditions, and power outages resulting in telephone, telecopy, and computer
 failures; market conditions or activities causing trading halts; systems
 failures involving computer or other information systems affecting the Trust,
 Vanguard, the Distributor, DTC, NSCC, or any other participant in the purchase
 process, and similar extraordinary events.


 The Distributor shall notify the prospective purchaser of a Creation Unit,
and/or the Authorized Participant acting on the purchaser's behalf, of its
rejection of the purchaser's order. The VIPER Fund, the Transfer Agent, the
Custodian, and the Distributor are under no duty, however, to give notification
of any defects or irregularities in the delivery of a Fund Deposit, nor shall
any of them incur any liability for the failure to give any such notification.

                                      B-48


TRANSACTION FEE ON PURCHASES OF CREATION UNITS


The VIPER Fund imposes a transaction fee (payable to the Fund) to compensate the
Fund for the transfer and other transaction costs associated with the issuance
of Creation Units. For purchases effected through the Clearing Process, the
transaction fee is $1,000, regardless of how many Creation Units are purchased.
An additional charge of up to $1,000 may be imposed for purchases effected
outside the Clearing Process.


 When the VIPER Fund permits a purchaser to substitute cash in lieu of
depositing one or more Deposit Securities, the purchaser will be assessed an
additional variable charge on the "cash in lieu" portion of its investment. The
amount of this variable charge shall be determined by the Fund in its sole
discretion, but shall not be more than is reasonably needed to compensate the
Fund for the brokerage costs associated with purchasing the relevant Deposit
Securities and, if applicable, the estimated market impact costs of purchasing
such securities.


REDEMPTION OF VIPER SHARES IN CREATION UNITS


VIPER Shares may be redeemed only in Creation Units; the VIPER Fund will not
redeem VIPER Shares tendered in less than Creation Unit-size aggregations.
Investors should expect to incur brokerage and other costs in connection with
assembling a sufficient number of VIPER Shares to constitute a redeemable
Creation Unit. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time to permit assembly of a
Creation Unit. Redemption requests in good order will receive the NAV next
determined after the request is made.


 An investor tendering a Creation Unit generally will receive redemption
proceeds consisting of (1) a basket of Redemption Securities, plus (2) a Cash
Redemption Amount equal to the difference between (x) the NAV of the Creation
Unit being redeemed, as next determined after receipt of a request in proper
form, and (y) the value of the Redemption Securities, less (3) a Redemption
Transaction Fee (described below). If the Redemption Securities have a value
greater then the NAV of a Creation Unit, the redeeming investor would pay the
Cash Redemption Amount to the Fund, rather than receiving such amount from the
Fund.


 Vanguard, through the NSCC, makes available immediately prior to the opening of
business on the AMEX (currently 9:30 a.m., Eastern time) on each Business Day,
the identity of the Redemption Securities that will be used (subject to possible
amendment or correction) to satisfy redemption requests received in proper form
(as defined below) on that day. The basket of Redemption Securities provided to
an investor redeeming a Creation Unit may not be identical to the basket of
Deposit Securities required of a investor purchasing a Creation Unit. If the
VIPER Fund and a redeeming investor mutually agree, the VIPER Fund may provide
the investor with a basket of Redemption Securities that differs from the
composition of the redemption basket published through NSCC.


TRANSACTION FEES ON REDEMPTIONS OF CREATION UNITS


The VIPER Fund imposes a transaction fee (payable to the Fund) to compensate the
Funds for the transfer and other transaction costs associated with the
redemption of Creation Units. For redemptions effected through the Clearing
Process, the transaction fee is $5,500, regardless of how many Creation Units
are redeemed. An additional charge of up to $5,500 may be imposed for
redemptions effected outside the Clearing Process.


 When a VIPER Fund permits a redeeming investor to receive cash in lieu of one
or more Redemption Securities, the investor will be assessed an additional
variable charge on the "cash in lieu" portion of its redemption. The amount of
this variable charge shall be determined by the VIPER Fund in its sole
discretion, but shall not be more than is reasonably needed to compensate the
Fund for the brokerage costs associated with selling portfolio securities to
raise the necessary cash and, if applicable, the estimated market impact costs
of selling such securities.


PLACEMENT OF REDEMPTION ORDERS USING CLEARING PROCESS


An order to redeem Creation Units through the Clearing Process is deemed
received on the Transmittal Date if (1)  such order is received by the
Distributor not later than the Closing Time on such Transmittal Date, and (2)
all other procedures set forth in the Participant Agreement are properly
followed. Such order will be effected based on the NAV of the Fund next
determined on that day. An order to redeem Creation Units through the Clearing
Process made in proper form but received by a Fund after Closing Time on the
Transmittal Date will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the NAV next determined
on that day. The Redemption Securities and the Cash Redemption Amount will be
transferred by the third NSCC Business Day following the date on which the
redemption request is deemed received.

                                      B-49


PLACEMENT OF REDEMPTION ORDERS OUTSIDE CLEARING PROCESS


An Authorized Participant that wishes to place an order to redeem a Creation
Unit outside the Clearing Process must state that it is not using the Clearing
Process and that redemption instead will be effected through a transfer of VIPER
Shares directly through DTC. An order to redeem a Creation Unit of a VIPER Fund
outside the Clearing Process is deemed received on the Transmittal Date if (1)
such order is received by the Fund's Transfer Agent prior to the Closing Time on
such Transmittal Date; and (2) all other procedures set forth in the Participant
Agreement are properly followed. If the Fund's custodian does not receive the
required number of VIPER Shares from the redeeming investor by the settlement
date (T+3 unless otherwise agreed), the Fund shall be entitled to charge the
redeeming investor for any costs (including investment losses, attorney's fees,
and interest) sustained by the Fund as a result of the late delivery or failure
to deliver.


 After the Transfer Agent has deemed an order for redemption outside the
Clearing Process received, the Transfer Agent will initiate procedures to
transfer the Redemption Securities and the Cash Redemption Amount to the
Authorized Participant on behalf of the redeeming Beneficial Owner by the third
Business Day following the Transmittal Date on which such redemption order is
deemed received by the Transfer Agent.


 The calculation of the value of the Redemption Securities and the Cash
Redemption Amount to be delivered upon redemption will be made by the Custodian
according to the procedures set forth under "Calculation of Net Asset Value,"
computed on the Business Day on which a redemption order is deemed received by
the Transfer Agent. Therefore, if a redemption order in proper form is submitted
to the Transfer Agent by an Authorized Participant prior to the Closing Time on
the Transmittal Date, then the value of the Redemption Securities and the Cash
Redemption Amount will be determined by the Custodian on such Transmittal Date.


 The VIPER Fund reserves the right, in its sole discretion, to require or permit
a redeeming investor to receive its redemption proceeds in cash. In such cases,
the investor would receive a cash payment equal to the net asset value of its
VIPER Shares based on the NAV of those shares next determined after the
redemption request is received in proper form (minus a transaction fee,
including a charge for cash redemptions, described above).


 If a redeeming investor (or an Authorized Participant through which it is
acting) is subject to a legal restriction with respect to a particular stock
included in the basket of Redemption Securities, such investor may be paid an
equivalent amount of cash in lieu of the stock. In addition, each VIPER Fund
reserves the right to redeem Creation Units partially for cash to the extent
that the Fund could not lawfully deliver one or more Redemption Securities or
could not do so without first registering such securities under federal or state
law.


                              FINANCIAL STATEMENTS



Each Fund's Financial Statements for the fiscal year ended January 31, 2005,
appearing in the Funds' 2005 Annual Reports to Shareholders, and the reports
thereon of PricewaterhouseCoopers LLP, an independent registered public
accounting firm, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Vanguard Dividend Apprerciation Fund
began operations on April xx, 2006, and therefore was not audited. For a more
complete discussion of each Fund's performance, please see the Funds' Annual and
Semiannual Reports to Shareholders, which may be obtained without charge.













                                                                   SAI051 042006






                                      B-50



                                     PART C

                           VANGUARD SPECIALIZED FUNDS
                               OTHER INFORMATION


ITEM 23. EXHIBITS

(a)  Declaration of Trust,  filed on October 7, 2002,  Post-Effective  Amendment
     No. 37, is hereby incorporated by reference.
(b)  By-Laws, filed on July 3, 2004,  Post-Effective Amendment No. 48, is hereby
     incorporated by reference.

(c)  Instruments  Defining  Rights of  Security  Holders,  Reference  is made to
     Articles III and V of the Registrant's  Declaration of Trust,  incorporated
     by reference in Item 23(a) of this post-effective amendment.

(d)  Investment Advisory Contracts,  for M&G Investment  Management Limited (for
     Vanguard  Precious  Metals  and  Mining  Fund),  filed  herewith;  and  for
     Wellington  Management  Company,  LLP (with  respect to  Vanguard  Dividend
     Growth Fund), filed on May 20, 2003,  Post-Effective  Amendment No. 41; are
     hereby incorporated by reference.  For Wellington  Management Company (with
     respect to Vanguard  Energy and Health Care Funds),  filed on May 31, 2005,
     Post-Effective  Amendment No. 51, are hereby incorporated by reference. The
     Vanguard Group provides investment advisory services to Vanguard REIT Index
     Fund,  Vanguard Energy Fund, and Vanguard Dividend  Appreciation Index Fund
     at cost  pursuant to the Amended and  Restated  Funds'  Service  Agreement,
     filed on  October  7,  2002,  Post-Effective  Amendment  No.  37, is hereby
     incorporated by reference.


(e)  Underwriting Contracts, Not applicable.
(f)  Bonus  or  Profit  Sharing  Contracts,  Reference  is made  to the  section
     entitled  "Management  of the  Funds"  in  the  Registrant's  Statement  of
     Additional Information.


(g)  Custodian Agreements, filed on September 21, 2004, Post-Effective Amendment
     No. 49, and for JPMorgan Chase Bank,  Wachovia Bank,  N.A.; filed on August
     1, 2005,  Post Effective  Amendment No. 53, for Citibank,  N.A., are hereby
     incorporated by reference.


(h)  Other Material  Contracts,  Amended and Restated Funds' Service  Agreement,
     filed on  October  7,  2002,  Post-Effective  Amendment  No.  37, is hereby
     incorporated by reference.
(i)  Legal Opinion, Not Applicable.
(j)  Consent of an Independent  Registered Public Accounting Firm, to be filed -
     by Amendment.
(k)  Omitted Financial Statements, Not Applicable.
(l)  Initial Capital Agreements, Not Applicable.
(m)  Rule 12(b)-1 Plan, Not Applicable

(n)  Rule 18f-3 Plan, filed herewith.

(o)  Reserved.
(p)  Code of Ethics,  for The Vanguard  Group,  Inc. and  Wellington  Management
     Company,  filed on March 30,  2005,  Post-Effective  Amendment  No. 50, are
     hereby  incorporated  by  reference;  and  for  M&G  Investment  Management
     Limited, filed on May 31, 2005,  Post-Effective Amendment No. 51, is hereby
     incorporated by reference.

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Registrant is not controlled by or under common control with any person.


ITEM 25. INDEMNIFICATION

The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability

                                      C-1



to which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.


ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Wellington Management Company, LLP (Wellington Management) is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
Advisers Act). The list required by this Item 26 of officers and partners of
Wellington Management, together with any information as to any business,
profession, vocation or employment of a substantial nature engaged in by such
officers and partners during the past two years, is incorporated herein by
reference from Schedules B and D of form ADV filed by Wellington Management
pursuant to the Advisers Act (SEC File No. 801-15908).

  M&G Investment Management Limited (M&G) is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of M&G, together with any information as to any business, profession,
vocation or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated herein by reference from
Schedules B and D of Form ADV filed by M&G pursuant to the Advisers Act (SEC
File No. 801-21981).

  The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under
the Advisers Act. The list required by this Item 26 of officers and directors of
Vanguard, together with any information as to any business profession, vocation,
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No.
801-11953).


ITEM 27. PRINCIPAL UNDERWRITERS

(a)    Not Applicable
(b)    Not Applicable
(c)    Not Applicable

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and
the Registrant's Custodians, Wachovia Bank, N.A., PA4942, 123 S. Broad Street,
Philadelphia, Pennsylvania 19109, Citibank, N.A., 111 Wall Street, New York, NY
11245, and JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017-2070.


ITEM 29. MANAGEMENT SERVICES

Other than as set forth in the section entitled "Management of the Funds" in
Part B of this Registration Statement, the Registrant is not a party to any
management-related service contract.


ITEM 30. UNDERTAKINGS

Not Applicable

                                      C-2



                               INDEX TO EXHIBITS

Investment Advisory Contracts. . . . . . . . . . . . . . .Ex-99.D

Rule 18f-3 Plan. . . . . . . . . . . . . . . . . . . . . .Ex-99.N

                                      C-3




                                   SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it has duly caused
this Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Valley
Forge and the Commonwealth of Pennsylvania, on the 1st day of February, 2006.

                                           VANGUARD SPECIALIZED FUNDS

                                   BY:_____________(signature)________________
                                                   -----------

                                                  (HEIDI STAM)
                                                JOHN J. BRENNAN*
                                      CHAIRMAN AND CHIEF EXECUTIVE OFFICER


  Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:



                                                        

--------------------------------------------------------------------------------
SIGNATURE                           TITLE                           DATE
--------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN         President, Chairman, Chief    February 1, 2006
   --------------------------- Executive Officer, and Trustee
       (Heidi Stam)
      John J. Brennan*

By:/S/ CHARLES D ELLIS         Trustee                       February 1, 2006
   ---------------------------
       (Heidi Stam)
     Charles D. Ellis*

By:/S/ RAJIV L. GUPTA          Trustee                        February 1, 2006
   ---------------------------
       (Heidi Stam)
         Rajiv L. Gupta*

By:/S/ JOANN HEFFERNAN HEISEN  Trustee                        February 1, 2006
   ---------------------------
       (Heidi Stam)
     JoAnn Heffernan Heisen*

By:/S/ ANDRE F. PEROLD         Trustee                        February 1, 2006
   ---------------------------
       (Heidi Stam)
       Andre F. Perold*

By:/S/ ALFRED M. RANKIN, JR.   Trustee                        February 1, 2006
   ---------------------------
       (Heidi Stam)
     Alfred M. Rankin, Jr.*

By:/S/ J. LAWRENCE WILSON      Trustee                       February 1, 2006
   ---------------------------
       (Heidi Stam)
     J. Lawrence Wilson*

By:/S/ THOMAS J. HIGGINS       Treasurer and Principal        February 1, 2006
   --------------------------- Financial Officer and Principal
       (Heidi Stam)            Accounting Officer
      Thomas J. Higgins*





*By Power of Attorney. Filed on January 23, 2006, see File No. 2-31333.
 Incorporated by Reference.

EX-99.D

                                                                     DRAFT COPY
                          INVESTMENT ADVISORY AGREEMENT

         THIS AGREEMENT is made as of this 1st day of February, 2006, between
Vanguard Specialized Funds, a Delaware statutory trust (the "Trust"), and M&G
Investment Management Limited, a corporation organized under the laws of England
authorized and regulated by the Financial Services Authority (the "Advisor").
                               W I T N E S S E T H
         WHEREAS, the Trust is an open-end, diversified management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
          WHEREAS, the Trust offers a series of shares known as VANGUARD
PRECIOUS METALS AND MINING FUND (the "Fund"); and

         WHEREAS, the Trust retains the Advisor to render investment advisory
services to the Fund under an Investment Advisory Agreement, dated as of April
28, 1999 (the "Prior Agreement");

         WHEREAS, the Trust desires to amend and restate such Investment
Advisory Agreement in certain respects, and the Advisor is willing to render
investment advisory services to the Fund in accordance with such amendments.

         NOW THEREFORE, in consideration of the mutual promises and undertakings
set forth in this "Agreement," the Trust and the Advisor hereby agree as
follows:

         1. APPOINTMENT OF ADVISOR. The Trust hereby employs the Advisor as
investment advisor, on the terms and conditions set forth herein, for the
portion of the assets of the Fund that the Trust's Board of Trustees (the "Board
of Trustees") determines in its sole discretion to assign to the Advisor from
time to time (referred to in this Agreement as the "M&G Portfolio"). As of the
date of this Agreement, the M&G Portfolio will consist of the portion of the
assets of the Fund that the Board of Trustees has determined to assign to the
Advisor, as communicated to the Advisor on behalf of the Board of Trustees by
The Vanguard Group, Inc. ("Vanguard"). The Board of Trustees may, from time to
time, make additions to, and withdrawals from, the assets of the Fund assigned
to the Advisor. The Advisor accepts such employment and agrees to render the
services herein set forth, for the compensation herein provided.

         2. DUTIES OF ADVISOR. The Trust employs the Advisor to manage the
investment and reinvestment of the assets of the M&G Portfolio; to continuously
review, supervise, and administer an investment program for the M&G Portfolio;
to determine in its discretion the securities or other investments, including
bullion and coins, to be purchased or sold and the portion of such assets to be
held uninvested; to provide the Fund with all records concerning the activities
of the Advisor that the Fund is required to maintain; and to render regular
reports to the Trust's officers and Board of Trustees concerning the discharge
of the foregoing responsibilities. The Advisor will discharge the foregoing
responsibilities subject to the supervision and oversight of the Trust's
officers and the Board of Trustees, and in compliance with the objectives,
policies
                                       1




and limitations set forth in the Fund's prospectus and Statement of
Additional Information, any additional operating policies or procedures that the
Fund communicates to the Advisor in writing, and applicable laws and
regulations. The Advisor agrees to provide, at its own expense, the office
space, furnishings and equipment, and personnel required by it to perform the
services on the terms and for the compensation provided herein.

         3. SECURITIES TRANSACTIONS. The Advisor is authorized to select the
brokers or dealers that will execute purchases and sales of securities for the
M&G Portfolio, and is directed to use its best efforts to obtain best execution
for such transactions. In selecting brokers or dealers to execute trades for the
M&G Portfolio, the Advisor will comply with all applicable statutes, rules,
interpretations by the Securities and Exchange Commission or its staff, other
applicable law, and the written policies and procedures established by the
Fund's Board of Trustees and communicated to the Advisor in writing.

         4. COMPENSATION OF ADVISOR. For services to be provided by the Advisor
pursuant to this Agreement, the Fund will pay to the Advisor, and the Advisor
agrees to accept as full compensation therefore, an investment advisory fee at
the rate specified in Schedule A to this Agreement. The fee will be calculated
based on annual percentage rates applied to the average month-end net assets of
the M&G Portfolio and will be paid to the Advisor quarterly.

        5. Reports. The Fund and the Advisor agree to furnish to each other
current prospectuses,  proxy  statements,  reports to shareholders,  certified
copies of their  financial  statements,  and such other  information  with
regard to their affairs  as  each  may  reasonably  request,  including,  but
not  limited  to, information about changes in partners of the Advisor.

         6. COMPLIANCE. The Advisor agrees to comply with all Applicable Law and
all policies, procedures or reporting requirements that the Board of Trustees of
the Trust reasonably adopts and communicates to the Advisor in writing,
including, without limitation, any such policies, procedures or reporting
requirements relating to soft dollar or other brokerage arrangements.
"Applicable Law" means (i) the "federal securities laws" as defined in Rule
38a-1(e)(1) under the 1940 Act, as amended from time to time, and (ii) any and
all other laws, rules, and regulations, whether foreign or domestic, in each
case applicable at any time and from time to time to the investment management
operations of the Advisor.

         7. STATUS OF ADVISOR. The services of the Advisor to the Fund are not
to be deemed exclusive, and the Advisor will be free to render similar services
to others so long as its services to the Fund are not impaired thereby. The
Advisor will be deemed to be an independent contractor and will, unless
otherwise expressly provided or authorized, have no authority to act for or
represent the Fund in any way or otherwise be deemed an agent of the Fund or the
Trust.

         8. LIABILITY OF ADVISOR. No provision of this Agreement will be deemed
to protect the Advisor against any liability to the Fund or its shareholders to
which it might otherwise be subject by reason of any willful misfeasance, bad
faith or gross negligence in the performance of its duties or the reckless
disregard of its obligations with respect to the Advisor's management of the M&G
Portfolio under this Agreement.

                                       2



         9. LIMITATIONS ON CONSULTATIONS. The Advisor is prohibited from
consulting with other advisors of the Fund, except Vanguard, concerning
transactions for the Fund in securities or other assets.

         10. DURATION; TERMINATION; NOTICES; AMENDMENT. This Agreement will
become effective on the date hereof and will continue in effect for a period of
two years thereafter, and shall continue in effect for successive twelve-month
periods thereafter, only so long as this Agreement is approved at least annually
by votes of the Trust's Board of Trustees who are not parties to such Agreement
or interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval. In addition, the question of continuance
of the Agreement may be presented to the shareholders of the Fund; in such
event, such continuance will be effected only if approved by the affirmative
vote of a majority of the outstanding voting securities of the Fund.

        Notwithstanding the foregoing, however, (i) this Agreement may at any
time be terminated without payment of any penalty either by vote of the Board of
Trustees of the Trust or by vote of a majority of the outstanding voting
securities of the Fund, on thirty days' written notice to the Advisor, (ii) this
Agreement will automatically terminate in the event of its assignment, and (iii)
this Agreement may be terminated by the Advisor on ninety days' written notice
to the Fund. Any notice under this Agreement will be given in writing, addressed
and delivered, or mailed postpaid, to the other party as follows:

              If to the Fund, at:

              Vanguard Precious Metals and Mining Fund
              P.O. Box 2600
              Valley Forge, PA 19482
              Attention:  Joseph P. Brennan
              Telephone: 610-503-2042
              Facsimile:  610-503-5855

              If to the Advisor, at:

              M&G Investment Management Limited
              Laurence Pountney Hill
              London, EC4R OHH, England
              Attention: Stefanie Dann
              Telephone: 44-207-548-3609
              Facsimile: 44-207-548-3008

This Agreement may be amended by mutual consent, but the consent of the Trust
must be approved (i) by a majority of those members of the Board of Trustees who
are not parties to this Agreement or interested persons of any such party, cast
in person at a meeting called for the purpose of voting on such amendment, and
(ii) to the extent required by the 1940 Act, by a vote of a majority of the
outstanding voting securities of the Fund of the Trust.

                                       3



         As used in this Section 10, the terms "assignment," "interested
persons," and "vote of a majority of the outstanding voting securities" will
have the respective meanings set forth in Section 2(a)(4), Section 2(a)(19) and
Section 2(a)(42) of the 1940 Act.

         11. SEVERABILITY. If any provision of this Agreement will be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement will not be affected thereby.

         12. CONFIDENTIALITY. The Advisor shall keep confidential any and all
information obtained in connection with the services rendered hereunder and
relating directly or indirectly to the Fund, the Trust, or Vanguard and shall
not disclose any such information to any person other than the Trust, the Board
of Trustees of the Trust, Vanguard, and any director, officer, or employee of
the Trust or Vanguard, except (i) with the prior written consent of the Trust,
(ii) as required by law, regulation, court order or the rules or regulations of
any self-regulatory organization, governmental body or official having
jurisdiction over the Advisor, or (iii) for information that is publicly
available other than due to disclosure by the Advisor or its affiliates or
becomes known to the Advisor from a source other than the Trust, the Board of
Trustees of the Trust, or Vanguard.

         13. PROXY POLICY. The Advisor acknowledges that Vanguard will vote the
shares of all securities that are held by the Fund unless other mutually
acceptable arrangements are made with the Advisor with respect to the M&G
Portfolio.

         14. GOVERNING LAW. All questions concerning the validity, meaning, and
effect of this Agreement shall be determined in accordance with the laws
(without giving effect to the conflict-of-law principles thereof) of the State
of Delaware applicable to contracts made and to be performed in that state.

         IN WITNESS WHEREOF, the parties hereto have caused this Investment
Advisory Agreement to be executed as of the date first set forth herein.


                                                                                            


M&G Investment Management Limited                            Vanguard Specialized Funds


-------------------------------             ---------        -------------------------------             ---------
Signature                                   Date             Signature                                   Date



----------------------------                                 ----------------------------
Print Name                                                   Print Name





                                       4

EX-99.N

                                 VANGUARD FUNDS
                               MULTIPLE CLASS PLAN


I.       INTRODUCTION

     This Multiple Class Plan (the "Plan")  describes  four separate  classes of
shares that may be offered by investment  company  members of The Vanguard Group
(collectively  the  "Funds,"  individually  a  "Fund").  The Plan  explains  the
separate  arrangements for each class, how expenses are allocated to each class,
and the conversion  features of each class.  Each Fund may offer any one or more
of the specified classes.

     The Plan has been approved by the Board of Directors of The Vanguard  Group
("Vanguard").  In addition, the Plan has been adopted by a majority of the Board
of Trustees  of each Fund,  including  a majority  of the  Trustees  who are not
interested  persons of each Fund. The classes of shares offered by each Fund are
designated  in Schedule A hereto,  as such  Schedule may be amended from time to
time.

II.      SHARE CLASSES

     A Fund may offer any one or more of the following share classes:

                                    Investor Shares
                                    Admiral Shares
                                    Institutional Shares
                                    VIPER Shares

If a Fund has not previously issued separate classes of shares, all of its
currently outstanding shares will be designated as Investor Shares. Currently
outstanding shares of other Funds will continue to be designated as Investor
Shares, Admiral Shares, Institutional Shares, or VIPER Shares as appropriate.

III.     DISTRIBUTION, AVAILABILITY AND ELIGIBILITY

     Distribution  arrangements  will  be the  same  for all  classes.  Vanguard
retains sole  discretion in determining  share class  availability,  and whether
Fund  shares  shall be offered  either  directly  or through  certain  financial
intermediaries,  or on certain  financial  intermediary  platforms.  Eligibility
requirements for purchasing shares of each class will differ, as follows:

         A.       INVESTOR SHARES

               Investor  Shares  will  be  available  to  investors  who are not
          permitted  to  purchase  other  classes  of  shares,  subject  to  the
          eligibility  requirements  specified  in  Schedule  B hereto,  as such





          Schedule  may be amended  from time to time.  It is expected  that the
          minimum  investment  amount for Investor Shares will be  substantially
          lower  than the  amount  required  for any other  class of the  Fund's
          shares.

         B.       ADMIRAL SHARES

               Admiral  Shares  will be  available  to  investors  who  meet the
          eligibility  requirements  specified  in  Schedule  B hereto,  as such
          Schedule  may  be  amended  from  time  to  time.  These   eligibility
          requirements may take into account: (i) the amount of an investment in
          the  Fund;  (ii)  the  length  of time  that a Fund  account  has been
          maintained;  (iii)  whether the  investor has  registered  for on-line
          access to the Fund account  through  Vanguard's  web site; or (iv) any
          other factors deemed appropriate by a Fund's Board of Trustees.

         C.       INSTITUTIONAL SHARES

               Institutional  Shares will be available to investors who meet the
          eligibility  requirements  specified  in  Schedule  B hereto,  as such
          Schedule  may be amended  from time to time.  It is expected  that the
          minimum   investment   amount  for   Institutional   Shares   will  be
          substantially  higher than the amount  required for any other class of
          the Fund's shares.

         D.       VIPER SHARES

               VIPER  Shares will be  available  to  investors  that are (or who
          purchase through)  Authorized DTC Participants,  and who pay for their
          VIPER shares by depositing a prescribed  basket of  securities  rather
          than paying cash. An Authorized  DTC  Participant  is an  institution,
          usually a broker-dealer, that is a participant in the Depository Trust
          Company (DTC) and that has executed a Participant  Agreement  with the
          Fund's  distributor.   Additional  eligibility   requirements  may  be
          specified in Schedule B hereto,  as such  Schedule may be amended from
          time to time.

IV.      SERVICE ARRANGEMENTS

     All share classes will receive a range of services  provided by Vanguard on
a per account  basis.  These  "account-based"  services may include  transaction
processing  and  shareholder  recordkeeping,  as well as the  mailing of updated
prospectuses,  shareholder  reports,  tax statements,  confirmation  statements,
quarterly  portfolio  summaries,  and  other  items.  It is  expected  that  the
aggregate  amount of  account-based  services  provided to Investor  Shares will
materially  exceed the amount of such services  provided to any other class, due
to the existence of many more accounts holding  Investor Shares.  In addition to
this  difference in the volume of services  provided,  arrangements  will differ
among the classes as follows:

         A.       INVESTOR SHARES

                  Investor Shares will receive the most basic level of service
         from Vanguard. In general, Investor Shares will be serviced through a
         pool of Vanguard client service representatives. Investor Shares held
         through an employee benefit plan may receive VISTA recordkeeping
         services from Vanguard.


                                       2




         B.       ADMIRAL SHARES

               Admiral  Shares  will  receive  a higher  level of  service  from
          Vanguard  as  compared  to Investor  Shares.  Special  client  service
          representatives  will be  assigned  to  service  Admiral  Shares,  and
          holders of such shares from time to time may receive special  mailings
          from Vanguard and unique additional services.

               Admiral  Shares  generally  are not  eligible  to  receive  VISTA
          recordkeeping services.

          C.      INSTITUTIONAL SHARES

               Institutional  Shares will  receive the highest  level of service
          from Vanguard as compared to any other share  classes.  Special client
          service  representatives  will be  assigned  to service  Institutional
          Shares,  and most  holders of such shares  periodically  will  receive
          special  updates  from  Vanguard's   investment   staff.   Holders  of
          Institutional  Shares may  receive  unique  additional  services  from
          Vanguard,  and  generally  will be permitted to transact with Vanguard
          through the National Securities Clearing Corporation's FundSERV system
          and other special servicing platforms for institutional investors.

               Institutional  Shares generally are not eligible to receive VISTA
          recordkeeping services.

         D.       VIPER Shares

                  A Fund is expected to maintain only one shareholder of record
         for VIPER Shares--DTC or its nominee. Special client service
         representatives will be assigned to the DTC account, and all
         transactions on this account will be handled electronically. Due to the
         nature and purpose of the DTC account, VIPER Shares will not receive
         any special updates from Vanguard's investment staff.

               VIPER  Shares are not  eligible  to receive  VISTA  recordkeeping
          services.

V.       CONVERSION FEATURES

         A.       VOLUNTARY CONVERSIONS

               1.  CONVERSION  INTO  INVESTOR  SHARES.  An investor  may convert
          Admiral  Shares or  Institutional  Shares  into  Investor  Shares  (if
          available),  provided that following the conversion the investor:  (i)
          meets  the  then  applicable  eligibility  requirements  for  Investor
          Shares;  and (ii) receives  services  consistent with Investor Shares.

                                       3




          Any such  conversion  will occur at the respective net asset values of
          the share  classes next  calculated  after  Vanguard's  receipt of the
          investor's request in good order.

               2.  CONVERSION  INTO  ADMIRAL  SHARES.  An  investor  may convert
          Investor  Shares or  Institutional  Shares  into  Admiral  Shares  (if
          available),  provided that following the conversion the investor:  (i)
          meets the then applicable eligibility requirements for Admiral Shares;
          and (ii) receives  services  consistent with Admiral Shares.  Any such
          conversion  will occur at the respective net asset values of the share
          classes next  calculated  after  Vanguard's  receipt of the investor's
          request in good order.

               3. CONVERSION INTO INSTITUTIONAL  SHARES. An investor may convert
          Investor  Shares or  Admiral  Shares  into  Institutional  Shares  (if
          available),  provided that following the conversion the investor:  (i)
          meets the then applicable  eligibility  requirements for Institutional
          Shares;  and (ii)  receives  services  consistent  with  Institutional
          Shares.  Any such  conversion  will occur at the  respective net asset
          values of the share classes next calculated after  Vanguard's  receipt
          of the investor's request in good order.

               4. CONVERSION INTO VIPER SHARES. An investor may convert Investor
          Shares,  Admiral Shares, or Institutional Shares into VIPER Shares (if
          available), provided that: (i) the shares to be converted are not held
          through an employee  benefit plan; and (ii) following the  conversion,
          the investor will hold VIPER Shares through a brokerage  account.  Any
          such  conversion  will occur at the respective net asset values of the
          share  classes  next  calculated  after  Vanguard's   receipt  of  the
          investor's  request in good order.  Vanguard or the Fund may charge an
          administrative fee to process conversion transactions.


         B.       AUTOMATIC CONVERSIONS TO ADMIRAL SHARES

Vanguard may  automatically  convert  Investor  Shares into  Admiral  Shares (if
available),  provided that following the conversion the investor:  (i) meets the
then applicable  eligibility  requirements for Admiral Shares; and (ii) receives
services  consistent with Admiral Shares.  Any such conversion will occur at the
respective  net  asset  values  of  the  share  classes  next  calculated  after
Vanguard's  conversion  without the  imposition  of any charge.  Such  automatic
conversions may occur on a periodic,  or one-time basis.  Automatic  conversions
may occur at different  times due to the differing  mechanisms  through which an
account  is  funded  or  meets  the  required  investment   minimum.   Automatic
conversions  do not apply to  certain  types of  accounts  (e.g.  accounts  held
through certain intermediaries, or other accounts as may be excluded by Vanguard
management),  or to accounts that are eligible for Admiral Shares as a result of
tenure in a Fund.


                                       4





         C.       INVOLUNTARY CONVERSIONS AND CASH OUTS

               1. CASH  OUTS.  If an  investor  in any class of shares no longer
          meets the eligibility  requirements for such shares, the Fund may cash
          out the investor's  remaining account balance.  Any such cash out will
          be preceded by written  notice to the  investor and will be subject to
          the Fund's normal redemption fees, if any.

               2. CONVERSION OF ADMIRAL  SHARES.  If an investor no longer meets
          the eligibility  requirements for Admiral Shares, the Fund may convert
          the investor's Admiral Shares into Investor Shares (if available). Any
          such  conversion  will be preceded by written  notice to the investor,
          and will occur at the respective net asset values of the share classes
          without the imposition of any sales load, fee, or other charge.

               3. CONVERSION OF INSTITUTIONAL  SHARES.  If an investor no longer
          meets the eligibility  requirements for Institutional Shares, the Fund
          may convert the  investor's  Institutional  Shares into Admiral Shares
          (or into Investor Shares if the investor does not meet the eligibility
          requirements for Admiral Shares). Any such conversion will be preceded
          by written  notice to the investor,  and will occur at the  respective
          net asset values of the share  classes  without the  imposition of any
          sales load, fee, or other charge.


VI.      EXPENSE ALLOCATION AMONG CLASSES

         A.       BACKGROUND

               Vanguard is a  jointly-owned  subsidiary  of the Funds.  Vanguard
          provides  the  Funds,  on an  at-cost  basis,  virtually  all of their
          corporate  management,   administrative  and  distribution   services.
          Vanguard also may provide  investment  advisory services on an at-cost
          basis to the Funds.  Vanguard was established and operates pursuant to
          a  Funds'  Service   Agreement  between  itself  and  the  Funds  (the
          "Agreement"),  and pursuant to certain exemptive orders granted by the
          U.S.   Securities  and  Exchange  Commission   ("Exemptive   Orders").
          Vanguard's  direct  and  indirect  expenses  of  providing   corporate
          management,  administrative and distribution services to the Funds are
          allocated among such funds in accordance with methods specified in the
          Agreement.

         B.       CLASS SPECIFIC EXPENSES

               1. EXPENSES FOR ACCOUNT-BASED SERVICES.  Expenses associated with
          Vanguard's  provision of  account-based  services to the Funds will be
          allocated  among  the share  classes  of each Fund on the basis of the
          amount incurred by each such class as follows:

                    (A) ACCOUNT MAINTENANCE  EXPENSES.  Expenses associated with
               the  maintenance  of investor  accounts  will be  proportionately
               allocated  among the Funds'  share  classes  based upon a monthly

                                       5



               determination  of the  costs to  service  each  class of  shares.
               Factors  considered in this  determination are (i) the percentage
               of total shareholder accounts represented by each class; (ii) the
               percentage  of total account  transactions  performed by Vanguard
               for each class;  and (iii) the percentage of new accounts  opened
               for each class.

                    (B)  EXPENSES OF SPECIAL  SERVICING  ARRANGEMENTS.  Expenses
               relating to any  special  servicing  arrangements  for a specific
               class will be proportionally  allocated among the eligible Funds'
               share  classes  primarily  based  on  their  percentage  of total
               shareholder    accounts    receiving   the   special    servicing
               arrangements.

                    (C)  LITERATURE  PRODUCTION AND MAILING  EXPENSES.  Expenses
               associated with  shareholder  reports,  proxy materials and other
               literature will be allocated among the Funds' share classes based
               upon the number of such items produced and mailed for each class.

               2.  OTHER  CLASS  SPECIFIC  EXPENSES.  Expenses  for the  primary
          benefit of a  particular  share class will be  allocated to that share
          class.  Such expenses would include any legal fees  attributable  to a
          particular class.

         C.       FUND-WIDE EXPENSES

               1. MARKETING AND DISTRIBUTION EXPENSES.  Expenses associated with
          Vanguard's  marketing and  distribution  activities  will be allocated
          among the Funds and their  separate  share  classes  according  to the
          "Vanguard  Modified  Formula,"  with each share class treated as if it
          were a separate  Fund.  The Vanguard  Modified  Formula,  which is set
          forth in the Agreement and in certain of the SEC Exemptive Orders, has
          been deemed an appropriate allocation methodology by each Fund's Board
          of  Trustees  under  paragraph  (c)(1)(v)  of  Rule  18f-3  under  the
          Investment Company Act of 1940.

               2. ASSET MANAGEMENT EXPENSES. Expenses associated with management
          of a Fund's  assets  (including  all  advisory,  tax  preparation  and
          custody fees) will be allocated  among the Fund's share classes on the
          basis of their relative net assets.

                           3. Other Fund Expenses. Any other Fund expenses not
                  described above will be allocated among the share classes on
                  the basis of their relative net assets.

VII.     ALLOCATION OF INCOME, GAINS AND LOSSES

     Income,  gains and losses will be allocated  among the Fund's share classes
on the  basis of their  relative  net  assets.  As a result  of  differences  in
allocated expenses, it is expected that the net income of, and dividends payable
to, each class of shares will vary.  Dividends  and  distributions  paid to each
class of shares will be  calculated  in the same manner,  on the same day and at
the same time.

                                       6



VIII.    VOTING AND OTHER RIGHTS

     Each share  class  will have:  (i)  exclusive  voting  rights on any matter
submitted to  shareholders  that relates  solely to its service or  distribution
arrangements;  and (ii)  separate  voting  rights  on any  matter  submitted  to
shareholders  in which the  interests of one class differ from the  interests of
the other class;  and (iii) in all other  respects the same rights,  obligations
and privileges as each other, except as described in the Plan.

IX.      AMENDMENTS

     All material  amendments  to the Plan must be approved by a majority of the
Board of Trustees of each Fund, including a majority of the Trustees who are not
interested persons of the Fund. In addition,  any material amendment to the Plan
must be approved by the Board of Directors of Vanguard.




Original Board Approval: July 21, 2000
Last Approved by Board: May 20, 2005


                                       7








                                   SCHEDULE A
                                       to
                       VANGUARD FUNDS MULTIPLE CLASS PLAN



                                                
--------------------------------------------------------------------------------
VANGUARD FUND                                 SHARE CLASSES AUTHORIZED
--------------------------------------------------------------------------------

Vanguard Admiral Funds
o        Admiral Treasury Money Market Fund   Investor

Vanguard Balanced Index Fund                  Investor, Admiral, Institutional

Vanguard Bond Index Funds
o        Short-Term Bond Index Fund           Investor, Admiral
o        Intermediate-Term Bond Index Fund    Investor, Admiral, Institutional
o        Long-Term Bond Index Fund            Investor, Institutional
o        Total Bond Market Index Fund         Investor, Admiral, Institutional

Vanguard California Tax-Exempt Funds
o        Tax-Exempt Money Market Fund         Investor
o        Intermediate-Term Tax-Exempt Fund    Investor, Admiral
o        Long-Term Tax-Exempt Fund            Investor, Admiral

Vanguard Chester Funds
o        PRIMECAP Fund                        Investor, Admiral
o        Target Retirement Funds              Investor

Vanguard Convertible Securities Fund          Investor

Vanguard Explorer Fund                        Investor, Admiral

Vanguard Fenway Funds
o        Equity Income Fund                   Investor, Admiral
o        Growth Equity Fund                   Investor
o        PRIMECAP Core Fund                   Investor



                                       A-1







                                                
--------------------------------------------------------------------------------
VANGUARD FUND                                 SHARE CLASSES AUTHORIZED
--------------------------------------------------------------------------------

Vanguard Fixed Income Securities Funds
o        Short-Term Treasury Fund             Investor, Admiral
o        Short-Term Federal Fund              Investor, Admiral
o        Short-Term Investment Grade Fund     Investor, Admiral, Institutional
o        Intermediate-Term Treasury Fund      Investor, Admiral
o        Intermediate-Term Investment Grade
              Fund                            Investor, Admiral
o        GNMA Fund                            Investor, Admiral
o        Long-Term Treasury Fund              Investor, Admiral
o        Long-Term Investment Grade Fund      Investor, Admiral
o        High Yield Corporate Fund            Investor, Admiral
o        Inflation-Protected Securities Fund  Investor, Admiral, Institutional

Vanguard Florida Tax-Exempt Fund              Investor, Admiral

Vanguard Horizon Funds
o        Capital Opportunity Fund             Investor, Admiral
o        Global Equity Fund                   Investor
o        Strategic Equity Fund                Investor
o        Strategic Small Cap Equity Fund      Investor

Vanguard Index Funds
o        500 Index Fund                       Investor, Admiral
o        Extended Market Index Fund           Investor, Admiral, Institutional, VIPER
o        Growth Index Fund                    Investor, Admiral, Institutional, VIPER
o        Large-Cap Index Fund                 Investor, Admiral, Institutional, VIPER
o        Mid-Cap Index Fund                   Investor, Admiral, Institutional, VIPER
o        Small-Cap Growth Index Fund          Investor, Institutional, VIPER
o        Small-Cap Index Fund                 Investor, Admiral, Institutional, VIPER
o        Small-Cap Value Index Fund           Investor, Institutional, VIPER
o        Total Stock Market Index Fund        Investor, Admiral, Institutional, VIPER
o        Value Index Fund                     Investor, Admiral, Institutional, VIPER

Vanguard International Equity Index Funds
o        Emerging Markets Stock Index Fund    Investor, Institutional, VIPER
o        European Stock Index Fund            Investor, Admiral, Institutional, VIPER
o        Pacific Stock Index Fund             Investor, Admiral, Institutional, VIPER

Vanguard Malvern Funds
o        Asset Allocation Fund                Investor, Admiral
o        Capital Value Fund                   Investor
o        U.S. Value Fund                      Investor

Vanguard Massachusetts Tax-Exempt Fund        Investor

Vanguard Money Market Reserves
o        Prime Money Market Fund              Investor, Institutional
o        Federal Money Market Fund            Investor



                                      A-2






                                           
--------------------------------------------------------------------------------
VANGUARD FUND                                 SHARE CLASSES AUTHORIZED
--------------------------------------------------------------------------------

Vanguard Morgan Growth Fund                   Investor, Admiral

Vanguard Municipal Bond Funds
o        Tax-Exempt Money Market Fund         Investor
o        Short-Term Tax-Exempt Fund           Investor, Admiral
o        Limited-Term Tax-Exempt Fund         Investor, Admiral
o        Intermediate-Term Tax-Exempt Fund    Investor, Admiral
o        Insured Long-Term Tax-Exempt Fund    Investor, Admiral
o        Long-Term Tax-Exempt Fund            Investor, Admiral
o        High Yield Tax-Exempt Fund           Investor, Admiral

Vanguard New Jersey Tax-Exempt Funds
o        Tax-Exempt Money Market Fund         Investor
o        Long-Term Tax-Exempt Fund            Investor, Admiral

Vanguard New York Tax-Exempt Funds
o        Tax-Exempt Money Market Fund         Investor
o        Long-Term Tax-Exempt Fund            Investor, Admiral

Vanguard Ohio Tax-Exempt Funds
o        Tax-Exempt Money Market Fund         Investor
o        Long-Term Tax-Exempt Fund            Investor

Vanguard Pennsylvania Tax-Exempt Funds
o        Tax-Exempt Money Market  Fund        Investor
o        Long-Term Tax-Exempt Fund            Investor, Admiral

Vanguard Quantitative Funds
o        Growth and Income Fund               Investor, Admiral

Vanguard Specialized Funds
o        Energy Fund                          Investor, Admiral
o        Precious Metals Fund                 Investor
o        Health Care Fund                     Investor, Admiral
o        Dividend Growth Fund                 Investor
o        REIT Index Fund                      Investor, Admiral, Institutional,
                                              VIPERS

Vanguard Tax-Managed Funds
o        Tax-Managed Balanced Fund            Investor
o        Tax-Managed Capital Appreciation
              Fund                            Investor, Admiral, Institutional
o        Tax-Managed Growth and Income Fund   Investor, Admiral, Institutional
o        Tax-Managed International Fund       Investor, Institutional
o        Tax-Managed Small-Cap Fund           Investor, Institutional

Vanguard Treasury Funds
o        Treasury Money Market Fund           Investor


                                      A-3






                                           
--------------------------------------------------------------------------------
VANGUARD FUND                                 SHARE CLASSES AUTHORIZED
--------------------------------------------------------------------------------

Vanguard Trustees' Equity Fund
o        International Value Fund             Investor

Vanguard Wellesley Income Fund                Investor, Admiral

Vanguard Wellington Fund                      Investor, Admiral

Vanguard Whitehall Funds
o        Selected Value Fund                  Investor
o        Mid-Cap Growth Fund                  Investor
o        International Explorer Fund          Investor

Vanguard Windsor Funds
o        Windsor Fund                         Investor, Admiral
o        Windsor II                           Investor, Admiral

Vanguard World Funds
o        U.S. Growth Fund                     Investor, Admiral
o        International Growth Fund            Investor, Admiral
o        Calvert Social Index Fund            Investor, Institutional
o        Consumer Discretionary Index Fund    Admiral, VIPER
o        Consumer Staples Index Fund          Admiral, VIPER
o        Energy Index Fund                    Admiral, VIPER
o        Financial Index Fund                 Admiral, VIPER
o        Health Care Index Fund               Admiral, VIPER
o        Industrial Index Fund                Admiral, VIPER
o        Information Technology Index Fund    Admiral, VIPER
o        Materials Index Fund                 Admiral, VIPER
o        Telecommunication Services Index
             Fund                             Admiral, VIPER
o        Utilities Index Fund                 Admiral, VIPER



                                      A-4







                                           
--------------------------------------------------------------------------------
VANGUARD FUND                                 SHARE CLASSES AUTHORIZED
--------------------------------------------------------------------------------

Vanguard Variable Insurance Funds
o        Balanced Portfolio                   Investor
o        Diversified Value Portfolio          Investor
o        Equity Income Portfolio              Investor
o        Equity Index Portfolio               Investor
o        Growth Portfolio                     Investor
o        Total Bond Market Index Portfolio    Investor
o        High Yield Bond Portfolio            Investor
o        International Portfolio              Investor
o        Mid-Cap Index Portfolio              Investor
o        Money Market Portfolio               Investor
o        REIT Index Portfolio                 Investor
o        Short-Term Investment Grade
             Portfolio(1)                     Investor
o        Small Company Growth Portfolio       Investor
o        Capital Growth Portfolio             Investor
o        Total Stock Market Index Portfolio   Investor




Original Board Approval: July 21, 2000
Last Approved by Board: January 20, 2006



----------------------------------------
1    Short-Term  Corporate  Portfolio  was renamed  Short-Term  Investment-Grade
     Portfolio in August 2004 after board approval.



                                      A-5





                                   SCHEDULE B
                                       to
                       VANGUARD FUNDS MULTIPLE CLASS PLAN


INVESTOR SHARES - ELIGIBILITY REQUIREMENTS

Investor  Shares  generally  require a minimum  initial  investment  and ongoing
account  balance of $3,000.  Particular  Vanguard  Funds may, from time to time,
establish  higher or lower minimum  amounts for Investor  Shares.  Vanguard also
reserves  the right to  establish  higher or lower  minimum  amounts for certain
investors or a group of investors.

ADMIRAL SHARES - ELIGIBILITY REQUIREMENTS

Admiral  Shares  generally  require a minimum  initial  investment  and  ongoing
account  balance of  $100,000.  However,  Vanguard  also  reserves  the right to
establish  higher or lower minimum  amounts for certain  investors or a group of
investors.  Admiral  Share class  eligibility  also is subject to the  following
special rules:

     o    Account  Tenure - The minimum  amount for Admiral Shares is $50,000 if
          the investor has maintained an account in the  applicable  Fund for 10
          years,  subject to  administrative  policies  developed by Vanguard to
          exclude  costly  accounts.   For  these  purposes,   a  Fund  may,  in
          appropriate cases,  count periods during which an investor  maintained
          an  account  in the Fund  through a  financial  intermediary.  To take
          advantage of the tenure rule, an investor generally must be registered
          for on-line  access to their Fund  account  through  Vanguard.com,  or
          otherwise transact with Vanguard on a similarly cost-effective basis.

     o    Financial   Intermediaries   -Admiral  Shares  are  not  available  to
          financial  intermediaries  who would meet eligibility  requirements by
          aggregating  the holdings of  underlying  investors  within an omnibus
          account.  However, a financial intermediary may hold Admiral Shares in
          an omnibus account if:

          (1)  each  underlying  investor  in the omnibus  account  individually
               meets the $100,000  minimum  amount or the tenure rule  described
               above; and

          (2)  the financial  intermediary  agrees to monitor ongoing compliance
               of the  underlying  investor  accounts with the $100,000  minimum
               amount or the tenure rule described above; or

          (3)  a sub-accounting  arrangement  between Vanguard and the financial
               intermediary  for the omnibus  account allows Vanguard to monitor
               compliance  with  the  eligibility  requirements  established  by
               Vanguard.

     o    VISTA - Admiral Shares are not available to  participants  in employee
          benefit plans that use Vanguard's VISTA system for plan recordkeeping.

                                      B-1



     o    Certain  Retirement  Plans  -  Admiral  Shares  are not  available  to
          403(b)(7)  custodial  accounts,  and SIMPLE IRAs,  held  directly with
          Vanguard,  and  other  Vanguard  Retirement  Plans  receiving  special
          administrative services from Vanguard.

     o    Asset  Allocation Fund -- Admiral Shares of Asset  Allocation Fund are
          not available to certain  institutional clients who receive no special
          recordkeeping services from Vanguard.

     o    Account  Aggregation  -- Vanguard  clients may hold Admiral  Shares by
          aggregating  up to three  separate  accounts  within the same Vanguard
          Fund,  provided that the total balance of the  aggregated  accounts in
          the Fund is at least $1 million.  For purposes of this rule,  Vanguard
          management is authorized to permit  aggregation of a greater number of
          accounts  in the case of clients  whose  aggregate  assets  within the
          Vanguard Funds are expected to generate  substantial  economies in the
          servicing of their accounts.  The  aggregation  rule does not apply to
          clients  receiving special  recordkeeping or  sub-accounting  services
          from Vanguard, nor does it apply to nondiscretionary  omnibus accounts
          maintained by financial intermediaries.

     o    Accumulation  Period -- Accounts funded through regular  contributions
          (e.g. employer sponsored participant contribution plans), whose assets
          are expected to quickly achieve  eligibility  levels,  may qualify for
          Admiral  Shares upon  account  creation,  rather than  undergoing  the
          conversion process shortly after account set-up if Vanguard management
          determines  that the account will become  eligible for Admiral  Shares
          within a limited period of time (generally 90 days).

     o    Asset  Allocation  Models  --  Vanguard  clients  with  defined  asset
          allocation  models  whose  assets meet  eligibility  requirements  may
          qualify for Admiral  Shares if such models  comply with  policies  and
          procedures that have been approved by Vanguard management.



INSTITUTIONAL SHARES - ELIGIBILITY REQUIREMENTS

Institutional  Shares generally require a minimum initial investment and ongoing
account  balance of  $5,000,000.  However,  Vanguard  also reserves the right to
establish  higher or lower minimum  amounts for certain  investors or a group of
investors.  Institutional  Share  class  eligibility  also  is  subject  to  the
following special rules:

     o    Vanguard  Short-Term Investment Grade  Fund(2) -  $50,000,000  minimum
          amount for Institutional Shares

     o    Vanguard  Long-Term Bond Index Fund - $25,000,000  minimum amount for
          Institutional Shares

     o    Vanguard  Intermediate-Term  Bond  Index  Fund -  $25,000,000  minimum
          amount for Institutional Shares

     o    Financial  Intermediaries - Institutional  Shares are not available to
          financial  intermediaries who would meet the eligibility  requirements
          by  aggregating  the  holdings of  underlying  investors.  However,  a
          financial  intermediary  may hold  Institutional  Shares in an omnibus
          account if:

---------------------------------------
     2    Short-Term Corporate Fund was renamed Short-Term Investment-Grade Fund
          in August 2004 after board approval.

                                      B-2



          (1)  each  underlying  investor  in the omnibus  account  individually
               meets the investment  minimum amount or the tenure rule described
               above; and

          (2)  the financial  intermediary  agrees to monitor ongoing compliance
               of the underlying  investor accounts with the investment  minimum
               amount or the tenure rule described above; or

          (3)  a sub-accounting  arrangement  between Vanguard and the financial
               intermediary  for the omnibus  account allows Vanguard to monitor
               compliance  with  the  eligibility  requirements  established  by
               Vanguard.

     o    VISTA -  Institutional  Shares are not  available to  participants  in
          employee  benefit plans that utilize  Vanguard's VISTA system for plan
          recordkeeping,  unless  Vanguard  management  determines  that  a plan
          sponsor's  aggregate  assets  within the  Vanguard  Funds will  likely
          generate substantial economies in the servicing of their accounts.

     o    Account  Aggregation--  Vanguard clients may hold Institutional Shares
          by aggregating up to three separate  accounts within the same Vanguard
          Fund,  provided that the total balance of the  aggregated  accounts in
          the Fund is at least $5 million ($50 million for Short-Term  Corporate
          Fund). For purposes of this rule, Vanguard management is authorized to
          permit  aggregation  of a greater  number of  accounts  in the case of
          clients whose aggregate  assets within the Vanguard Funds are expected
          to generate substantial  economies in the servicing of their accounts.
          The  aggregation  rule does not  apply to  clients  receiving  special
          recordkeeping or  sub-accounting  services from Vanguard,  nor does it
          apply to  nondiscretionary  omnibus  accounts  maintained by financial
          intermediaries.

     o    Accumulation  Period -- Accounts funded through regular  contributions
          (e.g. employer sponsored participant contribution plans), whose assets
          are expected to quickly achieve  eligibility  levels,  may qualify for
          Institutional Shares upon account creation, rather than undergoing the
          conversion process shortly after account set-up if Vanguard management
          determines  that the account will become  eligible  for  Institutional
          Shares within a limited period of time (generally 90 days).

     o    Asset  Allocation  Models  --  Vanguard  clients  with  defined  asset
          allocation  models  whose  assets meet  eligibility  requirements  may
          qualify for  Institutional  Shares if such models comply with policies
          and procedures that have been approved by Vanguard management.

VIPER SHARES - ELIGIBILITY REQUIREMENTS

The  eligibility  requirements  for VIPER Shares will be set forth in the Fund's
Registration  Statement. To be eligible to purchase VIPER Shares directly from a
Fund,  an  investor  must  be (or  must  purchase  through)  an  Authorized  DTC
Participant, as defined in Paragraph III.D of the Multiple Class Plan. Investors
purchasing  VIPER Shares from a Fund must  purchase a minimum  number of shares,
known as a Creation Unit. The number of VIPER Shares in a Creation Unit may vary
from Fund to Fund, and will be set forth in the relevant  prospectus.  The value
of a Fund's Creation Unit will vary with the net asset value of the Fund's VIPER
Shares,  but is expected to be several  million  dollars.  An eligible  investor
generally  must purchase a Creation  Unit by  depositing a prescribed  basket of
securities with the Fund, rather than paying cash.


                                      B-3









Original Board Approval: July 21, 2000
Last Approved by Board: November 17, 2005




                                      B-4

COVER

February 1, 2006





U.S. Securities & Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549


RE:  VANGUARD SPECIALIZED FUNDS
     FILE NO.  2-88116
----------------------------------------------------------------


Commissioners:


Enclosed is the 57th Post-Effective Amendment of the registration statement on
Form N-1A for the Vanguard Specialized Funds (the "Trust"). The purpose of this
amendment is to (1) add a new series to the Trust that will be known as Vanguard
Dividend Appreciation Index Fund; (2) to disclose changes to Vanguard Precious
Metals and Mining Fund's investment advisory arrangement with M&G Investment
Management Limited; (3) to include information concerning policies to limit
frequent trading and market timing; and (4) to effect a number of non-material
editorial changes.Note that the cover of the Vanguard Dividend Appreciation
Index Fund's prospectus will include the pre-effective language required
by Rule 481(b)(2)

Pursuant to the requirements of Rule 485(a)(2), it is hereby requested that this
Amendment be declared effective on April 15, 2006. Prior to April 15, 2006,
Vanguard will submit a Rule 485(b) filing that responds to SEC staff comments.
Pursuant to Rule 485(d)(2), Vanguard will request that the Rule 485(b) filing be
declared effective concurrently with this 485(a) filing on April 15, 2006.

Please contact me at (610) 503-2320 with any questions or comments that you have
concerning the enclosed Amendment.


Sincerely,


 /s/ Christopher A. Wightman

Christopher A. Wightman
Associate Counsel
The Vanguard Group, Inc.

Enclosures

cc: Christian Sandoe, Esquire
  U.S. Securities and Exchange Commission