-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q/F58Vvn43x/QJyuaJhiy6BBaI0Xr3gZW4Snc0iY9go7IN9VpnfRS1MB/FWL5KeU YRJRPSijywWR9irgrVj+4g== 0000932471-07-000581.txt : 20070227 0000932471-07-000581.hdr.sgml : 20070227 20070227163106 ACCESSION NUMBER: 0000932471-07-000581 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20070227 DATE AS OF CHANGE: 20070227 EFFECTIVENESS DATE: 20070228 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD INTERNATIONAL EQUITY INDEX FUNDS CENTRAL INDEX KEY: 0000857489 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-32548 FILM NUMBER: 07653629 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696295 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD INTERNATIONAL EQUITY INDEX FUND INC DATE OF NAME CHANGE: 19920703 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD INTERNATIONAL EQUITY INDEX FUNDS CENTRAL INDEX KEY: 0000857489 IRS NUMBER: 000000000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-05972 FILM NUMBER: 07653630 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696295 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD INTERNATIONAL EQUITY INDEX FUND INC DATE OF NAME CHANGE: 19920703 0000857489 S000005786 Vanguard Emerging Markets Stock Index Fund C000015900 Investor Shares VEIEX C000015901 Institutional Shares VEMIX C000015902 ETF Shares VWO C000035633 Admiral Shares VEMAX C000038994 Signal Shares VERSX 0000857489 S000005787 Vanguard European Stock Index Fund C000015903 Investor Shares VEURX C000015904 Admiral Shares VEUSX C000015905 Institutional Shares VESIX C000015906 ETF Shares VGK C000038995 Signal Shares VESSX 0000857489 S000005788 Vanguard Pacific Stock Index Fund C000015907 Investor Shares VPACX C000015908 Admiral Shares VPADX C000015909 Institutional Shares VPKIX C000015910 ETF Shares VPL C000038996 Signal Shares VPASX 0000857489 S000015871 Vanguard FTSE All-World ex-US Index Fund C000043571 Investor Shares C000043572 ETF Shares C000043573 Institutional Shares 485BPOS 1 intlequity485b.txt INTERNATIONAL EQUITY INDEX FUNDS 485B - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT (NO. 33-32548) UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. POST-EFFECTIVE AMENDMENT NO. 54 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 55 VANGUARD INTERNATIONAL EQUITY INDEX 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 FEBRUARY 28, 2007, PURSUANT TO PARAGRAPH (B) OF RULE 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Vanguard/(R)/ International Stock Index Funds > Prospectus Investor Shares & Admiral(TM)Shares February 28, 2007 SHIP LOGO VANGUARD(R) Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund Vanguard Emerging Markets Stock Index Fund LOGO [INDEXED TO MSCI] This prospectus contains financial data for the Funds through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - -------------------------------------------------------------------------------- An Introduction to Index Funds 1 Investing with Vanguard 37 - ------------------------------------------------------------------------------- Vanguard Fund Profiles 2 Purchasing 37 Shares - ------------------------------------------------------------------------------- European Stock Index Fund 2 Converting Shares 40 - ------------------------------------------------------------------------------- Pacific Stock Index Fund 6 Redeeming Shares 41 - ------------------------------------------------------------------------------- Emerging Markets Stock Index 10 Exchanging Shares 46 Fund - ------------------------------------------------------------------------------- More on the Funds 15 Frequent-Trading Limits 46 - ------------------------------------------------------------------------------- The Funds and Vanguard 23 Other Rules You Should Know 48 - ------------------------------------------------------------------------------- Investment Advisor 24 Fund and Account Updates 51 - ------------------------------------------------------------------------------- Dividends, Capital Gains, and 25 Contacting Vanguard 53 Taxes - ------------------------------------------------------------------------------- Share Price 27 ETF Shares 55 - ------------------------------------------------------------------------------- Financial Highlights 29 Glossary of Investment Terms 60 - ------------------------------------------------------------------------------- Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. Share Class Overview This prospectus offers Investor Shares and Admiral Shares for all of the Funds. Please note that the Admiral Shares are not available for: - -SIMPLE IRAs and 403(b)(7) custodial accounts; - -Other retirement plan accounts receiving special administrative services from Vanguard; or - -Accounts maintained by financial intermediaries, except in limited circumstances. A separate prospectus offers the Funds' Signal(TM) Shares, which are generally for Vanguard's institutional clients who invest at least $1 million and meet other eligibility requirements. Another prospectus offers the Funds' Institutional Shares, which are for investors who generally do not require special employee benefit plan services and who invest a minimum of $5 million. In addition, each Fund provides an exchange-traded class of shares (Vanguard ETF Shares), which are also offered through a separate prospectus. A brief description of ETF Shares and how to convert into them appears on pages 55 to 59 of this prospectus. The Funds' separate share classes have different expenses; as a result, their investment performances will differ. 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 in This Prospectus Vanguard offers a variety of stock index funds (both U.S. and international), as well as bond and balanced index funds. This prospectus provides information about three Vanguard International Stock Index Funds. These Funds seek to track particular segments of the international stock market. Fund Seeks to Track - ------------------------------------------------------------------------------- Vanguard European Stock European stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Pacific Stock Australian and Far East stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Emerging 25 emerging stock markets in Europe, Asia, Africa, Markets Stock Index Fund and Latin America - ------------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 1 Fund Profile--Vanguard European Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index. The MSCI Europe Index is made up of approximately 603 common stocks of companies located in 16 European countries--mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization, as of October 31, 2006). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden. For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to four countries (the United Kingdom, France, Switzerland, and Germany) subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, Europe--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's 2 Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns--Investor Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 1997 24.23% 1998 28.86 1999 16.62 2000 -8.18 2001 -20.30 2002 -17.95 2003 38.70 2004 20.86 2005 9.26 2006 33.42 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 22.30% (quarter ended June 30, 2003), and the lowest return for a quarter was -22.84% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - ------------------------------------------------------------------------------- Vanguard European Stock Index Fund Investor Shares - ------------------------------------------------------------------------------- Return Before Taxes 33.42% 14.93% 10.60% - ------------------------------------------------------------------------------- Return After Taxes on 32.86 14.38 9.95 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale 22.33 12.89 9.09 of Fund Shares - ------------------------------------------------------------------------------- Vanguard European Stock Index Fund Admiral Shares/1/ - ------------------------------------------------------------------------------- Return Before Taxes 33.57% 15.05% -- - ------------------------------------------------------------------------------- MSCI Europe Index/2/ (reflects no deduction for fees, expenses, or 33.72% 14.87% 10.47% taxes) - ------------------------------------------------------------------------------- 1 From the inception date of the Admiral Shares on August 13, 2001, through December 31, 2006, the average annual returns were 13.29% for the Fund's Admiral Shares and 13.26% for the MSCI Europe Index. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 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 3 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 after-tax returns are shown only for the Investor Shares and will vary for a fund's other share classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 those incurred in the fiscal year ended October 31, 2006.
Shareholder Fees (Fees paid directly from your investment) - ----------------------------------------------------------------------------------------------------------------- Investor Shares Admiral Shares - ----------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None None - ----------------------------------------------------------------------------------------------------------------- Purchase Fee None None - ----------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None None - ----------------------------------------------------------------------------------------------------------------- Redemption Fee 2%/1/ 2%/1/ - ----------------------------------------------------------------------------------------------------------------- Account Maintenance Fee (for accounts under $10,000) $10/year/2/ None - ----------------------------------------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ----------------------------------------------------------------------------------------------------------------- Investor Shares Admiral Shares - ----------------------------------------------------------------------------------------------------------------- Management Expenses 0.22% 0.13% - ----------------------------------------------------------------------------------------------------------------- 12b-1 Distribution Fee None None - ----------------------------------------------------------------------------------------------------------------- Other Expenses 0.05% 0.04% - ----------------------------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.27% 0.17% - ----------------------------------------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund, or when Vanguard applies the low-balance account-closure policy. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. 2 If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, a fraction of a share may be automatically redeemed to make up the difference.
4 The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------- Investor Shares $28 $87 $152 $343 - ------------------------------------------------------------- Admiral Shares 17 55 96 217 - ------------------------------------------------------------- These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $23.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Suitable for IRAs Yes - ------------------------------------------------------------------------------- Investor Shares Admiral Shares - ------------------------------------------------------------------------------- Inception Date June 18, 1990 August 13, 2001 - ------------------------------------------------------------------------------- Minimum Initial Investment $3,000 $100,000 - ------------------------------------------------------------------------------- Conversion Features May be converted to Admiral May be Shares if you meet eligibility converted to requirements Investor shares if you are no longer eligible for Admiral Shares - ------------------------------------------------------------------------------- Newspaper Abbreviation Europe EuropeAdml - ------------------------------------------------------------------------------- Vanguard Fund Number 79 579 - ------------------------------------------------------------------------------- Cusip Number 922042205 922042809 - ------------------------------------------------------------------------------- Ticker Symbol VEURX VEUSX - ------------------------------------------------------------------------------- 5 Fund Profile--Vanguard Pacific Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of the Pacific region. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the MSCI Pacific Index. The MSCI Pacific Index consists of approximately 562 common stocks of companies located in Japan, Australia, Hong Kong, Singapore, and New Zealand. (As of October 31, 2006, Japan and Australia made up 74% and 18%, respectively, of the Index's market capitalization.) For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to Japan subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, the Pacific region--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. Keep in mind that the Fund's past 6 performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns--Investor Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 1997 -25.67% 1998 2.41 1999 57.05 2000 -25.74 2001 -26.34 2002 -9.32 2003 38.42 2004 18.83 2005 22.59 2006 11.99 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 26.50% (quarter ended December 31, 1998), and the lowest return for a quarter was -20.69% (quarter ended December 31, 1997). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Investor Shares - ------------------------------------------------------------------------------- Return Before Taxes 11.99% 15.42% 2.97% - ------------------------------------------------------------------------------- Return After Taxes on 11.47 15.02 2.64 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale 8.10 13.39 2.38 of Fund Shares - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Admiral Shares/1/ - ------------------------------------------------------------------------------- Return Before Taxes 12.10% 15.54% -- - ------------------------------------------------------------------------------- MSCI Pacific Index/2/ (reflects no deduction for fees, expenses, or 12.20% 15.51% 3.11% taxes) - ------------------------------------------------------------------------------- 1 From the inception date of the Admiral Shares on August 13, 2001, through December 31, 2006, the average annual returns were 11.25% for the Fund's Admiral Shares and 11.47% for the MSCI Pacific Index. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 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 after-tax returns are shown only for the Investor Shares and will vary for a fund's other share 7 classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 those incurred in the fiscal year ended October 31, 2006.
Shareholder Fees (Fees paid directly from your investment) - ----------------------------------------------------------------------------------------------------------------- Investor Shares Admiral Shares - ----------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None None - ----------------------------------------------------------------------------------------------------------------- Purchase Fee None None - ----------------------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None None - ----------------------------------------------------------------------------------------------------------------- Redemption Fee 2%/1/ 2%/1/ - ----------------------------------------------------------------------------------------------------------------- Account Maintenance Fee (for accounts under $10,000) $10/year/2/ None - ----------------------------------------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ----------------------------------------------------------------------------------------------------------------- Investor Shares Admiral Shares - ----------------------------------------------------------------------------------------------------------------- Management Expenses 0.22% 0.13% - ----------------------------------------------------------------------------------------------------------------- 12b-1 Distribution Fee None None - ----------------------------------------------------------------------------------------------------------------- Other Expenses 0.05% 0.04% - ----------------------------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.27% 0.17% - ----------------------------------------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund, or when Vanguard applies the low-balance account-closure policy. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. 2 If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, a fraction of a share may be automatically redeemed to make up the difference.
The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual 8 funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------- Investor Shares $28 $87 $152 $343 - ------------------------------------------------------------- Admiral Shares 17 55 96 217 - ------------------------------------------------------------- These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $11.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Suitable for IRAs Yes - ------------------------------------------------------------------------------- Investor Shares Admiral Shares - ------------------------------------------------------------------------------- Inception Date June 18, 1990 August 13, 2001 - ------------------------------------------------------------------------------- Minimum Initial Investment $3,000 $100,000 - ------------------------------------------------------------------------------- Conversion Features May be converted to Admiral May be Shares if you meet eligibility converted to requirements Investor Shares if you are no longer eligible for Admiral Shares - ------------------------------------------------------------------------------- Newspaper Abbreviation Pacific PacifAdm - ------------------------------------------------------------------------------- Vanguard Fund Number 72 572 - ------------------------------------------------------------------------------- Cusip Number 922042106 922042700 - ------------------------------------------------------------------------------- Ticker Symbol VPACX VPADX - ------------------------------------------------------------------------------- 9 Fund Profile--Vanguard Emerging Markets Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 840 common stocks of companies located in emerging markets around the world. As of October 31, 2006, the largest markets covered in the Index were South Korea, Taiwan, Brazil, China, and Russia (which made up 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization). For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. The Index's, and therefore the Fund's, heavy exposure to South Korea, Taiwan, Brazil, China, and Russia subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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. Both the bar chart and table present information for the Fund's Investor Shares, because Admiral Shares were not in operation long enough to report a 10 full calendar year return. The bar chart shows how the performance of the Fund's Investor Shares (including operating expenses but excluding shareholder fees) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns (including operating expenses and any applicable shareholder fees) compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. Annual Total Returns--Investor Shares1 - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 1997 -16.82% 1998 -18.12 1999 61.57 2000 -27.56 2001 -2.88 2002 -7.43 2003 57.65 2004 26.12 2005 32.05 2006 29.39 - ------------------------------------------------------------ 1 If applicable shareholder fees were reflected, returns would be less than those shown. During the periods shown in the bar chart, the highest return for a calendar quarter was 28.32% (quarter ended December 31, 1999), and the lowest return for a quarter was -22.03% (quarter ended September 30, 2001). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - ------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Fund Investor Shares - ------------------------------------------------------------------------------- Return Before Taxes 28.11% 25.51% 9.21% - ------------------------------------------------------------------------------- Return After Taxes on 27.80 25.17 8.58 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale of 18.69 22.70 7.75 Fund Shares - ------------------------------------------------------------------------------- Comparative Indexes (reflect no deduction for fees, expenses, or taxes) - ------------------------------------------------------------------------------- MSCI Emerging Markets 32.17% 26.59% -- Index/1/ - ------------------------------------------------------------------------------- Spliced Emerging Markets 29.73 26.38 9.51% Index/2/ - ------------------------------------------------------------------------------- 1 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 2 Select Emerging Markets Index through August 23, 2006, and the MSCI Emerging Markets Index thereafter. The Select Emerging Markets Index was discontinued on August 24, 2006. 11 Note on after-tax returns. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains. State and local income taxes are not reflected in the calculations. Please note that actual after-tax returns are shown only for the Investor Shares and that actual after-tax returns will vary for a fund's other share classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 the following: for the Investor Shares, expenses are based on those incurred in the fiscal year ended October 31, 2006, and for the Admiral Shares, which did not begin operations until June 23, 2006, expenses are based on estimated amounts for the current fiscal year. 12
Shareholder Fees (Fees paid directly from your investment) - --------------------------------------------------------------------------------------------------- Investor Shares Admiral Shares - --------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None None - --------------------------------------------------------------------------------------------------- Purchase Fee 0.5%/1/ 0.5%/1/ - --------------------------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None None - --------------------------------------------------------------------------------------------------- Redemption Fee 0.5%/2/ 0.5%/2/ - --------------------------------------------------------------------------------------------------- Account Maintenance Fee (for accounts under $10,000) $10/year/3/ None - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted directly from the Fund's assets) - --------------------------------------------------------------------------------------------------- Management Expenses 0.27% 0.23% - --------------------------------------------------------------------------------------------------- 12b-1 Distribution Fee None None - --------------------------------------------------------------------------------------------------- Other Expenses 0.15% 0.07% - --------------------------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.42% 0.30% - --------------------------------------------------------------------------------------------------- 1 The purchase fee is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains. 2 The 0.5% fee applies to shares redeemed 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. 3 If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, a fraction of a share may be automatically redeemed to make up the difference.
The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses match our estimates, and that you redeem your shares at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------- Investor Shares $145 $241 $346 $655 - ------------------------------------------------------------- Admiral Shares 133 203 280 508 - ------------------------------------------------------------- You would pay the following expenses if you did not redeem your shares (the difference being that the Fund's 0.5% redemption fee would not apply to any of the following periods, as it would to those in the preceding example): 13 1 Year 3 Years 5 Years 10 Years - ------------------------------------------------------------- Investor Shares $93 $184 $284 $577 - ------------------------------------------------------------- Admiral Shares 81 146 218 429 - ------------------------------------------------------------- These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $10.8 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Suitable for IRAs Yes - ------------------------------------------------------------------------------- Investor Shares Admiral Shares - ------------------------------------------------------------------------------- Inception Date May 4, 1994 June 23, 2006 - ------------------------------------------------------------------------------- Minimum Initial Investment $3,000 $100,000 - ------------------------------------------------------------------------------- Conversion Features May be converted to Admiral May be Shares if you meet eligibility converted to requirements Investor Shares if you are no longer eligible for Admiral Shares - ------------------------------------------------------------------------------- Newspaper Abbreviation EmerMkt EmMkAdml - ------------------------------------------------------------------------------- Vanguard Fund Number 533 5533 - ------------------------------------------------------------------------------- Cusip Number 922042304 922042841 - ------------------------------------------------------------------------------- Ticker Symbol VEIEX VEMAX - ------------------------------------------------------------------------------- 14 More on the Funds This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for 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 each 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. Under normal circumstances, each Fund will invest at least 80% of its assets in the types of stocks indicated by its name. A Fund may change its 80% policy or indexing strategy upon 60 days' notice to shareholders. Note that each Fund's investment objective is not fundamental and may be changed without a shareholder vote. Advantages of Index Funds Index funds typically have the following characteristics: - -Variety of investments. Most Vanguard index funds generally invest in the securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have low or no research costs and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Compared with actively managed funds, most index funds have lower turnover rates and lower capital gains distributions. However, from time to time, some index funds may pay out higher-than-expected taxable distributions. That's because index funds must adjust their holdings to reflect changes in their target indexes. In some cases, such changes may force an index fund to sell securities that have appreciated in value, thereby realizing a capital gain that must be distributed to shareholders. A security may move out of an index for a number of reasons, including a merger or acquisition, or a substantial change in the market capitalization of the issuer. Generally, these changes tend to occur more frequently with small and medium-size companies than they do with large, well-established companies. 15 Indexing Methods In seeking to track a particular index, a fund generally uses one of the following methods to select the securities in which it invests. Replication method. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in approximately the same proportion as represented in the index itself. For example, if 5% of the Standard & Poor's 500 Index were made up of the stock of a specific company, a fund tracking that index would invest approximately 5% of its assets in that company. Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund employ this method of indexing. Sampling method. Because it would be expensive and inefficient to buy and sell all securities held in certain indexes (the Dow Jones Wilshire 5000 Composite Index, for example, included more than 4,956 separate stocks as of October 31, 2006), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund selects, from the target index, a representative sample of securities that will resemble the full target index in terms of key risk factors and other characteristics. For stock funds, these factors include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. For certain stock index funds, the advisor seeks to reduce risk by using a different form of sampling--determining whether or no to invest in certain securities based on an analysis of several factors, which vary from fund to fund. Vanguard Emerging Markets Stock Index Fund employs this method of indexing. Market Exposure To track their target indexes as closely as possible, the Funds attempt to remain fully invested in the foreign stocks included in their particular indexes. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 16 FLAG Each Fund is subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. To illustrate the volatility of international stock prices, the following table shows the best, worst, and average annual total returns for foreign stock markets over various periods as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of international market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Funds in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 17
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Funds in particular. FLAG Each 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 Regional Versus Broad International Investing Regional funds are international funds that invest in a particular geographical region, such as Europe or the Pacific Basin. Because they concentrate their holdings in a single region, these funds typically have higher share-price volatility than broadly diversified international stock funds (which, by investing in many different foreign markets, may offset losses from one country with gains from another at any given time). - -------------------------------------------------------------------------------- 18 Security Selection In seeking to track their target indexes, the Funds invest in portfolios of foreign stocks selected in a manner that mirrors the weightings of their target indexes. European Stock Index Fund. The Fund invests in the common stocks included in the MSCI Europe Index, which is made up of approximately 603 common stocks of companies located in 16 European countries. Four countries--the United Kingdom, France, Germany, and Switzerland--dominate the Index. These four countries made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 12 countries--Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden--are much less significant to the Index and, consequently, to the Fund. The Fund's heavy exposure to just four countries subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $55.2 billion. Pacific Stock Index Fund. The Fund invests in the common stocks included in the MSCI Pacific Index, which is made up of approximately 562 common stocks of Pacific Basin companies. The Index is dominated by the Japanese stock market, which represented 74% of the Index's market capitalization as of October 31, 2006. The other three markets represented in the Index are Australia, Hong Kong, and Singapore. The Fund's large investment in the Japanese stock market subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $17 billion. Emerging Markets Stock Index Fund. The Fund invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, which is made up of approximately 840 common stocks of companies located in 25 emerging markets of Europe, Asia, Africa, and Latin America. (The depositary receipt for a common stock will be considered to be a common stock for the purposes of meeting this percentage test.) Five countries--South Korea, Taiwan, Brazil, China, and Russia--collectively represent a majority of the Index, with 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 20 countries are Argentina, Chile, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, South Africa, Thailand, and Turkey. The Fund's advisor employs a sampling technique, using its discretion--based on an analysis that considers liquidity, repatriation of capital, and entry barriers in various markets--to determine whether or not to invest in particular securities. Emerging markets can be substantially more volatile, and substantially less liquid, than both U.S. and more developed foreign markets. In addition, the smaller-capitalization stocks in which the Emerging Markets Stock Index Fund typically invests 19 often perform quite differently from the large-cap stocks that dominate the overall stock market. Therefore, the Fund may expose investors to a higher degree of volatility and illiquidity than funds that invest in more developed markets. As of October 31, 2006, the MSCI Emerging Markets Index had an asset-weighted median market capitalization of $12.2 billion. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. Depositary Receipts. Each Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, each Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, a Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. A Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. Each Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. Other Investment Policies and Risks Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund's agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same market segment as the current index. Each Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of underlying securities, assets, or market indexes. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Each Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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 20 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Funds may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Cash Management Vanguard may invest each Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Purchase, Redemption, Account Maintenance, and Custodial Fees Vanguard Emerging Markets Stock Index Fund charges a 0.5% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 0.5% fee on redemptions of its shares, including shares redeemed by selling or by exchanging to another Vanguard fund, or when Vanguard applies the low-balance account-closure policy. Vanguard European and Pacific Stock Index Funds charge a 2% redemption fee on shares that are redeemed before they have been held two months. The 2% fee applies when shares are redeemed by selling or by exchanging to another Vanguard fund, or when Vanguard applies the low-balance account-closure policy. Shares you have held the longest will be redeemed first. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption fees are 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. 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--$10 per year--is deducted from the annual 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. 21 See the Fund Profiles and Investing With Vanguard for more information about fees. Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will use fair-value pricing as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. Do not invest with Vanguard if you are a market-timer. 22 - -------------------------------------------------------------------------------- Plain Talk About Costs of Investing Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- Turnover Rate Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, index-oriented funds sell securities only in response to redemption requests or changes in the composition of a target index. Because of this, the turnover rate for each Fund has been very low. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for passively managed foreign stock funds was approximately 28%; for all foreign stock funds, the average turnover rate was approximately 76%, as reported by Morningstar, Inc., on October 31, 2006. - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. - -------------------------------------------------------------------------------- The Funds and Vanguard Each Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund 23 with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended October 31, 2006, the advisory expenses of the European, Pacific, and Emerging Markets Stock Index Funds represented an effective annual rate of 0.01% or less of each Fund's average net assets. For a discussion of why the board of trustees approved each Fund's investment advisory arrangement, see the Funds' most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. 24 - -------------------------------------------------------------------------------- Plain Talk About the Funds' Portfolio Managers The managers primarily responsible for the day-to-day management of the Funds are: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989 and has managed the European Stock Index Fund since 1992 and the Emerging Markets Stock Index Fund since 1994. Education: B.S., LaSalle University. Michael H. Buek, Principal of Vanguard. He has been with Vanguard since 1987 and has managed the Pacific Stock Index Fund since 1997. Education: B.S., University of Vermont; M.B.A., Villanova University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Funds. Dividends, Capital Gains, and Taxes Fund Distributions Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- 25 Basic Tax Points Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic tax points: - -Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. - -Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - -Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income," if any, distributed by the Fund. - -Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - -Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - -A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - -Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - -The Fund may be subject to foreign taxes or foreign tax withholding on dividends, interest, and some capital gains that it receives on foreign securities. You may qualify for an offsetting credit or deduction under U.S. tax laws for your portion of the Fund's foreign tax obligations, provided that you meet certain requirements. See your tax advisor or IRS publications for more information. - -Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 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. 26 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. - -------------------------------------------------------------------------------- Plain Talk About "Buying a Dividend" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- Share Price Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected because the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage 27 a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 28 Financial Highlights The following financial highlights tables are intended to help you understand each Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with each Fund's financial statements--is included in the Funds' most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. 29 - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Tables This explanation uses the European Stock Index Fund's Investor Shares as an example. The Investor Shares began fiscal year 2006 with a net asset value (price) of $27.00 per share. During the year, each Investor Share earned $0.92 from investment income (interest and dividends) and $7.45 from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $0.70 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $34.67, reflecting earnings of $8.37 per share and distributions of $0.70 per share. This was an increase of $7.67 per share (from $27.00 at the beginning of the year to $34.67 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was 31.63% for the year. As of October 31, 2006, the Investor Shares had approximately $16.8 billion in net assets. For the year, the expense ratio was 0.27% ($2.70 per $1,000 of net assets), and the net investment income amounted to 3.35% of average net assets. The Fund sold and replaced securities valued at 6% of its net assets. - -------------------------------------------------------------------------------- 30
European Stock Index Fund Investor Shares Year Ended October 31, 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $27.00 $23.77 $19.93 $16.44 $19.50 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .92 .67 .54 .44 .39 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 7.45 3.14 3.76 3.45 (3.01) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 8.37 3.81 4.30 3.89 (2.62) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.70) (.58) (.46) (.40) (.44) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (.70) (.58) (.46) (.40) (.44) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $34.67 $27.00 $23.77 $19.93 $16.44 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 31.63% 16.21% 21.89% 24.27% -13.81% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $16,850 $10,759 $7,904 $5,339 $3,870 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.27% 0.27% 0.27% 0.32% 0.33% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average 3.35% 2.84% 2.67% 2.76% 2.24% Net Assets - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 6% 5% 5% 6% 15% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months or the $10 annual account maintenance fee applied on balances under $10,000. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
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European Stock Index Fund Admiral Shares - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended October 31, ------------------------------------------------------------------------------------ 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $63.44 $55.84 $46.82 $38.61 $45.77 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 2.23 1.611 1.308 1.070 .96 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 17.51 7.396 8.830 8.115 (7.08) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 19.74 9.007 10.138 9.185 (6.12) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $81.50 $63.44 $55.84 $46.82 $38.61 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 31.77% 16.32% 21.98% 24.42% -13.74% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $2,175 $1,360 $628 $447 $335 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.18% 0.18% 0.23% 0.23% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 3.45% 2.93% 2.76% 2.84% 2.41% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 6% 5% 5% 6% 15% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
32
Pacific Stock Index Fund Investor Shares Year Ended October 31, -------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 Net Asset Value, Beginning of Period $10.39 $8.63 $7.80 $5.90 $6.79 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .19 .156 .121 .082 .065 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 1.71 1.761 .814 1.885 (.923) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.90 1.917 .935 1.967 (.858) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.16) (.157) (.105) (.067) (.032) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (.16) (.157) (.105) (.067) (.032) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $12.13 $10.39 $8.63 $7.80 $5.90 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 18.39% 22.48% 12.15% 33.75% -12.67% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $7,814 $5,202 $3,471 $2,265 $1,386 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.27% 0.32% 0.34% 0.39% 0.40% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average 1.73% 1.76% 1.57% 1.49% 1.04% Net Assets - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 2% 7% 3% 3% 20% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months or the $10 annual account maintenance fee applied on balances under $10,000. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
33
Pacific Stock Index Fund Admiral Shares Year Ended October 31, 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $68.05 $56.47 $51.05 $38.63 $44.40 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.302 1.069 .835 .575 .461 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 11.185 11.583 5.318 12.318 (6.016) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 12.487 12.652 6.153 12.893 (5.555) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $79.43 $68.05 $56.47 $51.05 $38.63 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 18.46% 22.68% 12.23% 33.82% -12.55% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,128 $720 $314 $198 $102 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.20% 0.25% 0.30% 0.30% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.83% 1.90% 1.69% 1.59% 1.16% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 2% 7% 3% 3% 20% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
34
Emerging Markets Stock Index Fund Investor Shares - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended October 31, 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $16.91 $12.88 $11.04 $ 7.48 $7.28 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .396 .307 .263 .170 .15 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 5.059 3.982 1.749 3.512 .25 on Investments/1/ - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 5.455 4.289 2.012 3.682 .40 - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.315) (.259) (.172) (.122) (.20) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital -- -- -- -- -- Gains - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (.315) (.259) (.172) (.122) (.20) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $22.05 $16.91 $12.88 $11.04 $7.48 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/2/ 32.55% 33.66% 18.43% 49.88% 5.27% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $7,202 $4,937 $2,556 $1,589 $841 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.42% 0.45% 0.48% 0.53% 0.57% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.20% 2.48% 2.44% 2.26% 1.67% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/3/ 26% 15% 11% 16% 65% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Includes increases from redemption fees of $0.01, $0.00, $0.00, $0.00, and $0.00. 2 Total returns do not reflect the 0.5% transaction fee on purchases; the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; the 0.5% fee on all other redemptions; or the $10 annual account maintenance fee applied on balances under $10,000. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
35 Emerging Markets Stock Index Fund Admiral Shares Jun. 23/1/ to Oct. 31, 2006 - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $25.00 - ------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------- Net Investment Income .222 - ------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 3.808 on Investments/2/ - ------------------------------------------------------------------------------- Total from Investment Operations 4.030 - ------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------- Dividends from Net Investment Income -- - ------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- - ------------------------------------------------------------------------------- Total Distributions -- - ------------------------------------------------------------------------------- Net Asset Value, End of Period $29.03 - ------------------------------------------------------------------------------- Total Return/3/ 16.12% - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,491 - ------------------------------------------------------------------------------- Ratio of Total Expenses to Average 0.30%/4/ Net Assets - ------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net 2.32%/4/ Assets - ------------------------------------------------------------------------------- Turnover Rate/5/ 26% - ------------------------------------------------------------------------------- 1 Inception. 2 Includes increases from redemption fees of $0.01. 3 Total returns do not reflect the 0.5% transaction fee on purchases and the 0.5% fee assessed on redemptions. 4 Annualized. 5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units. 36 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing 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, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. Account Minimums for Admiral Shares To open and maintain an account. $100,000 for new investors. Shareholders who are registered on Vanguard.com, have held shares of the Fund for ten years, and have $50,000 or more in the same Fund account are eligible to convert their Investor Shares into Admiral Shares. See Converting Shares. Institutional clients should contact Vanguard for information on special rules that may apply to them. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open 37 fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--"Fund # . " For a list of Fund numbers (for Funds and share classes in this prospectus), see Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. 38 For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Purchase Fees The Emerging Markets Stock Index Fund charges a purchase fee of 0.5% on all share purchases, including shares purchased by exchange from other Vanguard funds. In addition, each Fund reserves the right to impose purchase fees on all share purchases. Purchase fees do not apply to shares purchased through reinvested dividends and capital gains. Other Purchase Rules You Should Know Admiral Shares. Please note that Admiral Shares are not available for: - -SIMPLE IRAs and 403(b)(7) custodial accounts; - -Other retirement plan accounts receiving special administrative services from Vanguard; or - -Accounts maintained by financial intermediaries, except in limited circumstances. Check purchases. All purchase checks must be written in U.S. dollars and 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. 39 New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a fund's operation or performance. Large purchases. Please call Vanguard before attempting to invest a large dollar amount. No cancellations. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written, wire, check, or automatic transaction requests, Vanguard will not cancel any transaction once it has been processed. Converting Shares A conversion between share classes of the same fund is a nontaxable event. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's net asset values. At the time of conversion, the total dollar value of your "old" shares will equal the total dollar value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total dollar value of your "new" shares compared with that of your "old" shares. 40 Conversions From Investor Shares Into Admiral Shares Shares purchased before the issuance of Admiral Shares are considered Investor Shares. Self-directed conversions. You may convert Investor Shares into Admiral Shares at any time if your account balance in the Fund is at least $100,000. Registered users of Vanguard.com may request a conversion to Admiral Shares online, or you may contact Vanguard by telephone or by mail to request this transaction. See Contacting Vanguard. Tenure conversions. You are eligible for a self-directed conversion from Investor Shares into Admiral Shares if you have had an account in the Fund for ten years, that account balance is at least $50,000, and you are registered with Vanguard.com. Registered users of Vanguard.com may request a tenure conversion online, or you may contact Vanguard by telephone or by mail to request this transaction. Automatic conversions. The Fund conducts periodic reviews of account balances and may convert an eligible account's Investor Shares into Admiral Shares. The Fund will notify the investor in writing before any automatic conversion into Admiral Shares. If you do not wish to convert to the lower-cost Admiral Shares, you may choose not to convert to them. Automatic conversions do not apply to accounts that qualify for Admiral Shares on the basis of tenure in the Fund. Conversions Into Institutional Shares You are eligible for a self-directed conversion from Investor Shares or Admiral Shares into Institutional Shares of the same Fund, provided that your account balance in the Fund is at least $5 million. Automatic conversions do not apply to accounts that qualify for Institutional Shares. The Fund's Institutional Shares are offered through a separate prospectus. Please contact Vanguard's Institutional Division for more information. Mandatory Conversions Into Investor Shares If an investor no longer meets the requirements for Admiral Shares, the Fund may automatically convert the investor's Admiral Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. 41 Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: For telephone requests received by Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime 42 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Redemption Fees Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund each charge a 2% redemption fee on shares redeemed within two months of purchase. Shares held for two months or more are not subject to the 2% fee. Vanguard Emerging Markets Stock Index Fund charges a 0.5% redemption fee. Each Fund's redemption fee applies to shares redeemed by selling or by exchanging to another fund, or when Vanguard applies the low-balance account-closure policy. The fee is withheld from redemption proceeds and is paid directly to the Fund to offset the cost of buying and selling securities. After redeeming shares that are exempt from redemption fees, shares you have held the longest will be redeemed first. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), redemption fees will not apply to the following: 43 - -Redemptions of shares purchased with reinvested dividend and capital gains distributions (not applicable to Vanguard Emerging Markets Fund). - -Share transfers, rollovers, or re-registrations within the same fund. - -Conversions of shares from one share class to another in the same fund. - -Redemptions of shares to pay fund or account fees. - -Section 529 college savings plans. - -For a one-year period, shares (except shares of Vanguard Emerging Markets Stock Index Fund) rolled over to an IRA held at Vanguard from a retirement plan for which Vanguard serves as recordkeeper (except for Vanguard Small Business Services retirement plans). - -Distributions by shareholders age 701/2 or older from the following (not applicable to Vanguard Emerging Markets Stock Index Fund): -Traditional IRAs. -Inherited IRAs (traditional and Roth). -Rollover IRAs. -SEP-IRAs. -SIMPLE IRAs. -Section 403(b)(7) plans served by the Vanguard Small Business Services Department. -Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee. For participants in employer-sponsored defined contribution plans (other than those serviced by the Vanguard Small Business Services Department), in addition to the exclusions previously listed, redemption fees will not apply to the following: - -Exchanges of shares purchased with participant payroll or employer contributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. Redemption fees will apply to shares exchanged out of a fund within the fund's redemption-fee period into which fund the shares had previously been exchanged, rolled over, or transferred by a participant. If Vanguard does not serve as recordkeeper for your plan, redemption fees may be applied differently. Please read your recordkeeper's plan materials carefully to learn of any other rules or fees that may apply. Also see Frequent-Trading Limits--Accounts 44 Held by Intermediaries for information about the assessment of redemption fees by intermediaries. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would negatively affect the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance. Share certificates. If share certificates have been issued for your fund 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. 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 or automatic transaction requests, Vanguard will not cancel any transaction once it has been processed. 45 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 an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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. 46 - -Section 529 college savings plans. - -Certain approved institutional portfolios and asset allocation programs, as well as trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, the frequent-trading policy does not apply to: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares. - -Conversions of shares from one share class to another in the same fund. Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege. Accounts Held by Intermediaries When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that 47 intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. Telephone Transactions Automatic. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. Tele-Account/(R)/. To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information: - -Authorization to act on the account (as the account owner or by legal documentation or other means). - -Account registration and address. - -Social Security or employer identification number. - -Fund name and account number, if applicable. - -Other information relating to the caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. 48 Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: - -The fund name and account number. - -The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: - -Signatures of all registered owners. - -Signature guarantees, if required for the type of transaction.* - -Any supporting legal documentation that may be required. The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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 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. 49 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 consult your financial intermediary to determine whether Admiral Shares are available through that firm and to learn about other rules that may apply. Please see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees and monitoring of frequent trading for accounts held by intermediaries. 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 without prior notice, to liquidate any investment-only retirement-plan fund account or any nonretirement fund account whose balance falls below the minimum initial investment. Shares redeemed in accordance with this policy will be subject to applicable redemption fees. 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 (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) alter, impose, discontinue, or waive any redemption fee, low-balance account fee, account maintenance fee, or other 50 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 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. 51 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 (or provide online, whichever you prefer) financial reports about Vanguard International Stock Index Funds twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - -Performance assessments and comparisons with industry benchmarks. - -Financial statements with listings of Fund holdings. 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 each Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 52 Contacting Vanguard Web - -------------------------------------------------------------------------------- Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a For fund, account, and service information week For most account transactions For literature requests - ------------------------------------------------------------------------------- Phone - ------------------------------------------------------------------------------- Vanguard Tele-Account(R) For automated fund and account information 800-662-6273 For exchange transactions (subject to limitations) (ON-BOARD) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------- Investor Information For fund and service information 800-662-7447 (SHIP) (Text For literature requests telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired at 800-952-3335) p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Client Services For account information 800-662-2739 (CREW) (Text For most account transactions telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired at 800-749-7273) p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Admiral Service Center For Admiral account information 888-237-9949 For most Admiral transactions Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Institutional Division For information and services for large 888-809-8102 institutional investors Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial 800-997-2798 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 - ------------------------------------------------------------------------------- 53 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Numbers Please use the specific fund number when contacting us: Investor Shares Admiral Shares - ----------------------------------------------------------------------------- Vanguard European Stock Index Fund 79 579 - ----------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund 72 572 - ----------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Fund 533 5533 - ----------------------------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Tele-Account, Vanguard Tele-Account, Admiral, Signal, Vanguard ETF, Vanguard Small Business Online, Vanguard Brokerage Services, and the ship logo are trademarks of The Vanguard Group, Inc. The Funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All other marks are the exclusive property of their respective owners. 54 ETF Shares In addition to Investor Shares and Admiral Shares, certain Vanguard funds offer a class of shares, known as Vanguard ETF* Shares, that are listed for trading on the American Stock Exchange (AMEX). If you own Investor Shares or Admiral Shares issued by one of these funds, you may convert those shares into ETF Shares of the same fund. Note: Vanguard reserves the right to modify or terminate the conversion privilege in the future. Each Fund currently offers an ETF Share class: Fund ETF Shares Ticker Symbol - ------------------------------------------------------------------------------- Vanguard European Stock Index Fund European ETF VGK - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Pacific ETF VPL - ------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Emerging Markets ETF VWO Fund - ------------------------------------------------------------------------------- Although ETF Shares represent an investment in the same portfolio of securities as Investor Shares or Admiral Shares, they have different characteristics and may appeal to a different group of investors. It is important that you understand the differences before deciding whether to convert your shares to ETF Shares. The following material summarizes key information about ETF Shares. A separate prospectus with more complete information about ETF Shares is also available. Investors should review that prospectus before deciding whether to convert. Differences Between ETF Shares and Conventional Mutual Fund Shares Investor Shares, Admiral Shares, Signal Shares, and Institutional Shares are "conventional" mutual fund shares; that is, they can be purchased from and redeemed with the issuing fund for cash at a net asset value (NAV) calculated once a day. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund, except as noted. An organized trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on the AMEX. Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day based on the supply of, and demand for, ETF Shares and on changes in the prices of the fund's portfolio holdings. The market price of a fund's ETF Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. * U.S. Pat. No. 6,879,964 B2. 55 Buying and Selling ETF Shares Vanguard ETF Shares must be held in a brokerage account. Therefore, before acquiring ETF Shares, whether through a conversion or an open-market purchase, you must have an account with a broker. You buy and sell ETF Shares in the same way you buy and sell any other exchange-traded security--on the open market, through a broker. In most cases, the broker will charge you a commission to execute the transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must purchase. Because open-market transactions occur at market prices, you may pay more than NAV when you buy ETF Shares and receive less than NAV when you sell those shares. If you own conventional shares (Investor Shares, Admiral Shares, Signal Shares, and Institutional Shares) of a Vanguard fund that issues ETF Shares, you can convert those shares into ETF Shares of equivalent value--but you cannot convert back. See "Conversion Privilege" for a discussion of the conversion process. There is one other way to buy and sell ETF Shares. Investors can purchase and redeem ETF Shares directly from the issuing fund at NAV if they do so (1) through certain authorized broker-dealers, (2) in large blocks of 100,000 ETF Shares (depending on the fund), known as Creation Units, and (3) in exchange for baskets of securities rather than cash. However, because Creation Units will be worth millions of dollars, and because most investors prefer to transact in cash rather than with securities, it is expected that only a limited number of institutional investors will purchase and redeem ETF Shares this way. Risks ETF Shares issued by a fund are subject to the same risks as conventional shares of the same fund. ETF Shares also are subject to the following risks: - -The market price of a fund's ETF Shares will vary somewhat from the NAV of those shares. Therefore, you may pay more than NAV when buying ETF Shares and you may receive less than NAV when selling them. - -ETF Shares cannot be redeemed with the Fund, except in Creation Unit aggregations. Therefore, if you no longer wish to own ETF Shares, you must sell them on the open market. Although ETF Shares will be listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of a fund's ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if the shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. 56 Fees and Expenses When you buy and sell ETF Shares through a brokerage firm, you will pay whatever commissions the firm charges. You also will incur the cost of the "bid-asked spread," which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. If you convert from conventional shares to ETF Shares, you will not pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50 for each conversion transaction, and your broker may impose its own conversion fees as well. The total annual operating expenses (the expense ratio) for each type of ETF Share are: ETF Shares Expense Ratio - --------------------------------------- European ETF 0.18% - --------------------------------------- Pacific ETF 0.18 - --------------------------------------- Emerging Markets ETF 0.30 - --------------------------------------- Account Services Because you hold ETF Shares through a brokerage account, Vanguard will have no record of your ownership unless you hold the shares through Vanguard Brokerage Services/(R)/ (Vanguard Brokerage). Your broker will service your account. For example, the broker will provide account statements, confirmations of your purchases and sales of ETF Shares, and year-end tax information. The broker also will be responsible for ensuring that you receive shareholder reports and other communications from the fund whose ETF Shares you own. You will receive certain services (e.g., dividend reinvestment and average-cost information) only if your broker offers those services. Conversion Privilege Owners of conventional shares (Investor Shares, Admiral Shares, Signal Shares, and Institutional Shares) issued by a Vanguard Fund that offers ETF Shares may convert those shares into ETF Shares of equivalent value of the same fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard imposes a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. Your broker may charge an additional fee to process a conversion. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Unless you are an Authorized Participant, you must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, you must have 57 an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF Shares, please contact your broker. Converting conventional shares into ETF Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. Your Fund's transfer agent will reflect ownership of all ETF Shares in the name of the Depository Trust Company (DTC). The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you. Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion. If you convert your conventional shares to ETF Shares through Vanguard Brokerage Services, all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into ETF Shares: - -The conversion transaction is nontaxable except, as applicable, to the limited extent as previously described. - -The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either 58 on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - -Until the conversion process is complete, you will remain fully invested in 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 ETF Shares. 59 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. Country Risk. The chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. Currency Risk. The chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 60 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. 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. SHIP LOGO VANGUARD(R) P.O. Box 2600 Valley Forge, PA 19482-2600 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard International Stock Index Funds, the following documents are available free upon request: Annual/Semiannual Reports to Shareholders Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Statement of Additional Information (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Funds or other Vanguard funds, please visit www.vanguard.com or contact us as follows: The Vanguard Group Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-662-7447 (SHIP) Text Telephone for the hearing impaired: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone for the hearing impaired: 800-749-7273 Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Funds are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P072 022007 Vanguard/(R)/ International Stock Index Funds > Prospectus Investor Shares for Participants February 28, 2007 SHIP LOGO VANGUARD(R) Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund Vanguard Emerging Markets Stock Index Fund LOGO [INDEXED TO MSCI] This prospectus contains financial data for the Funds through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - ------------------------------------------------------------------------------- An Introduction to 1 Financial Highlights 26 Index Funds - ------------------------------------------------------------------------------- Vanguard Fund Profiles 2 Investing With Vanguard 30 - ------------------------------------------------------------------------------- European Stock Index 2 Accessing Fund Information by Computer 33 Fund - ------------------------------------------------------------------------------- Pacific Stock Index 6 Glossary of Investment Terms 34 Fund - ------------------------------------------------------------------------------- Emerging Markets 10 Stock Index Fund - ------------------------------------------------------------------------------- More on the Funds 14 - ------------------------------------------------------------------------------- The Funds and Vanguard 22 - ------------------------------------------------------------------------------- Investment Advisor 23 - ------------------------------------------------------------------------------- Dividends, Capital 24 Gains, and Taxes - ------------------------------------------------------------------------------- Share Price 25 - ------------------------------------------------------------------------------- Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. This prospectus offers the Funds' Investor Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 800-662-7447. 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 in This Prospectus Vanguard offers a variety of stock index funds (both U.S. and international), as well as bond and balanced index funds. This prospectus provides information about three Vanguard International Stock Index Funds. These Funds seek to track particular segments of the international stock market. Fund Seeks to Track - ------------------------------------------------------------------------------- Vanguard European Stock European stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Pacific Stock Australian and Far East stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Emerging 25 emerging stock markets in Europe, Asia, Africa, Markets Stock Index Fund and Latin America - ------------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 1 Fund Profile--Vanguard European Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index. The MSCI Europe Index is made up of approximately 603 common stocks of companies located in 16 European countries--mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization, as of October 31, 2006). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden. For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to four countries (the United Kingdom, France, Germany, and Switzerland) subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, Europe--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's 2 Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. Annual Total Returns--Investor Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 1997 24.23% 1998 28.86 1999 16.62 2000 -8.18 2001 -20.30 2002 -17.95 2003 38.70 2004 20.86 2005 9.26 2006 33.42 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 22.30% (quarter ended June 30, 2003), and the lowest return for a quarter was -22.84% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - -------------------------------------------------------------------------------- Vanguard European 33.42% 14.93% 10.60% Stock Index Fund Investor Shares - -------------------------------------------------------------------------------- MSCI Europe Index/1/ (reflects no deduction 33.72 14.87 10.47 for fees or expenses) - -------------------------------------------------------------------------------- 1 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. - -------------------------------------------------------------------------------- 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 the investment performance figures included in this prospectus. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2006. 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 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.22% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.05% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.27% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $28 $87 $152 $343 - ---------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. 4 Additional Information as of October 31, 2006 - ---------------------------------------------------------------------------- Net Assets $23.4 billion - ---------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ---------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ---------------------------------------------------------------------------- Inception Date June 18, 1990 - ---------------------------------------------------------------------------- Newspaper Abbreviation Europe - ---------------------------------------------------------------------------- Vanguard Fund Number 79 - ---------------------------------------------------------------------------- Cusip Number 922042205 - ---------------------------------------------------------------------------- Ticker Symbol VEURX - ---------------------------------------------------------------------------- 5 Fund Profile--Vanguard Pacific Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of the Pacific region. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the MSCI Pacific Index. The MSCI Pacific Index consists of approximately 562 common stocks of companies located in Japan, Australia, Hong Kong, and Singapore. (As of October 31, 2006, Japan and Australia made up 74% and 18%, respectively, of the Index's market capitalization.) For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to Japan subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, the Pacific region--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. 6 Annual Total Returns--Investor Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 1997 -25.67% 1998 2.41 1999 57.05 2000 -25.74 2001 -26.34 2002 -9.32 2003 38.42 2004 18.83 2005 22.59 2006 11.99 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 26.50% (quarter ended December 31, 1998), and the lowest return for a quarter was -20.69% (quarter ended December 31, 1997). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - ------------------------------------------------------------------------------- Vanguard Pacific Stock 11.99% 15.42% 2.97% Index Fund Investor Shares - ------------------------------------------------------------------------------- MSCI Pacific Index (reflects no deduction 12.20 15.51 3.11 for fees or expenses) - ------------------------------------------------------------------------------- 1 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. - ------------------------------------------------------------------------------- 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 the investment performance figures included in this prospectus. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2006. 7 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.22% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.05% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.27% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $28 $87 $152 $343 - ---------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. 8 Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets $11.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date June 18, 1990 - ------------------------------------------------------------------------------- Newspaper Abbreviation Pacific - ------------------------------------------------------------------------------- Vanguard Fund Number 72 - ------------------------------------------------------------------------------- Cusip Number 922042106 - ------------------------------------------------------------------------------- Ticker Symbol VPACX - ------------------------------------------------------------------------------- 9 Fund Profile--Vanguard Emerging Markets Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 840 common stocks of companies located in emerging markets around the world. As of October 31, 2006, the largest markets covered in the Index were South Korea, Taiwan, Brazil, China, and Russia (which made up 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization). For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. The Index's, and therefore the Fund's, heavy exposure to South Korea, Taiwan, Brazil, China, and Russia subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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's Investor Shares (including operating expenses but excluding shareholder fees) has 10 varied from one calendar year to another over the periods shown. The table shows how the average annual total returns (including operating expenses and any applicable shareholder fees) compare with those of the Fund's target index. Keep in mind that the Fund's past returns do not indicate how the Fund will perform in the future. Annual Total Returns --Investor Shares1 - ------------------------------------------------------------------------------- BAR CHART RANGE -40% TO 80% 1997 -16.82% 1998 -18.12 1999 61.57 2000 -27.56 2001 -2.88 2002 -7.43 2003 57.65 2004 26.12 2005 32.05 2006 29.39 - ------------------------------------------------------------------------------- 1 If applicable shareholder fees were reflected, returns would be less than those shown. During the periods shown in the bar chart, the highest return for a calendar quarter was 28.32% (quarter ended December 31, 1999), and the lowest return for a quarter was -22.03% (quarter ended September 30, 2001). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - -------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index 28.11% 25.51% 9.21% Fund Investor Shares - ------------------------------------------------------------------------------- Comparative Indexes (reflect no deduction for fees or expenses) - ------------------------------------------------------------------------------- MSCI Emerging Markets Index/1/ 32.17% 26.59% -- - ------------------------------------------------------------------------------- Spliced Emerging Markets Index/2/ 29.73 26.38 9.51 - ------------------------------------------------------------------------------- 1 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 2 Select Emerging Markets Index through August 23, 2006; MSCI Emerging Markets Index thereafter. The Select Emerging Markets Index was discontinued on August 24, 2006. 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 the investment performance figures included in 11 this prospectus. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended October 31, 2006. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee 0.5%/1/ - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested None Dividends - ------------------------------------------------------------------------------- Redemption Fee 0.5%/2/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted directly from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.27% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.15% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.42% - ------------------------------------------------------------------------------- 1 The purchase fee is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains. 2 The 0.5% fee applies to shares redeemed by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses remain the same, and that you redeem your shares at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $145 $241 $346 $655 - ---------------------------------------------------------- You would pay the following expenses if you did not redeem your shares (the difference being that the Fund's 0.5% redemption fee would not apply to any of the following periods, as it would to those in the preceding example): 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $93 $184 $284 $577 - ---------------------------------------------------------- 12 These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information as of October 31, 2006 - ---------------------------------------------------------------------------- Net Assets $10.8 billion - ---------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ---------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ---------------------------------------------------------------------------- Inception Date May 4, 1994 - ---------------------------------------------------------------------------- Newspaper Abbreviation EmerMkt - ---------------------------------------------------------------------------- Vanguard Fund Number 533 - ---------------------------------------------------------------------------- Cusip Number 922042304 - ---------------------------------------------------------------------------- Ticker Symbol VEIEX - ---------------------------------------------------------------------------- 13 More on the Funds This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for 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 each 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. Under normal circumstances, each Fund will invest at least 80% of its assets in the types of stocks indicated by its name. A Fund may change its 80% policy or indexing strategy only upon 60 days' notice to shareholders. Note that each Fund's investment objective is not fundamental and may be changed without a shareholder vote. Advantages of Index Funds Index funds typically have the following characteristics: - -Variety of investments. Most Vanguard index funds generally invest in the securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have low or no research costs and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Indexing Methods In seeking to track a particular index, a fund generally uses one of the following methods to select the securities in which it invests. Replication method. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in approximately the same proportion as represented in the index itself. For example, if 5% of the Standard & Poor's 500 Index were made up of the stock of a specific company, a fund tracking that index would invest approximately 5% of its assets in that company. Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund employ this method of indexing. 14 Sampling method. Because it would be expensive and inefficient to buy and sell all securities held in certain indexes (the Dow Jones Wilshire 5000 Composite Index, for example, included more than 4,956 separate stocks as of October 31, 2006), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund selects, from the target index, a representative sample of securities that will resemble the full target index in terms of key risk factors and other characteristics. For stock funds, these factors include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. For certain stock index funds, the advisor seeks to reduce risk by using a different form of sampling--determining whether or no to invest in certain securities based on an analysis of several factors, which vary from fund to fund. Vanguard Emerging Markets Stock Index Fund employs this method of indexing. Market Exposure To track their target indexes as closely as possible, the Funds attempt to remain fully invested in the foreign stocks included in their particular indexes. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- FLAG Each Fund is subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. To illustrate the volatility of international stock prices, the following table shows the best, worst, and average annual total returns for foreign stock markets over various periods as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of international market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses 15 that a real-world investment portfolio would incur. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Funds in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 16
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Funds in particular. FLAG Each 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 Regional Versus Broad International Investing Regional funds are international funds that invest in a particular geographical region, such as Europe or the Pacific Basin. Because they concentrate their holdings in a single region, these funds typically have higher share-price volatility than broadly diversified international stock funds (which, by investing in many different foreign markets, may offset losses from one country with gains from another at any given time). - -------------------------------------------------------------------------------- 17 Security Selection In seeking to track their target indexes, the Funds invest in portfolios of foreign stocks selected in a manner that mirrors the weightings of their target indexes. European Stock Index Fund. The Fund invests in the common stocks included in the MSCI Europe Index, which is made up of approximately 603 common stocks of companies located in 16 European countries. Four countries--the United Kingdom, France, Germany, and Switzerland--dominate the Index. These four countries made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 12 countries--Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden--are much less significant to the Index and, consequently, to the Fund. The Fund's heavy exposure to just four countries subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $55.2 billion. Pacific Stock Index Fund. The Fund invests in the common stocks included in the MSCI Pacific Index, which is made up of approximately 562 common stocks of Pacific Basin companies. The Index is dominated by the Japanese stock market, which represented 74% of the Index's market capitalization as of October 31, 2006. The other three markets represented in the Index are Australia, Hong Kong, and Singapore. The Fund's large investment in the Japanese stock market subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $17 billion. Emerging Markets Stock Index Fund. The Fund invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, which is made up of approximately 840 common stocks of companies located in 25 emerging markets of Europe, Asia, Africa, and Latin America. (The depositary receipt for a common stock will be considered to be a common stock for the purposes of meeting this percentage test.) Five countries--South Korea, Taiwan, Brazil, China, and Russia--collectively represent a majority of the Index, with 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 20 countries are Argentina, Chile, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, South Africa, Thailand, and Turkey. The Fund's advisor employs a sampling technique, using its discretion--based on an analysis that considers liquidity, repatriation of capital, and entry barriers in various markets--to determine whether or not to invest in particular securities. Emerging markets can be substantially more volatile, and substantially less liquid, than both U.S. and more developed foreign markets. In addition, the smaller-capitalization stocks in which the Emerging Markets Stock Index Fund typically invests 18 often perform quite differently from the large-cap stocks that dominate the overall stock market. Therefore, the Fund may expose investors to a higher degree of volatility and illiquidity than funds that invest in more developed markets. As of October 31, 2006, the MSCI Emerging Markets Index had an asset-weighted median market capitalization of $12.2 billion. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. Depositary Receipts. Each Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, each Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, a Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. A Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. Each Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. Other Investment Policies and Risks Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund's agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same market segment as the current index. Each Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Each Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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 19 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Funds may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Cash Management Vanguard may invest each Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Purchase and Redemption Fees Vanguard Emerging Markets Stock Index Fund charges a 0.5% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 0.5% fee on redemptions of its shares, including shares redeemed by exchanging to another Vanguard fund. Participants who exchange into Vanguard European and Pacific Stock Index Funds will be subject to a 2% redemption fee if they subsequently exchange those shares out of the Fund within two months. When shares are exchanged out of the European and Pacific Stock Index Funds, Vanguard first exchanges shares that are exempt from redemption fees (such as shares purchased with dividend or capital gains distributions and shares purchased with plan participant payroll or employer contributions). Shares a participant has held the longest will be redeemed next. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption fees are designed to ensure that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. See the Fund Profiles and Investing With Vanguard for more information about fees. Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is 20 shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, a participant from exchanging into a fund account for 60 calendar days after the participant exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 21 Turnover Rate Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, index-oriented funds sell securities only in response to redemption requests or changes in the composition of a target index. Because of this, the turnover rate for each Fund has been very low. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for passively managed foreign stock funds was approximately 28%; for all foreign stock funds, the average turnover rate was approximately 76%, as reported by Morningstar, Inc., on October 31, 2006. - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. - -------------------------------------------------------------------------------- The Funds and Vanguard Each Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. 22 - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended October 31, 2006, the advisory expenses of the European, Pacific, and Emerging Markets Stock Index Funds represented an effective annual rate of 0.01% or less of each Fund's average net assets. For a discussion of why the board of trustees approved each Fund's investment advisory arrangement, see the Funds' most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. 23 - -------------------------------------------------------------------------------- Plain Talk About the Funds' Portfolio Managers The managers primarily responsible for the day-to-day management of the Funds are: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989 and has managed the European Stock Index Fund since 1992 and the Emerging Markets Stock Index Fund since 1994. Education: B.S., LaSalle University. Michael H. Buek, Principal of Vanguard. He has been with Vanguard since 1987 and has managed the Pacific Stock Index Fund since 1997. Education: B.S., University of Vermont; M.B.A., Villanova University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Funds. Dividends, Capital Gains, and Taxes Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax advisor about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- 24 Share Price Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected because the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 25 Financial Highlights The following financial highlights tables are intended to help you understand the Investor Shares' financial performance for the periods shown, and certain information reflects financial results for a single Investor Share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Investor Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with each Fund's financial statements--is included in the Funds' most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Tables This explanation uses the European Stock Index Fund's Investor Shares as an example. The Investor Shares began fiscal year 2006 with a net asset value (price) of $27.00 per share. During the year, each Investor Share earned $0.92 from investment income (interest and dividends) and $7.45 from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $0.70 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $34.67, reflecting earnings of $8.37 per share and distributions of $0.70 per share. This was an increase of $7.67 per share (from $27.00 at the beginning of the year to $34.67 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was 31.63% for the year. As of October 31, 2006, the Investor Shares had approximately $16.8 billion in net assets. For the year, the expense ratio was 0.27% ($2.70 per $1,000 of net assets), and the net investment income amounted to 3.35% of average net assets. The Fund sold and replaced securities valued at 6% of its net assets. - -------------------------------------------------------------------------------- 26
European Stock Index Fund Investor Shares Year Ended October 31, 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $27.00 $23.77 $19.93 $16.44 $19.50 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .92 .67 .54 .44 .39 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 7.45 3.14 3.76 3.45 (3.01) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 8.37 3.81 4.30 3.89 (2.62) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.70) (.58) (.46) (.40) (.44) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (.70) (.58) (.46) (.40) (.44) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $34.67 $27.00 $23.77 $19.93 $16.44 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 31.63% 16.21% 21.89% 24.27% -13.81% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $16,850 $10,759 $7,904 $5,339 $3,870 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.27% 0.27% 0.27% 0.32% 0.33% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average 3.35% 2.84% 2.67% 2.76% 2.24% Net Assets - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 6% 5% 5% 6% 15% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months or the $10 annual account maintenance fee applied on balances under $10,000. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
27
Pacific Stock Index Fund Investor Shares Year Ended October 31, -------------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 Net Asset Value, Beginning of Period $10.39 $8.63 $7.80 $5.90 $6.79 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .19 .156 .121 .082 .065 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 1.71 1.761 .814 1.885 (.923) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.90 1.917 .935 1.967 (.858) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.16) (.157) (.105) (.067) (.032) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (.16) (.157) (.105) (.067) (.032) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $12.13 $10.39 $8.63 $7.80 $5.90 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 18.39% 22.48% 12.15% 33.75% -12.67% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $7,814 $5,202 $3,471 $2,265 $1,386 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.27% 0.32% 0.34% 0.39% 0.40% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average 1.73% 1.76% 1.57% 1.49% 1.04% Net Assets - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 2% 7% 3% 3% 20% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months or the $10 annual account maintenance fee applied on balances under $10,000. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
28
Emerging Markets Stock Index Fund Investor Shares - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended October 31, 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $16.91 $12.88 $11.04 $ 7.48 $7.28 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income .396 .307 .263 .170 .15 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 5.059 3.982 1.749 3.512 .25 on Investments/1/ - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 5.455 4.289 2.012 3.682 .40 - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.315) (.259) (.172) (.122) (.20) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital -- -- -- -- -- Gains - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (.315) (.259) (.172) (.122) (.20) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $22.05 $16.91 $12.88 $11.04 $7.48 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/2/ 32.55% 33.66% 18.43% 49.88% 5.27% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $7,202 $4,937 $2,556 $1,589 $841 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.42% 0.45% 0.48% 0.53% 0.57% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.20% 2.48% 2.44% 2.26% 1.67% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/3/ 26% 15% 11% 16% 65% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Includes increases from redemption fees of $0.01, $0.00, $0.00, $0.00, and $0.00. 2 Total returns do not reflect the 0.5% transaction fee on purchases; the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; the 0.5% fee on all other redemptions; or the $10 annual account maintenance fee applied on balances under $10,000. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
29 Investing With Vanguard Your retirement or savings plan investment options include one or more of the Funds. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect a Fund as an investment option. - -If you have any questions about a Fund or Vanguard, including those about a Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 800-523-1188. - -If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. - -Be sure to carefully read each topic that pertains to your transactions with Vanguard. - -Vanguard reserves the right to change these policies without prior notice to shareholders. Investment Options and Allocations Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. Transactions Contribution, exchange, or redemption requests must be in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined NAV after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's NAV. This is known as your trade date. Redemption Fees Redemption fees apply to shares exchanged out of a fund into which they were exchanged, rolled over, or transferred by the participant within the fund's redemption-fee period. The fee is withheld from redemption proceeds and is retained by the fund. Shares held longer than the redemption-fee holding period are not subject to the fee. After exchanging shares that are exempt from redemption fees, shares you have held the longest will be exchanged first. For retirement plan participants, redemption fees do not apply to the following: 30 - -Exchanges of shares purchased with participant payroll or employer contributions. - -Exchanges of shares purchased with reinvested dividend and capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. - -Conversions of shares from one share class to another in the same fund. - -Redemptions of shares to pay fund or account fees. - -Re-registration of shares in the same fund. Exchanges The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard places certain limits on the exchange privilege. If you are exchanging out of any Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares), the following policy applies, regardless of the dollar amount: - -You must wait 60 days before exchanging back into the fund. - -The 60-day clock restarts after every exchange out of the fund. The policy does not apply to the following: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares within the same fund. - -Conversions of shares from one share class to another in the same fund. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. 31 Before making an exchange to or from another fund available in your plan, consider the following: - -Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. - -Be sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 800-523-1188 for a copy. - -Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on other exchange policies that apply to your plan. Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not serve as recordkeeper for your plan, your plan's recordkeeper will establish accounts in Vanguard funds. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will 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 participants' trading activity in the Vanguard funds. For those Vanguard funds that charge purchase or redemption fees, intermediaries that establish accounts in the Vanguard funds will be asked to assess purchase or redemption fees on participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase or redemption fees or administer frequent-trading policies. If a firm other than Vanguard serves as recordkeeper for your plan, please read that firm's materials carefully to learn of any other rules or fees that may apply. Portfolio Holdings We generally post on our website at www.vanguard.com, in the Holdings section of each Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 32 Accessing Fund Information by Computer Vanguard on the World Wide Web WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. Vanguard, Connect with Vanguard, Plain Talk, Vanguard ETF, and the ship logo are trademarks of The Vanguard Group, Inc. The Funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All other marks are the exclusive property of their respective owners. 33 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. Country Risk. The chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. Currency Risk. The chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 34 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. 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. 35 This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard International Stock Index Funds, the following documents are available free upon request: Annual/Semiannual Reports to Shareholders Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Statement of Additional Information (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Funds or other Vanguard funds, please visit www.vanguard.com or contact us as follows: The Vanguard Group Participant Access Center P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 800-523-1188 Text Telephone for the hearing impaired: 800-749-7273 Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Funds are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I072 022007 Vanguard/(R)/ International Stock Index Funds > Prospectus Admiral(TM)Shares for Participants February 28, 2007 SHIP LOGO VANGUARD(R) Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund Vanguard Emerging Markets Stock Index Fund LOGO [INDEXED TO MSCI] This prospectus contains financial data for the Funds through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - -------------------------------------------------------------------------------- An Introduction to 1 Financial Highlights 26 Index Funds - ------------------------------------------------------------------------------- Vanguard Fund Profiles 2 Investing With Vanguard 30 - ------------------------------------------------------------------------------- European Stock Index 2 Accessing Fund Information by Computer 33 Fund - ------------------------------------------------------------------------------- Pacific Stock Index 6 Glossary of Investment Terms 34 Fund - ------------------------------------------------------------------------------- Emerging Markets 10 Stock Index Fund - ------------------------------------------------------------------------------- More on the Funds 14 - ------------------------------------------------------------------------------- The Funds and Vanguard 22 - ------------------------------------------------------------------------------- Investment Advisor 23 - ------------------------------------------------------------------------------- Dividends, Capital 24 Gains, and Taxes - ------------------------------------------------------------------------------- Share Price 25 - ------------------------------------------------------------------------------- Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. This prospectus offers the Funds' Admiral Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 800-662-7447. 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 in This Prospectus Vanguard offers a variety of stock index funds (both U.S. and international), as well as bond and balanced index funds. This prospectus provides information about three Vanguard International Stock Index Funds. These Funds seek to track particular segments of the international stock market. Fund Seeks to Track - ------------------------------------------------------------------------------- Vanguard European Stock European stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Pacific Stock Australian and Far East stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Emerging 25 emerging stock markets in Europe, Asia, Africa, Markets Stock Index Fund and Latin America - ------------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 1 Fund Profile--Vanguard European Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index. The MSCI Europe Index is made up of approximately 603 common stocks of companies located in 16 European countries--mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization, as of October 31, 2006). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden. For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. Primary Risk 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to four countries (the United Kingdom, France, Switzerland, and Germany) subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, Europe--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's Admiral 2 Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index and relevant market indexes. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. Annual Total Returns--Admiral Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 2002 -17.85% 2003 38.84 2004 20.96 2005 9.36 2006 33.57 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 22.29% (quarter ended June 30, 2003), and the lowest return for a quarter was -22.85% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years Since Inception/1/ - -------------------------------------------------------------------------------- Vanguard European 33.57% 15.05% 13.29% Stock Index Fund Admiral Shares - -------------------------------------------------------------------------------- MSCI Europe Index/2/ (reflects no deduction 33.72 14.87 13.26 for fees or expenses) - -------------------------------------------------------------------------------- 1 Since-inception returns are from August 13, 2001--the inception of the Admiral Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 those incurred in the fiscal year ended October 31, 2006. 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 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.13% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.04% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.17% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $17 $55 $96 $217 - -------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. 4 Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share $23.4 billion classes) - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Distributed annually in December Gains - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Admiral Shares--August 13, 2001 - ------------------------------------------------------------------------------- Newspaper Abbreviation EuropeAdml - ------------------------------------------------------------------------------- Vanguard Fund Number 579 - ------------------------------------------------------------------------------- Cusip Number 922042809 - ------------------------------------------------------------------------------- Ticker Symbol VEUSX - ------------------------------------------------------------------------------- 5 Fund Profile--Vanguard Pacific Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of the Pacific region. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the MSCI Pacific Index. The MSCI Pacific Index consists of approximately 562 common stocks of companies located in Japan, Australia, Hong Kong, and Singapore. (As of October 31, 2006, Japan and Australia made up 74% and 18%, respectively, of the Index's market capitalization.) For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to Japan subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, the Pacific region--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index and relevant market indexes. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. 6 Annual Total Returns--Admiral Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 2002 -9.22% 2003 38.58 2004 18.96 2005 22.73 2006 12.10 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 18.83% (quarter ended September 30, 2003), and the lowest return for a quarter was -12.73% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years Since Inception/1/ - ------------------------------------------------------------------------------- Vanguard Pacific Stock 12.10% 15.54% 11.25% Index Fund Admiral Shares - ------------------------------------------------------------------------------- MSCI Pacific Index/2/ (reflects no deduction 12.20 15.51 11.47 for fees or expenses) - ------------------------------------------------------------------------------- 1 Since-inception returns are from August 13, 2001--the inception date of the Admiral Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 those incurred in the fiscal year ended October 31, 2006. 7 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.13% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.04% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.17% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $17 $55 $96 $217 - -------------------------------------------------------- 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. 8 Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share $11.4 billion classes) - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Distributed Annually in December Gains - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Admiral Shares--August 13, 2001 - ------------------------------------------------------------------------------- Newspaper Abbreviation PacifAdml - ------------------------------------------------------------------------------- Vanguard Fund Number 572 - ------------------------------------------------------------------------------- Cusip Number 922042700 - ------------------------------------------------------------------------------- Ticker Symbol VPADX - ------------------------------------------------------------------------------- 9 Fund Profile--Vanguard Emerging Markets Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 840 common stocks of companies located in emerging markets around the world. As of October 31, 2006, the largest markets covered in the Index were South Korea, Taiwan, Brazil, China, and Russia (which made up 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization). For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. The Index's, and therefore the Fund's, heavy exposure to South Korea, Taiwan, Brazil, China, and Russia subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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's Investor Shares (including operating expenses but excluding shareholder fees) has 10 varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Investor Shares (including operating expenses and any applicable shareholder fees) compare with those of the Fund's target index and relevant market indexes. The table and chart present information for the Investor Shares only, because Admiral Shares were not in operation long enough to report a full calendar year return. 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--Investor Shares1 - ------------------------------------------------------------------------------- BAR CHART RANGE -40% TO 80% 1997 -16.82% 1998 -18.12 1999 61.57 2000 -27.56 2001 -2.88 2002 -7.43 2003 57.65 2004 26.12 2005 32.05 2006 29.39 - ------------------------------------------------------------------------------- 1 If applicable shareholder fees were reflected, returns would be less than those shown. During the periods shown in the bar chart, the highest return for a calendar quarter was 28.32% (quarter ended December 31, 1999), and the lowest return for a quarter was -22.03% (quarter ended September 30, 2001). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - -------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index 28.11% 25.51% 9.21% Fund Investor Shares - ------------------------------------------------------------------------------- Comparative Indexes (reflect no deduction for fees or expenses) - ------------------------------------------------------------------------------- MSCI Emerging Markets 32.17% 26.59% -- Index/1/ - ------------------------------------------------------------------------------- Spliced Emerging 29.73 26.38 9.51 Markets Index/2/ - ------------------------------------------------------------------------------- 1 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 2 Select Emerging Markets Index through August 23, 2006; MSCI Emerging Markets Index thereafter. The Select Emerging Markets Index was discontinued on August 24, 2006. 11 Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee 0.5%/1/ - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested None Dividends - ------------------------------------------------------------------------------- Redemption Fee 0.5%/2/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted directly from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.23% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.07% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.30% - ------------------------------------------------------------------------------- 1 The purchase fee is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains. 2 The 0.5% fee applies to shares redeemed by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. The following examples are intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses match our estimates, and that you redeem your shares at the end of the given period. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $133 $203 $280 $508 - -------------------------------------------------------- You would pay the following expenses if you did not redeem your shares (the difference being that the Fund's 0.5% redemption fee would not apply to any of the following periods, as it would to those in the preceding example): 12 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $81 $146 $218 $429 - -------------------------------------------------------- These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $10.8 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--May 4, 1994 Admiral Shares--June 23, 2006 - ------------------------------------------------------------------------------- Newspaper Abbreviation EmerMkt EmMkAdml - ------------------------------------------------------------------------------- Vanguard Fund Number 533 5533 - ------------------------------------------------------------------------------- Cusip Number 922042304 922042841 - ------------------------------------------------------------------------------- Ticker Symbol VEIEX VEMAX - ------------------------------------------------------------------------------- 13 More on the Funds This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for 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 each 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. Under normal circumstances, each Fund will invest at least 80% of its assets in the types of stocks indicated by its name. A Fund may change its 80% policy or indexing strategy upon 60 days' notice to shareholders. Note that each Fund's investment objective is not fundamental and may be changed without a shareholder vote. Advantages of Index Funds Index funds typically have the following characteristics: - -Variety of investments. Most Vanguard index funds generally invest in the securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have low or no research costs and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Indexing Methods In seeking to track a particular index, a fund generally uses one of the following methods to select the securities in which it invests. Replication method. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in approximately the same proportion as represented in the index itself. For example, if 5% of the Standard & Poor's 500 Index were made up of the stock of a specific company, a fund tracking that index would invest approximately 5% of its assets in that company. Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund employ this method of indexing. 14 Sampling method. Because it would be expensive and inefficient to buy and sell all securities held in certain indexes (the Dow Jones Wilshire 5000 Composite Index, for example, included more than 4,956 separate stocks as of October 31, 2006), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund selects, from the target index, a representative sample of securities that will resemble the full target index in terms of key risk factors and other characteristics. For stock funds, these factors include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. For certain stock index funds, the advisor seeks to reduce risk by using a different form of sampling--determining whether or no to invest in certain securities based on an analysis of several factors, which vary from fund to fund. Vanguard Emerging Markets Stock Index Fund employs this method of indexing. Market Exposure To track their target indexes as closely as possible, the Funds attempt to remain fully invested in the foreign stocks included in their particular indexes. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- FLAG Each Fund is subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. To illustrate the volatility of international stock prices, the following table shows the best, worst, and average annual total returns for foreign stock markets over various periods as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of international market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses 15 that a real-world investment portfolio would incur. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Funds in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 16
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Funds in particular. FLAG Each 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 Regional Versus Broad International Investing Regional funds are international funds that invest in a particular geographical region, such as Europe or the Pacific Basin. Because they concentrate their holdings in a single region, these funds typically have higher share-price volatility than broadly diversified international stock funds (which, by investing in many different foreign markets, may offset losses from one country with gains from another at any given time). - -------------------------------------------------------------------------------- 17 Security Selection In seeking to track their target indexes, the Funds invest in portfolios of foreign stocks selected in a manner that mirrors the weightings of their target indexes. European Stock Index Fund. The Fund invests in the common stocks included in the MSCI Europe Index, which is made up of approximately 603 common stocks of companies located in 16 European countries. Four countries--the United Kingdom, France, Germany, and Switzerland--dominate the Index. These four countries made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 12 countries--Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden--are much less significant to the Index and, consequently, to the Fund. The Fund's heavy exposure to just four countries subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $55.2 billion. Pacific Stock Index Fund. The Fund invests in the common stocks included in the MSCI Pacific Index, which is made up of approximately 562 common stocks of Pacific Basin companies. The Index is dominated by the Japanese stock market, which represented 74% of the Index's market capitalization as of October 31, 2006. The other three markets represented in the Index are Australia, Hong Kong, and Singapore. The Fund's large investment in the Japanese stock market subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $17 billion. Emerging Markets Stock Index Fund. The Fund invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, which is made up of approximately 840 common stocks of companies located in 25 emerging markets of Europe, Asia, Africa, and Latin America. (The depositary receipt for a common stock will be considered to be a common stock for the purposes of meeting this percentage test.) Five countries--South Korea, Taiwan, Brazil, China, and Russia--collectively represent a majority of the Index, with 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 20 countries are Argentina, Chile, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, South Africa, Thailand, and Turkey. The Fund's advisor employs a sampling technique, using its discretion--based on an analysis that considers liquidity, repatriation of capital, and entry barriers in various markets--to determine whether or not to invest in particular securities. Emerging markets can be substantially more volatile, and substantially less liquid, than both U.S. and more developed foreign markets. In addition, the smaller-capitalization stocks in which the Emerging Markets Stock Index Fund typically invests 18 often perform quite differently from the large-cap stocks that dominate the overall stock market. Therefore, the Fund may expose investors to a higher degree of volatility and illiquidity than funds that invest in more developed markets. As of October 31, 2006, the MSCI Emerging Markets Index had an asset-weighted median market capitalization of $12.2 billion. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. Depositary Receipts. Each Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, each Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, a Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. A Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. Each Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. Other Investment Policies and Risks Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund's agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same market segment as the current index. Each Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of underlying securities, assets, or market indexes. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Each Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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 19 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Funds may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Cash Management Vanguard may invest each Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Purchase and Redemption Fees Vanguard Emerging Markets Stock Index Fund charges a 0.5% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 0.5% fee on redemptions of its shares, including shares redeemed by exchanging to another Vanguard fund. Participants who exchange into Vanguard European and Pacific Stock Index Funds will be subject to a 2% redemption fee if they subsequently exchange those shares out of the Fund within two months. When shares are exchanged out of the European and Pacific Stock Index Funds, Vanguard first exchanges shares that are exempt from redemption fees (such as shares purchased with dividend or capital gains distributions and shares purchased with plan participant payroll or employer contributions). Shares a participant has held the longest will be redeemed next. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption fees are designed to ensure that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. See the Fund Profiles and Investing With Vanguard for more information about fees. Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is 20 shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, a participant from exchanging into a fund account for 60 calendar days after the participant exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 21 Turnover Rate Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, index-oriented funds sell securities only in response to redemption requests or changes in the composition of a target index. Because of this, the turnover rate for each Fund has been very low. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for passively managed foreign stock funds was approximately 28%; for all foreign stock funds, the average turnover rate was approximately 76%, as reported by Morningstar, Inc., on October 31, 2006. - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. - -------------------------------------------------------------------------------- The Funds and Vanguard Each Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. 22 - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended October 31, 2006, the advisory expenses of the European, Pacific, and Emerging Markets Stock Index Funds represented an effective annual rate of 0.01% or less of each Fund's average net assets. For a discussion of why the board of trustees approved each Fund's investment advisory arrangement, see the Funds' most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. 23 - -------------------------------------------------------------------------------- Plain Talk About the Funds' Portfolio Managers The managers primarily responsible for the day-to-day management of the Funds are: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989 and has managed the European Stock Index Fund since 1992 and the Emerging Markets Stock Index Fund since 1994. Education: B.S., LaSalle University. Michael H. Buek, Principal of Vanguard. He has been with Vanguard since 1987 and has managed the Pacific Stock Index Fund since 1997. Education: B.S., University of Vermont; M.B.A., Villanova University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Funds. Dividends, Capital Gains, and Taxes Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax advisor about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- 24 Share Price Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected because the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 25 Financial Highlights The following financial highlights tables are intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Admiral Share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Admiral Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with each Fund's financial statements--is included in the Funds' most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Tables This explanation uses the European Stock Index Fund's Admiral Shares as an example. The Admiral Shares began fiscal year 2006 with a net asset value (price) of $63.44 per share. During the year, each Admiral Share earned $2.23 from investment income (interest and dividends) and $17.51 from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $1.68 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $81.50, reflecting earnings of $19.74 per share and distributions of $1.68 per share. This was an increase of $18.06 per share (from $63.44 at the beginning of the year to $81.50 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was 31.77% for the year. As of October 31, 2006, the Admiral Shares had approximately $2.2 billion in net assets. For the year, the expense ratio was 0.17% ($1.70 per $1,000 of net assets), and the net investment income amounted to 3.45% of average net assets. The Fund sold and replaced securities valued at 6% of its net assets. - -------------------------------------------------------------------------------- 26
European Stock Index Fund Admiral Shares - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended October 31, ------------------------------------------------------------------------------------ 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $63.44 $55.84 $46.82 $38.61 $45.77 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 2.23 1.611 1.308 1.070 .96 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 17.51 7.396 8.830 8.115 (7.08) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 19.74 9.007 10.138 9.185 (6.12) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $81.50 $63.44 $55.84 $46.82 $38.61 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 31.77% 16.32% 21.98% 24.42% -13.74% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $2,175 $1,360 $628 $447 $335 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.18% 0.18% 0.23% 0.23% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 3.45% 2.93% 2.76% 2.84% 2.41% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 6% 5% 5% 6% 15% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
27
Pacific Stock Index Fund Admiral Shares Year Ended October 31, 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $68.05 $56.47 $51.05 $38.63 $44.40 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.302 1.069 .835 .575 .461 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 11.185 11.583 5.318 12.318 (6.016) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 12.487 12.652 6.153 12.893 (5.555) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $79.43 $68.05 $56.47 $51.05 $38.63 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 18.46% 22.68% 12.23% 33.82% -12.55% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,128 $720 $314 $198 $102 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.20% 0.25% 0.30% 0.30% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.83% 1.90% 1.69% 1.59% 1.16% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 2% 7% 3% 3% 20% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
28 Emerging Markets Stock Index Fund Admiral Shares Jun. 23/1/ to Oct. 31, 2006 - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $25.00 - ------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------- Net Investment Income .222 - ------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 3.808 on Investments/2/ - ------------------------------------------------------------------------------- Total from Investment Operations 4.030 - ------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------- Dividends from Net Investment Income -- - ------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- - ------------------------------------------------------------------------------- Total Distributions -- - ------------------------------------------------------------------------------- Net Asset Value, End of Period $29.03 - ------------------------------------------------------------------------------- Total Return/3/ 16.12% - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,491 - ------------------------------------------------------------------------------- Ratio of Total Expenses to Average 0.30%/4/ Net Assets - ------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net 2.32%/4/ Assets - ------------------------------------------------------------------------------- Turnover Rate/5/ 26% - ------------------------------------------------------------------------------- 1 Inception. 2 Includes increases from redemption fees of $0.01. 3 Total returns do not reflect the 0.5% transaction fee on purchases and the 0.5% fee assessed on redemptions. 4 Annualized. 5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units. 29 Investing With Vanguard Your retirement or savings plan investment options include one or both of the Funds. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect a Fund as an investment option. - -If you have any questions about a Fund or Vanguard, including those about a Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 800-523-1188. - -If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. - -Be sure to carefully read each topic that pertains to your transactions with Vanguard. - -Vanguard reserves the right to change these policies without prior notice to shareholders. Investment Options and Allocations Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. Transactions Contribution, exchange, or redemption requests must be in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined NAV after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's NAV. This is known as your trade date. Redemption Fees Redemption fees apply to shares exchanged out of a fund into which they were exchanged, rolled over, or transferred by the participant within the fund's redemption-fee period. The fee is withheld from redemption proceeds and is retained by the fund. Shares held longer than the redemption-fee holding period are not subject to the fee. After exchanging shares that are exempt from redemption fees, shares you have held the longest will be exchanged first. For retirement plan participants, redemption fees do not apply to the following: 30 - -Exchanges of shares purchased with participant payroll or employer contributions. - -Exchanges of shares purchased with reinvested dividend and capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. - -Conversions of shares from one share class to another in the same fund. - -Redemptions of shares to pay fund or account fees. - -Re-registration of shares in the same fund. Exchanges The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard places certain limits on the exchange privilege. If you are exchanging out of any Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares), the following policy applies, regardless of the dollar amount: - -You must wait 60 days before exchanging back into the fund. - -The 60-day clock restarts after every exchange out of the fund. The policy does not apply to the following: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares within the same fund. - -Conversions of shares from one share class to another in the same fund. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. 31 Before making an exchange to or from another fund available in your plan, consider the following: - -Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. - -Be sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 800-523-1188 for a copy. - -Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on other exchange policies that apply to your plan. Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not serve as recordkeeper for your plan, your plan's recordkeeper will establish accounts in Vanguard funds. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will 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 participants' trading activity in the Vanguard funds. For those Vanguard funds that charge purchase or redemption fees, intermediaries that establish accounts in the Vanguard funds will be asked to assess purchase or redemption fees on participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase or redemption fees or administer frequent-trading policies. If a firm other than Vanguard serves as recordkeeper for your plan, please read that firm's materials carefully to learn of any other rules or fees that may apply. Portfolio Holdings We generally post on our website at www.vanguard.com, in the Holdings section of each Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 32 Accessing Fund Information by Computer Vanguard on the World Wide Web WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. Vanguard, Connect with Vanguard, PlainTalk, Admiral, Vanguard ETF, and the ship logo are trademarks of The Vanguard Group, Inc. The Funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All other marks are the exclusive property of their respective owners. 33 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. 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. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 34 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. 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. 35 This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard International Stock Index Funds, the following documents are available free upon request: Annual/Semiannual Reports to Shareholders Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Statement of Additional Information (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Funds or other Vanguard funds, please visit www.vanguard.com or contact us as follows: The Vanguard Group Participant Access Center P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 800-523-1188 Text Telephone for the hearing impaired: 800-749-7273 Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Funds are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I572 022007 Vanguard/(R)/ International Stock Index Funds > Prospectus Institutional Shares February 28, 2007 SHIP LOGO VANGUARD(R) Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund Vanguard Emerging Markets Stock Index Fund LOGO [INDEXED TO MSCI] This prospectus contains financial data for the Funds through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - ------------------------------------------------------------------------------- An Introduction to Index Funds 1 Investing with Vanguard 34 - ------------------------------------------------------------------------------- Vanguard Fund Profiles 2 Purchasing 34 Shares - ------------------------------------------------------------------------------- European Stock Index Fund 2 Converting Shares 37 - ------------------------------------------------------------------------------- Pacific Stock Index Fund 6 Redeeming Shares 38 - ------------------------------------------------------------------------------- Emerging Markets Stock Index 10 Exchanging Shares 42 Fund - ------------------------------------------------------------------------------- More on the Funds 15 Frequent-Trading Limits 42 - ------------------------------------------------------------------------------- The Funds and Vanguard 23 Other Rules You Should Know 44 - ------------------------------------------------------------------------------- Investment Advisor 24 Fund and Account Updates 47 - ------------------------------------------------------------------------------- Dividends, Capital Gains, and 25 Contacting Vanguard 49 Taxes - ------------------------------------------------------------------------------- Share Price 27 ETF Shares 51 - ------------------------------------------------------------------------------- Financial Highlights 29 Glossary of Investment Terms 56 - ------------------------------------------------------------------------------- Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. Share Class Overview This prospectus offers the Funds' Institutional Shares, which are for investors who generally do not require special employee benefit plan services and who invest a minimum of $5 million. A separate prospectus offers Investor Shares for all of the Funds, which have an investment minimum of $3,000, as well as Admiral(TM)/ /Shares, which have a minimum of $100,000. A separate prospectus offers Signal(TM) Shares, which are generally for Institutional clients who invest at least $1 million and meet other eligibility requirements. In addition, each Fund provides an exchange-traded class of shares (Vanguard ETF Shares), which are also offered through a separate prospectus. A brief description of ETF Shares and how to convert into them appears on pages 51 to 55 of this prospectus. The Funds' separate share classes have different expenses; as a result, their investment performances will vary. 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 in This Prospectus Vanguard offers a variety of stock index funds (both U.S. and international), as well as bond and balanced index funds. This prospectus provides information about Vanguard International Stock Index Funds' Institutional Shares. Each Fund seeks to track a particular segment of the international stock market. Fund Seeks to Track - ------------------------------------------------------------------------------- Vanguard European Stock Index European stock markets Fund - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Australian and Far East stock markets - ------------------------------------------------------------------------------- Vanguard Emerging Markets Stock 25 emerging stock markets in Europe, Asia, Index Fund Africa, and Latin America - ------------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 1 Fund Profile--Vanguard European Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index. The MSCI Europe Index is made up of approximately 603 common stocks of companies located in 16 European countries--mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization, as of October 31, 2006). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden. For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. Primary Risk 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to four countries (the United Kingdom, France, Switzerland, and Germany) subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, Europe--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's 2 Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns--Institutional Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 2001 -20.22% 2002 -17.82 2003 38.89 2004 21.05 2005 9.44 2006 33.64 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 22.28% (quarter ended June 30, 2003), and the lowest return for a quarter was -22.87% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years Since Inception/1/ - -------------------------------------------------------------------------------- Vanguard European Stock Index Fund Institutional Shares - ------------------------------------------------------------------------------- Return Before Taxes 33.64% 15.11% 7.00% - ------------------------------------------------------------------------------- Return After Taxes on 33.05 14.53 6.36 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale 22.50 13.03 5.74 of Fund Shares - ------------------------------------------------------------------------------- MSCI Europe Index/2/ (reflects no deduction for fees, expenses, or 33.72% 14.87% 6.92% taxes) - ------------------------------------------------------------------------------- 1 Since-inception returns are from May 15, 2000--the inception date of the Institutional Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 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 3 returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 those incurred in the fiscal year ended October 31, 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 Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.07% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.05% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.12% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 4 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $12 $39 $68 $154 - ---------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information as of October 31, 2006 - -------------------------------------------------------------------------------- Net Assets (all share classes) $23.4 billion - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - -------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - -------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Institutional Shares--May 5, 2000 - -------------------------------------------------------------------------------- Newspaper Abbreviation EuroInst - -------------------------------------------------------------------------------- Vanguard Fund Number 235 - -------------------------------------------------------------------------------- Cusip Number 922042502 - -------------------------------------------------------------------------------- Ticker Symbol VESIX - -------------------------------------------------------------------------------- 5 Fund Profile--Vanguard Pacific Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of the Pacific region. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the MSCI Pacific Index. The MSCI Pacific Index consists of approximately 562 common stocks of companies located in Japan, Australia, Hong Kong, and Singapore. (As of October 31, 2006, Japan and Australia made up 74% and 18%, respectively, of the Index's market capitalization.) For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to Japan subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, the Pacific region--will be hurt by political upheaval, financial troubles, or natural disasters. - -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's Institutional Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. Keep in mind that the Fund's 6 past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns--Institutional Shares - ------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 2001 -26.27% 2002 -9.19 2003 38.65 2004 19.00 2005 22.87 2006 12.21 - ------------------------------------------------------------ During the periods shown in the bar chart, the highest return for a calendar quarter was 18.72% (quarter ended September 30, 2003), and the lowest return for a quarter was -18.25% (quarter ended September 30, 2001). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years Since Inception/1/ - -------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Institutional Shares - ------------------------------------------------------------------------------- Return Before Taxes 12.21% 15.61% 3.37% - ------------------------------------------------------------------------------- Return After Taxes on 11.66 15.17 2.98 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale 8.26 13.55 2.70 of Fund Shares - ------------------------------------------------------------------------------- MSCI Pacific Index/2/ (reflects no deduction for fees, expenses, or 12.20% 15.51% 3.50% taxes) - ------------------------------------------------------------------------------- 1 Since-inception returns are from May 15, 2000--the inception date of the Institutional Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 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 account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher 7 than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 those incurred in the fiscal year ended October 31, 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 Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.07% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.05% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.12% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $12 $39 $68 $154 - ---------------------------------------------------------- 8 This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $11.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Institutional Shares--May 15, 2000 - ------------------------------------------------------------------------------- Newspaper Abbreviation PacInst - ------------------------------------------------------------------------------- Vanguard Fund Number 237 - ------------------------------------------------------------------------------- Cusip Number 922042403 - ------------------------------------------------------------------------------- Ticker Symbol VPKIX - ------------------------------------------------------------------------------- 9 Fund Profile--Vanguard Emerging Markets Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 840 common stocks of companies located in emerging markets around the world. As of October 31, 2006, the largest markets covered in the Index were South Korea, Taiwan, Brazil, China, and Russia (which made up 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization). For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. The Index's, and therefore the Fund's, heavy exposure to South Korea, Taiwan, Brazil, China, and Russia subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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's Institutional Shares (including operating expenses but excluding shareholder fees) has 10 varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Institutional Shares (including operating expenses and any applicable shareholder fees) compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns--Institutional Shares1 - ------------------------------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2001 -2.74% 2002 -7.28 2003 57.97 2004 26.24 2005 32.35 2006 29.57 - ------------------------------------------------------------------------------- 1 If applicable shareholder fees were reflected, returns would be less than those shown. During the periods shown in the bar chart, the highest return for a calendar quarter was 25.53% (quarter ended December 31, 2001), and the lowest return for a quarter was -21.92% (quarter ended September 30, 2001). 11 Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years Since Inception/1/ - -------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Fund Institutional Shares - ------------------------------------------------------------------------------- Return Before Taxes 28.30% 25.72% 14.93% - ------------------------------------------------------------------------------- Return After Taxes on 27.96 25.35 14.36 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale 18.84 22.88 12.93 of Fund Shares - ------------------------------------------------------------------------------- Comparative Indexes (reflect no deduction for fees, expenses, or taxes) - ------------------------------------------------------------------------------- MSCI Emerging Markets 32.17% 26.59% -- Index/2// / - ------------------------------------------------------------------------------- Spliced Emerging 29.73 26.38 15.37 Markets Index/3/ - ------------------------------------------------------------------------------- 1 Since-inception returns are from June 22, 2000--the inception date of the Institutional Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 3 The Spliced Emerging Markets Index consists of the Select Emerging Markets Index through August 23, 2006, and the MSCI Emerging Markets Index thereafter. The Select Emerging Markets Index was discontinued on August 24, 2006. Note on after-tax returns. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains. 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 account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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 those incurred in the fiscal year ended October 31, 2006. 12 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee 0.5%/1/ - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested None Dividends - ------------------------------------------------------------------------------- Redemption Fee 0.5%/2/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted directly from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.10% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.15% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.25% - ------------------------------------------------------------------------------- 1 The purchase fee is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains. 2 The 0.5% fee applies to shares redeemed by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. The following examples are intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses remain the same, and that you redeem your shares at the end of the given period. 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $128 $187 $253 $446 - ---------------------------------------------------------- You would pay the following expenses if you did not redeem your shares (the difference being that the Fund's 0.5% redemption fee would not apply to any of the following periods, as it would to those in the preceding example): 1 Year 3 Years 5 Years 10 Years - ---------------------------------------------------------- $75 $130 $190 $367 - ---------------------------------------------------------- These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. 13 Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $10.8 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--May 4, 1994 Institutional Shares--June 22, 2000 - ------------------------------------------------------------------------------- Newspaper Abbreviation EmergInst - ------------------------------------------------------------------------------- Vanguard Fund Number 239 - ------------------------------------------------------------------------------- Cusip Number 922042601 - ------------------------------------------------------------------------------- Ticker Symbol VEMIX - ------------------------------------------------------------------------------- 14 More on the Funds This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for 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 each 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. Under normal circumstances, each Fund will invest at least 80% of its assets in the types of stocks indicated by its name. A Fund may change its 80% policy or indexing strategy upon 60 days' notice to shareholders. Note that each Fund's investment objective is not fundamental and may be changed without a shareholder vote. Advantages of Index Funds Index funds typically have the following characteristics: - -Variety of investments. Most Vanguard index funds generally invest in the securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have low or no research costs and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Compared with actively managed funds, most index funds have lower turnover rates and lower capital gains distributions. However, from time to time, some index funds may pay out higher-than-expected taxable distributions. That's because index funds must adjust their holdings to reflect changes in their target indexes. In some cases, such changes may force an index fund to sell securities that have appreciated in value, thereby realizing a capital gain that must be distributed to shareholders. A security may move out of an index for a number of reasons, including a merger or acquisition, or a substantial change in the market capitalization of the issuer. Generally, these changes tend to occur more frequently with small and medium-size companies than they do with large, well-established companies. 15 Indexing Methods In seeking to track a particular index, a fund generally uses one of the following methods to select the securities in which it invests. Replication method. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in approximately the same proportion as represented in the index itself. For example, if 5% of the Standard & Poor's 500 Index were made up of the stock of a specific company, a fund tracking that index would invest approximately 5% of its assets in that company. Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund employ this method of indexing. Sampling method. Because it would be expensive and inefficient to buy and sell all securities held in certain indexes (the Dow Jones Wilshire 5000 Composite Index, for example, included more than 4,956 separate stocks as of October 31, 2006), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund selects, from the target index, a representative sample of securities that will resemble the full target index in terms of key risk factors and other characteristics. For stock funds, these factors include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. For certain stock index funds, the advisor seeks to reduce risk by using a different form of sampling--determining whether or no to invest in certain securities based on an analysis of several factors, which vary from fund to fund. Vanguard Emerging Markets Stock Index Fund employs this method of indexing. Market Exposure To track their target indexes as closely as possible, the Funds attempt to remain fully invested in foreign stocks included in their particular indexes. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 16 FLAG Each Fund is subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. To illustrate the volatility of international stock prices, the following table shows the best, worst, and average annual total returns for foreign stock markets over various periods as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of international market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Funds in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 17
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Funds in particular. FLAG Each 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 Regional Versus Broad International Investing Regional funds are international funds that invest in a particular geographical region, such as Europe or the Pacific Basin. Because they concentrate their holdings in a single region, these funds typically have higher share-price volatility than broadly diversified international stock funds (which, by investing in many different foreign markets, may offset losses from one country with gains from another at any given time). - -------------------------------------------------------------------------------- 18 Security Selection In seeking to track their target indexes, the Funds invest in portfolios of foreign stocks selected in a manner that mirrors the weightings of their target indexes. European Stock Index Fund. The Fund invests in the common stocks included in the MSCI Europe Index, which is made up of approximately 603 common stocks of companies located in 16 European countries. Four countries--the United Kingdom, France, Germany, and Switzerland--dominate the Index. These four countries made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 12 countries--Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden--are much less significant to the Index and, consequently, to the Fund. The Fund's heavy exposure to just four countries subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $55.2 billion. Pacific Stock Index Fund. The Fund invests in the common stocks included in the MSCI Pacific Index, which is made up of approximately 562 common stocks of Pacific Basin companies. The Index is dominated by the Japanese stock market, which represented 74% of the Index's market capitalization as of October 31, 2006. The other three markets represented in the Index are Australia, Hong Kong, and Singapore. The Fund's large investment in the Japanese stock market subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $17 billion. Emerging Markets Stock Index Fund. The Fund invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, which is made up of approximately 840 common stocks of companies located in 25 emerging markets of Europe, Asia, Africa, and Latin America. (The depositary receipt for a common stock will be considered to be a common stock for the purposes of meeting this percentage test.) Five countries--South Korea, Taiwan, Brazil, China, and Russia--collectively represent a majority of the Index, with 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 20 countries are Argentina, Chile, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, South Africa, Thailand, and Turkey. The Fund's advisor employs a sampling technique, using its discretion--based on an analysis that considers liquidity, repatriation of capital, and entry barriers in various markets--to determine whether or not to invest in particular securities. Emerging markets can be substantially more volatile, and substantially less liquid, than both U.S. and more developed foreign markets. In addition, the smaller-capitalization stocks in which the Emerging Markets Stock Index Fund typically invests 19 often perform quite differently from the large-cap stocks that dominate the overall stock market. Therefore, the Fund may expose investors to a higher degree of volatility and illiquidity than funds that invest in more developed markets. As of October 31, 2006, the MSCI Emerging Markets Index had an asset-weighted median market capitalization of $12.2 billion. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. Depositary Receipts. Each Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, each Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, a Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. A Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. Each Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. Other Investment Policies and Risks Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund's agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same market segment as the current index. Each Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Each Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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 20 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Funds may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Cash Management Vanguard may invest each Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Purchase and Redemption Fees Vanguard Emerging Markets Stock Index Fund charges a 0.5% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 0.5% fee on redemptions of its shares, including shares redeemed by exchanging to another Vanguard fund. Vanguard European and Pacific Stock Index Funds charge a 2% redemption fee on shares that are redeemed before they have been held for two months. The 2% fee applies when shares are redeemed by selling or by exchanging to another Vanguard fund. Shares you have held the longest will be redeemed first. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption fees are designed to ensure that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. See the Fund Profiles and Investing With Vanguard for more information about fees. Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the 21 long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will use fair-value pricing as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. Do not invest with Vanguard if you are a market-timer. - -------------------------------------------------------------------------------- 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. - ------------------------------------------------------------------------------- 22 Turnover Rate Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, index-oriented funds sell securities only in response to redemption requests or changes in the composition of a target index. Because of this, the turnover rate for each Fund has been very low. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for passively managed foreign stock funds was approximately 28%; for all foreign stock funds, the average turnover rate was approximately 76%, as reported by Morningstar, Inc., on October 31, 2006. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. - -------------------------------------------------------------------------------- The Funds and Vanguard Each Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. 23 - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended October 31, 2006, the advisory expenses of the European, Pacific, and Emerging Markets Stock Index Funds represented an effective annual rate of 0.01% or less of each Fund's average net assets. For a discussion of why the board of trustees approved each Fund's investment advisory arrangement, see the Funds' most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. 24 - -------------------------------------------------------------------------------- Plain Talk About the Funds' Portfolio Managers The managers primarily responsible for the day-to-day management of the Funds are: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989 and has managed the European Stock Index Fund since 1992 and the Emerging Markets Stock Index Fund since 1994. Education: B.S., LaSalle University. Michael H. Buek, Principal of Vanguard. He has been with Vanguard since 1987 and has managed the Pacific Stock Index Fund since 1997. Education: B.S., University of Vermont; M.B.A., Villanova University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Funds. Dividends, Capital Gains, and Taxes Fund Distributions Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- 25 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 Funds' 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 your portion of the Fund's foreign tax obligations, provided that you meet certain requirements. See your tax advisor or IRS publications for more information. - -Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 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. 26 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. - -------------------------------------------------------------------------------- Plain Talk About "Buying a Dividend" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- Share Price Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected because the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage 27 a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 28 Financial Highlights The following financial highlights tables are intended to help you understand the Institutional Shares' financial performance for the periods shown, and certain information reflects financial results for a single Institutional Share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Institutional Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with each Fund's financial statements--is included in the Funds' most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. 29 - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Tables This explanation uses the European Stock Index Fund's Institutional Shares as an example. The Institutional Shares began fiscal year 2006 with a net asset value (price) of $27.05 per share. During the year, each Institutional Share earned $.978 from investment income (interest and dividends) and $7.45 from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $0.738 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $34.74, reflecting earnings of $8.428 per share and distributions of $0.738 per share. This was an increase of $7.69 per share (from $27.05 at the beginning of the year to $34.74 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was 31.83% for the year. As of October 31, 2006, the Institutional Shares had approximately $3.1 billion in net assets. For the year, the expense ratio was 0.12% ($1.20 per $1,000 of net assets), and the net investment income amounted to 3.50% of average net assets. The Fund sold and replaced securities valued at 6% of its net assets. - -------------------------------------------------------------------------------- 30
European Stock Index Fund Institutional Shares Year Ended October 31, ----------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, $27.05 $23.80 $19.96 $16.46 $19.52 Beginning of Period - ------------------------------------------------------------------------------------------------------------------------ Investment Operations - ------------------------------------------------------------------------------------------------------------------------ Net Investment Income .978 .721 .57 .471 .414 - ------------------------------------------------------------------------------------------------------------------------ Net Realized and Unrealized Gain (Loss) 7.450 3.140 3.76 3.454 (3.015) on Investments - ------------------------------------------------------------------------------------------------------------------------ Total from Investment 8.428 3.861 4.33 3.925 (2.601) Operations - ------------------------------------------------------------------------------------------------------------------------ Distributions - ------------------------------------------------------------------------------------------------------------------------ Dividends from Net (.738) (.611) (.49) (.425) (.459) Investment Income - ------------------------------------------------------------------------------------------------------------------------ Distributions from -- -- -- -- -- Realized Capital Gains - ------------------------------------------------------------------------------------------------------------------------ Total Distributions (.738) (.611) (.49) (.425) (.459) - ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, End of $34.74 $27.05 $23.80 $19.96 $16.46 Period - ------------------------------------------------------------------------------------------------------------------------ Total Return/1/ 31.83% 16.42% 22.03% 24.49% -13.71% - ------------------------------------------------------------------------------------------------------------------------ Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------ Net Assets, End of $3,113 $1,827 $988 $649 $311 Period (Millions) - ------------------------------------------------------------------------------------------------------------------------ Ratio of Total Expenses 0.12% 0.12% 0.12% 0.17% 0.18% to Average Net Assets - ------------------------------------------------------------------------------------------------------------------------ Ratio of Net Investment Income to Average 3.50% 2.99% 2.77% 2.96% 2.46% Net Assets - ------------------------------------------------------------------------------------------------------------------------ Turnover Rate/2/ 6% 5% 5% 6% 15% - ------------------------------------------------------------------------------------------------------------------------ 1 Total returns do not reflect the 2% fee assessed on redemption of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
31
Pacific Stock Index Fund Institutional Shares Year Ended October 31, ------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------- Net Asset Value, $10.41 $8.64 $7.81 $5.91 $6.79 Beginning of Period - ------------------------------------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------------------------------------- Net Investment Income .206 .18 .134 .090 .081 - ------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain 1.710 1.76 .814 1.885 (.923) (Loss) on Investments - ------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.916 1.94 .948 1.975 (.842) - ------------------------------------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------------------------------------- Dividends from Net (.176) (.17) (.118) (.075) (.038) Investment Income - ------------------------------------------------------------------------------------------------------------- Distributions from -- -- -- -- -- Realized Capital Gains - ------------------------------------------------------------------------------------------------------------- Total Distributions (.176) (.17) (.118) (.075) (.038) - ------------------------------------------------------------------------------------------------------------- Net Asset Value, End $12.15 $10.41 $8.64 $7.81 $5.91 of Period - ------------------------------------------------------------------------------------------------------------- Total Return/1/ 18.52% 22.74% 12.32% 33.88% -12.44% - ------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------- Net Assets, End of $1,788 $1,280 $754 $369 $131 Period (Millions) - ------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average 0.12% 0.14% 0.17% 0.22% 0.25% Net Assets - ------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to 1.88% 1.95% 1.76% 1.70% 1.20% Average Net Assets - ------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 2% 7% 3% 3% 20% - ------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
32
Emerging Markets Stock Index Fund Institutional Shares Year Ended October 31, ---------------------------------------------------------------------- 2006 2005 2004 2003 2002 - ------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $16.95 $12.90 $11.05 $7.49 $7.29 - ------------------------------------------------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------------------------------------------------- Net Investment Income .443 .344 .287 .183 .165 - ------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 5.059 3.982 1.749 3.512 .246 on Investments/1/ - ------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 5.502 4.326 2.036 3.695 .411 - ------------------------------------------------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (.342) (.276) (.186) (.135) (.211) - ------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital -- -- -- -- -- Gains - ------------------------------------------------------------------------------------------------------------------------- Total Distributions (.342) (.276) (.186) (.135) (.211) - ------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $22.11 $16.95 $12.90 $11.05 $7.49 - ------------------------------------------------------------------------------------------------------------------------- Total Return/2/ 32.78% 33.92% 18.64% 50.06% 5.40% - ------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $559 $468 $245 $137 $76 - ------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.25% 0.25% 0.33% 0.38% 0.41% Assets - ------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.37% 2.64% 2.61% 2.41% 1.85% - ------------------------------------------------------------------------------------------------------------------------- Turnover Rate/3/ 26% 15% 11% 16% 65% - ------------------------------------------------------------------------------------------------------------------------- 1 Includes increases from redemption fees of $0.01, $0.00, $0.00, $0.00, and $0.00. 2 Total returns do not reflect the 0.5% transaction fee on purchases; the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; or the 0.5% fee on all other redemptions. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
33 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing Shares Account Minimums for Institutional Shares To open and maintain an account. $5 million. Vanguard institutional clients generally may meet the minimum investment amount by aggregating up to three separate accounts within the same Fund. This policy does not apply to clients receiving special administrative services from Vanguard, nor does this policy apply to omnibus accounts maintained by financial intermediaries. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How 34 to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--"Fund # . " For a list of Fund numbers (for Funds in this prospectus), see Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. 35 For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Purchase Fees The Emerging Markets Stock Index Fund charges a purchase fee of 0.5% on all share purchases, including shares purchased by exchange from other Vanguard funds. In addition, each Fund reserves the right to impose purchase fees on all share purchases. Purchase fees do not apply to shares purchased through reinvested dividends and capital gains. Other 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, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a fund's operation or performance. Large purchases. Please call Vanguard before attempting to invest a large dollar amount. 36 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, wire, check, or automatic transaction requests, Vanguard will not cancel any transaction once it has been processed. Converting Shares A conversion between share classes of the same fund is a nontaxable event. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's net asset values. At the time of conversion, the total dollar value of your "old" shares will equal the total dollar value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total dollar value of your "new" shares compared with that of your "old" shares. Conversions From Investor Shares, Admiral(TM) Shares, or Signal Shares You are eligible for a self-directed conversion from Investor Shares, Admiral Shares, or Signal Shares into Institutional Shares of the same Fund, provided that your account balance is at least $5 million. Registered users of our website, www.vanguard.com, may request a conversion online, or you may contact Vanguard by telephone or by mail to request this transaction. Mandatory Conversions Into Investor Shares or Admiral Shares If an investor no longer meets the requirements for Institutional Shares, the Fund may automatically convert the investor's Institutional Shares into Investor Shares or Admiral Shares, as appropriate. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares or Admiral Shares. 37 Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange 38 (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: For telephone requests received by Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Redemption Fees Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund each charge a 2% redemption fee on shares redeemed within two months of purchase. Shares held for two months or more are not subject to the fee. Vanguard Emerging Markets Stock Index Fund charges a 0.5% redemption fee. Each Fund's redemption fee applies to shares redeemed by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and is paid directly to the Fund to offset the cost of buying and selling securities. After redeeming shares that are exempt from redemption fees, shares you have held the longest will be redeemed first. 39 For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), redemption fees will not apply to the following: - -Redemptions of shares purchased with reinvested dividend and capital gains distributions (not applicable to Vanguard Emerging Markets Stock Index Fund). - -Share transfers, rollovers, or re-registrations within the same fund. - -Conversions of shares from one share class to another in the same fund. - -Redemptions of shares to pay fund or account fees. - -Section 529 college savings plans. - -For a one-year period, shares (except shares of Vanguard Emerging Markets Stock Index Fund) rolled over to an IRA held at Vanguard from a retirement plan for which Vanguard serves as recordkeeper (except for Vanguard Small Business Services retirement plans). - -Distributions by shareholders age 701/2 or older from the following (not applicable to Vanguard Emerging Markets Stock Index Fund): -Traditional IRAs. -Inherited IRAs (traditional and Roth). -Rollover IRAs. -SEP-IRAs. -SIMPLE IRAs. -Section 403(b)(7) plans served by the Vanguard Small Business Services Department. -Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee. For participants in employer-sponsored defined contribution plans (other than those serviced by the Vanguard Small Business Services Department), in addition to the exclusions previously listed, redemption fees will not apply to the following: - -Exchanges of shares purchased with participant payroll or employer contributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. Redemption fees will apply to shares exchanged out of a fund within the fund's redemption-fee period into which fund the shares had previously been exchanged, rolled over, or transferred by a participant. 40 If Vanguard does not serve as recordkeeper for your plan, redemption fees may be applied differently. Please read your recordkeeper's plan materials carefully to learn of any other rules or fees that may apply. Also see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees by intermediaries. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would negatively affect the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance. Share certificates. If share certificates have been issued for your fund 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. 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 41 been confirmed. In the case of written or automatic 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 an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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. 42 - -Conversions of shares from one share class to another in the same fund. - -Checkwriting redemptions. - -Section 529 college savings plans. - -Certain approved institutional portfolios and asset allocation programs, as well as trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, the frequent-trading policy does not apply to: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares. - -Conversions of shares from one share class to another in the same fund. Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege. Accounts Held by Intermediaries When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of 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 and redemption fees on shareholder and participant 43 accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. Telephone Transactions Automatic. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. Tele-Account/(R)/. To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information: - -Authorization to act on the account (as the account owner or by legal documentation or other means). - -Account registration and address. - -Social Security or employer identification number. - -Fund name and account number, if applicable. - -Other information relating to the caller, the account holder, or the account. 44 Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: - -The fund name and account number. - -The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: - -Signatures of all registered owners. - -Signature guarantees, if required for the type of transaction.* - -Any supporting legal documentation that may be required. The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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 account statements that we send to you. It is important that you contact Vanguard immediately about any transactions you believe to be unauthorized. 45 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. Low-Balance Accounts Each Fund reserves the right to convert an investor's Institutional Shares into Investor Shares or Admiral Shares of the Fund if the investor's fund account balance falls below the minimum initial investment. Any such conversion will be preceded by written notice to the investor. No purchase or redemption fee will be imposed on share-class conversions. Right to Change Policies In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. 46 Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 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. 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. 47 Annual and Semiannual Reports We will send (or provide online, whichever you prefer) financial reports about Vanguard International Stock Index Funds twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - -Performance assessments and comparisons with industry benchmarks. - -Financial statements with listings of Fund holdings. 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 each Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 48 Contacting Vanguard Web - ------------------------------------------------------------------------------- Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a For fund, account, and service information week For most account transactions For literature requests - ------------------------------------------------------------------------------- Phone - ------------------------------------------------------------------------------- Vanguard Tele-Account(R) For automated fund and account information 800-662-6273 For exchange transactions (subject to limitations) (ON-BOARD) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------- Investor Information For fund and service information 800-662-7447 (SHIP) (Text For literature requests telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., at 800-952-3335) Eastern time - ------------------------------------------------------------------------------- Client Services For account information 800-662-2739 (CREW) (Text For most account transactions telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., at 800-749-7273) Eastern time - ------------------------------------------------------------------------------- Institutional Division For information and services for large 888-809-8102 institutional investors Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial 800-997-2798 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 - ------------------------------------------------------------------------------- 49 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Numbers Please use the specific fund number when contacting us: Vanguard European Stock Index Fund Institutional Shares 235 - ----------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Institutional Shares 237 - ----------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Fund Institutional Shares 239 - ----------------------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Tele-Account, Vanguard Tele-Account, Admiral, Signal, Vanguard ETF, Vanguard Small Business Online, Vanguard Brokerage Services, and the ship logo are trademarks of The Vanguard Group, Inc. The Funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All other marks are the exclusive property of their respective owners. 50 ETF Shares In addition to Institutional Shares, certain Vanguard funds offer a class of shares, known as Vanguard ETF* Shares, that are listed for trading on the American Stock Exchange (AMEX). If you own Institutional Shares issued by one of these funds, you may convert those shares into ETF Shares of the same fund. Note: Vanguard reserves the right to modify or terminate the conversion privilege in the future. Each Fund currently offers an ETF Share class: Fund ETF Shares Ticker Symbol - ------------------------------------------------------------------------------- Vanguard European Stock Index Fund European ETF VGK - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Pacific ETF VPL - ------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Emerging Markets ETF VWO Fund - ------------------------------------------------------------------------------- Although ETF Shares represent an investment in the same portfolio of securities as Institutional Shares, they have different characteristics and may appeal to a different group of investors. It is important that you understand the differences before deciding whether to convert your shares to ETF Shares. The following material summarizes key information about ETF Shares. A separate prospectus with more complete information about ETF Shares is also available. Investors should review that prospectus before deciding whether to convert. Differences between ETF Shares and conventional mutual fund shares Investor Shares, Admiral Shares, Signal Shares, and Institutional Shares are "conventional" mutual fund shares; that is, they can be purchased from and redeemed with the issuing fund for cash at a net asset value (NAV) calculated once a day. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund, except as noted. An organized trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on the AMEX. Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day based on the supply of, and demand for, ETF Shares and on changes in the prices of the fund's portfolio holdings. The market price of a fund's ETF Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. * U.S. Pat. No. 6,879,964 B2. 51 Buying and Selling ETF Shares Vanguard ETF Shares must be held in a brokerage account. Therefore, before acquiring ETF Shares, whether through a conversion or an open-market purchase, you must have an account with a broker. You buy and sell ETF Shares in the same way you buy and sell any other exchange-traded security--on the open market, through a broker. In most cases, the broker will charge you a commission to execute the transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must purchase. Because open-market transactions occur at market prices, you may pay more than NAV when you buy ETF Shares and receive less than NAV when you sell those shares. If you own conventional shares (Investor Shares, Admiral Shares, Signal Shares, or Institutional Shares) of a Vanguard fund that issues ETF Shares, you can convert those shares into ETF Shares of equivalent value--but you cannot convert back. See "Conversion Privilege" for a discussion of the conversion process. There is one other way to buy and sell ETF Shares. Investors can purchase and redeem ETF Shares directly from the issuing fund at NAV if they do so (1) through certain authorized broker-dealers, (2) in large blocks of 100,000 ETF Shares (depending on the fund), known as Creation Units, and (3) in exchange for baskets of securities rather than cash. However, because Creation Units will be worth millions of dollars, and because most investors prefer to transact in cash rather than with securities, it is expected that only a limited number of institutional investors will purchase and redeem ETF Shares this way. Risks ETF Shares issued by a fund are subject to the same risks as conventional shares of the same fund. ETF Shares also are subject to the following risks: - -The market price of a fund's ETF Shares will vary somewhat from the NAV of those shares. Therefore, you may pay more than NAV when buying ETF Shares and you may receive less than NAV when selling them. - -ETF Shares cannot be redeemed with the Fund, except in Creation Unit aggregations. Therefore, if you no longer wish to own ETF Shares, you must sell them on the open market. Although ETF Shares will be listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of a fund's ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if the shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. 52 Fees and Expenses When you buy and sell ETF Shares through a brokerage firm, you will pay whatever commissions the firm charges. You also will incur the cost of the "bid-asked spread," which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. If you convert from conventional shares to ETF Shares, you will not pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50 for each conversion transaction, and your broker may impose its own conversion fees as well. The total annual operating expenses (the expense ratio) for each type of ETF Share are: ETF Shares Expense Ratio - --------------------------------------- European ETF 0.18% - --------------------------------------- Pacific ETF 0.18 - --------------------------------------- Emerging Markets ETF 0.30 - --------------------------------------- Account Services Because you hold ETF Shares through a brokerage account, Vanguard will have no record of your ownership unless you hold the shares through Vanguard Brokerage Services/(R)/ (Vanguard Brokerage). Your broker will service your account. For example, the broker will provide account statements, confirmations of your purchases and sales of ETF Shares, and year-end tax information. The broker also will be responsible for ensuring that you receive shareholder reports and other communications from the fund whose ETF Shares you own. You will receive certain services (e.g., dividend reinvestment and average-cost information) only if your broker offers those services. Conversion Privilege Owners of conventional shares (Investor Shares, Admiral Shares, Signal Shares, or Institutional Shares) issued by a Vanguard fund that offers ETF Shares may convert those shares into ETF Shares of equivalent value of the same fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard imposes a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. Your broker may charge an additional fee to process a conversion. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Unless you are an Authorized Participant, you must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, you must have 53 an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF Shares, please contact your broker. Converting conventional shares into ETF Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. Your Fund's transfer agent will reflect ownership of all ETF Shares in the name of the Depository Trust Company (DTC). The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you. Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion. If you convert your conventional shares to ETF Shares through Vanguard Brokerage Services, all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into ETF Shares: - -The conversion transaction is nontaxable except, as applicable, to the limited extent as previously described. - -The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes 54 conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - -Until the conversion process is complete, you will remain fully invested in 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 ETF Shares. 55 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. Country Risk. The chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. Currency Risk. The chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 56 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. 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. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard International Stock Index Funds, the following documents are available free upon request: Annual/Semiannual Reports to Shareholders Additional information about the Fund's investments is available in the Funds' 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 Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Fund or other Vanguard funds, please visit www.vanguard.com or contact us as follows: If you are an individual investor: The Vanguard Group Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 800-662-7447 (SHIP) Text Telephone for the hearing impaired: 800-952-3335 If you are a client of Vanguard's Institutional Division: The Vanguard Group Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102 Text Telephone for the hearing impaired: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone for the hearing impaired: 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 Funds are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I235 022007 Vanguard/(R)/ International Stock ETFs > Prospectus Exchange-traded fund shares that are not individually redeemable February 28, 2007 SHIP LOGO VANGUARD(R) Vanguard European ETF Vanguard Pacific ETF Vanguard Emerging Markets ETF LOGO [INDEXED TO MSCI] This prospectus contains financial data for the Funds through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - ------------------------------------------------------------------------------- An Introduction to 1 More on the Funds and ETF Shares 18 Vanguard ETF Shares - ------------------------------------------------------------------------------- Vanguard ETF Profiles 3 The Funds and Vanguard 33 - ------------------------------------------------------------------------------- European ETF 3 Investment 33 Advisor - ------------------------------------------------------------------------------- Pacific ETF 8 Dividends, Capital Gains, and Taxes 35 - ------------------------------------------------------------------------------- Emerging Markets ETF 13 Daily Pricing 36 - ------------------------------------------------------------------------------- Financial Highlights 38 - ------------------------------------------------------------------------------- Glossary of Investment Terms 42 - ------------------------------------------------------------------------------- A Note to Retail Investors Vanguard ETF Shares can be purchased directly from the issuing Fund only in exchange for a basket of securities that is expected to be worth several million dollars. Most individual investors, therefore, will not be able to purchase ETF Shares directly from the Fund. Instead, these investors will purchase ETF Shares on the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus--such as information about purchasing and redeeming ETF Shares from a Fund and references to transaction fees imposed on purchases and redemptions--is not relevant to most individual investors. An Introduction to Vanguard ETF(TM)Shares What Are Vanguard ETF Shares? Vanguard ETF Shares are an exchange-traded class of shares issued by certain Vanguard mutual funds. ETF Shares represent an interest in the portfolio of stocks held by the issuing fund. Vanguard International Stock Index Funds offer the following ETF Shares through this prospectus:
Fund ETF Shares Seeks to Track - ------------------------------------------------------------------------------------------------------------- Vanguard European Stock Vanguard European ETF European stock markets Index Fund Vanguard Pacific Stock Vanguard Pacific ETF Stock markets in Japan, Index Fund Australia, Hong Kong, and Singapore Vanguard Emerging Markets Vanguard Emerging 25 emerging stock markets Stock Index Fund Markets ETF in Europe, Asia, Africa, and Latin America - -------------------------------------------------------------------------------------------------------------
In addition to ETF Shares, the Funds offer three conventional (not exchange-traded) classes of shares. This prospectus, however, relates only to ETF Shares. How Are Vanguard ETF Shares Different From Conventional Mutual Fund Shares? Conventional mutual fund shares are bought from and redeemed with the issuing fund for cash at a net asset value (NAV) typically calculated once a day. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund except by or through Authorized Participants (defined below), and then only for an in-kind basket of securities. An organized trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on the American Stock Exchange (AMEX). Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day, based on the supply of, and demand for, ETF Shares and on changes in the prices of the fund's portfolio holdings. The market price of a fund's ETF Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. How Do I Buy and Sell Vanguard ETF Shares? Each Fund issues and redeems ETF Shares only in bundles of 100,000 shares. These bundles are known as "Creation Units." To purchase or redeem a Creation Unit, you must be an Authorized Participant or you must trade through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository 1 Trust Company that has executed a Participant Agreement with the fund's Distributor. Vanguard will provide a list of Authorized Participants upon request. Because Creation Units can be purchased only in exchange for a basket of securities likely to cost millions of dollars, it is expected that only a limited number of institutional investors will purchase and redeem ETF Shares directly with an issuing fund. Investors who cannot afford to purchase a Creation Unit can acquire ETF Shares in one of two ways. If you own conventional shares of a fund that issues ETF Shares, you can, for a fee, convert those shares into ETF Shares of equivalent value. For more information about the conversion privilege, see "Conversion Privilege" under More on the Funds and ETF Shares. In addition, any investor may purchase ETF Shares on the secondary market through a broker. ETF Shares are publicly traded on the AMEX. To acquire ETF Shares through either means, you must have a brokerage account. For information about acquiring ETF Shares through conversion of conventional shares or through a secondary-market purchase, please contact your broker. If you want to sell ETF Shares, you must do so through your broker; ETF Shares cannot be converted back into conventional shares. When you buy or sell ETF Shares on the secondary market, your broker will charge a commission. 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. In addition, because secondary-market transactions occur at market prices, you may pay more than NAV when you buy ETF Shares, and receive less than NAV when you sell those shares. 2 Profile--Vanguard European ETF The following profile summarizes key features of Vanguard European ETF Shares, an exchange-traded class of shares issued by Vanguard European Stock Index Fund. Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index. The MSCI Europe Index is made up of approximately 603 common stocks of companies located in 16 European countries--mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization, as of October 31, 2006). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden. Primary Risks - -For European ETF Shares, the total return, like stock prices generally, will fluctuate within a wide range, so an investor could lose money over short or even long periods. - -European ETF Shares are 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. - -European ETF Shares are subject to 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. The Index's, and therefore the European ETF Shares', heavy exposure to four countries (the United Kingdom, France, Switzerland, and Germany) involves a higher degree of country risk than that of more geographically diversified international funds. - -European ETF Shares are subject to regional risk, which is the chance that an entire region--namely, Europe--will be hurt by political upheaval, financial troubles, or natural disasters. - -European ETF Shares are subject to 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. 3 - -European ETF Shares are listed for trading on the American Stock Exchange (AMEX) and can be bought and sold on the secondary market at market prices. Although it is expected that the market price of a European ETF Share typically will approximate its net asset value, there may be times when the market price and the NAV vary significantly. Thus, you may pay more than NAV when buying European ETF Shares on the secondary market, and you may receive less than NAV when you sell those shares. - -Although European ETF Shares are listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of European ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if European ETF Shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" halts stock trading generally. Performance/Risk Information The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows the performance of the Fund's ETF Shares in their first full calendar year. The table shows how the average annual total returns (before and after taxes) compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. Annual Total Return--ETF Shares/1/ - ------------------------------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2006 33.57% - ------------------------------------------------------------------------------- 1 Return figures assume that an investor purchased shares at net asset value, and do not reflect the transaction fee imposed on purchases and redemptions of Creation Units or the commissions that investors pay their brokers to buy and sell ETF Shares on the secondary market. During the period shown in the bar chart, the highest return for a calendar quarter was 11.24% (quarter ended December 31, 2006), and the lowest return for a quarter was 2.69% (quarter ended June 30, 2006). 4 Average Annual Total Returns for Periods Ended December 31, 2006 Since 1 Year Inception/1/ - ------------------------------------------------------------------------------- Vanguard European Stock Index Fund ETF Shares Based on the NAV of an ETF Share - ------------------------------------------------------------------------------- Return Before Taxes 33.57% 20.23% - ------------------------------------------------------------------------------- Return After Taxes on 32.98 19.72 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale of Fund 22.45 17.32 Shares - ------------------------------------------------------------------------------- Based on the Market Price of an ETF Share 33.08% 20.72% Return Before Taxes - ------------------------------------------------------------------------------- MSCI Europe Index/2/ (reflects no deduction for 33.72% 20.33% fees, expenses, or taxes) - ------------------------------------------------------------------------------- 1 Since-inception returns are from March 4, 2005--the inception date of the ETF Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 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 after-tax returns will vary for a fund's other share classes and are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold European ETF Shares. 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 those incurred in the fiscal year ended October 31, 2006. 5 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Transaction Fee on Purchases and Redemptions Varies/1/ - ------------------------------------------------------------------------------- Transaction Fee Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.14% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.04% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.18% - ------------------------------------------------------------------------------- 1 An investor purchasing or redeeming Creation Units of European ETF Shares will pay to the issuing Fund a standard transaction fee of $9,600. An additional fee may be charged for cash purchases and redemptions. Please see pages 27 and 28 for additional information. An investor buying or selling European ETF Shares on the secondary market will pay a commission to his or her broker in an amount established by the broker. An investor converting conventional shares into European ETF Shares will pay a $50 conversion fee to Vanguard; in addition, the broker may impose a conversion fee of its own. The following example is intended to help retail investors compare the cost of investing in Vanguard European ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that such investors would incur over various periods if they invest $10,000 in European ETF Shares. This example assumes that European ETF Shares provide a return of 5% a year and that operating expenses remain the same. This example does not include the brokerage commissions that retail investors will pay to buy and sell European ETF Shares. It also does not include the transaction fees on purchases and redemptions of Creation Units, because these fees will not be imposed on retail investors. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $18 $58 $101 $230 - -------------------------------------------------------- The value of a European ETF Creation Unit as of October 31, 2006, was approximately $6.5 million. Assuming an investment of $6.5 million, payment of the standard $9,600 transaction fee applicable to both the purchase and redemption of the Creation Unit, a 5% return each year, and no change in operating expenses, the total cost of holding a European ETF Creation Unit would be $31,164 if the Creation Unit were redeemed after one year and $56,851 if redeemed after three years. 6 This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes of $23.4 billion Vanguard European Stock Index Fund) - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 ETF Shares--March 4, 2005 - ------------------------------------------------------------------------------- Number of European ETF Shares in a 100,000 Creation Unit - ------------------------------------------------------------------------------- Vanguard Fund Number 963 - ------------------------------------------------------------------------------- Cusip Number 922042874 - ------------------------------------------------------------------------------- AMEX Trading Symbol VGK - ------------------------------------------------------------------------------- 7 Profile--Vanguard Pacific ETF The following profile summarizes key features of Vanguard Pacific ETF Shares, an exchange-traded class of shares issued by Vanguard Pacific Stock Index Fund. Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of the Pacific region. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the MSCI Pacific Index. The MSCI Pacific Index consists of approximately 562 common stocks of companies located in Japan, Australia, Hong Kong, and Singapore. (As of October 31, 2006, Japan and Australia made up 74% and 18%, respectively, of the Index's market capitalization.) Primary Risks - -For Pacific ETF Shares, the total return, like stock prices generally, will fluctuate within a wide range, so an investor could lose money over short or even long periods. - -Pacific ETF Shares are 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. - -Pacific ETF Shares are subject to 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. The Index's, and therefore the Pacific ETF Shares', heavy exposure to Japan involves a higher degree of country risk than that of more geographically diversified international funds. - -Pacific ETF Shares are subject to regional risk, which is the chance that an entire region--namely, the Pacific region--will be hurt by political upheaval, financial troubles, or natural disasters. - -Pacific ETF Shares are subject to 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. - -Pacific ETF Shares are listed for trading on the American Stock Exchange (AMEX) and can be bought and sold on the secondary market at market prices. Although it is expected that the market price of a Pacific ETF Share typically will approximate its net asset value, there may be times when the market price and the NAV vary significantly. 8 Thus, you may pay more than NAV when buying Pacific ETF Shares on the secondary market, and you may receive less than NAV when you sell those shares. - -Although Pacific ETF Shares are listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of Pacific ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if Pacific ETF Shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" halts stock trading generally. Performance/Risk Information The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows the performance of the Fund's ETF Shares in their first full calendar year. The table shows how the average annual total returns (before and after taxes) compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. Annual Total Return--ETF Shares/1/ - ------------------------------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2006 12.10% - ------------------------------------------------------------------------------- 1 Return figures assume that an investor purchased shares at net asset value, and do not reflect the transaction fee imposed on purchases and redemptions of Creation Units or the commissions that investors pay their brokers to buy and sell ETF Shares on the secondary market. During the period shown in the bar chart, the highest return for a calendar quarter was 7.83% (quarter ended December 31, 2006), and the lowest return for a quarter was -2.78% (quarter ended June 30, 2006). 9 Average Annual Total Returns for Periods Ended December 31, 2006 Since 1 Year Inception/1/ - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund ETF Shares Based on the NAV of an ETF Share - ------------------------------------------------------------------------------- Return Before Taxes 12.10% 17.74% - ------------------------------------------------------------------------------- Return After Taxes on 11.57 17.26 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale of 8.19 15.08 Fund Shares - ------------------------------------------------------------------------------- Based on the Market Price of an ETF Share 11.72% 18.34% Return Before Taxes - ------------------------------------------------------------------------------- MSCI Pacific Index/2/ (reflects no deduction for 12.20% 18.05% fees, expenses, or taxes) - ------------------------------------------------------------------------------- 1 Since-inception returns are from March 4, 2005--the inception date of the ETF Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 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 after-tax returns will vary for a fund's other share classes and are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Pacific ETF Shares. 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 those incurred in the fiscal year ended October 31, 2006. 10 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------ Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------ Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------ Transaction Fee on Purchases and Redemptions Varies/1/ - ------------------------------------------------------------------------------ Transaction Fee Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------ Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------ Management Expenses 0.14% - ------------------------------------------------------------------------------ 12b-1 Distribution Fee None - ------------------------------------------------------------------------------ Other Expenses 0.04% - ------------------------------------------------------------------------------ Total Annual Fund Operating Expenses 0.18% - ------------------------------------------------------------------------------ 1 An investor purchasing or redeeming Creation Units of Pacific ETF Shares will pay to the issuing Fund a standard transaction fee of $7,200. An additional fee may be charged for cash purchases and redemptions. Please see pages 27 and 28 for additional information. An investor buying or selling Pacific ETF Shares on the secondary market will pay a commission to his or her broker in an amount established by the broker. An investor converting conventional shares into Pacific ETF Shares will pay a $50 conversion fee to Vanguard; in addition, the broker may impose a conversion fee of its own. The following example is intended to help retail investors compare the cost of investing in Vanguard Pacific ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that such investors would incur over various periods if they invest $10,000 in Pacific ETF Shares. This example assumes that Pacific ETF Shares provide a return of 5% a year and that operating expenses remain the same. This example does not include the brokerage commissions that retail investors will pay to buy and sell Pacific ETF Shares. It also does not include the transaction fees on purchases and redemptions of Creation Units, because these fees will not be imposed on retail investors. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $18 $58 $101 $230 - -------------------------------------------------------- The value of a Pacific ETF Creation Unit as of October 31, 2006, was approximately $6.4 million. Assuming an investment of $6.4 million, payment of the standard $7,200 transaction fee applicable to both the purchase and redemption of the Creation Unit, a 5% return each year, and no change in operating expenses, the total cost of holding a Pacific ETF Creation Unit would be $26,184 if the Creation Unit were redeemed after one year and $51,484 if redeemed after three years. 11 This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes of $11.4 billion Vanguard Pacific Stock Index Fund) - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 ETF Shares--March 4, 2005 - ------------------------------------------------------------------------------- Number of Pacific ETF Shares in a 100,000 Creation Unit - ------------------------------------------------------------------------------- Vanguard Fund Number 962 - ------------------------------------------------------------------------------- Cusip Number 922042866 - ------------------------------------------------------------------------------- AMEX Trading Symbol VPL - ------------------------------------------------------------------------------- 12 Profile--Vanguard Emerging Markets ETF The following profile summarizes key features of Vanguard Emerging Markets ETF Shares, an exchange-traded class of shares issued by Vanguard Emerging Markets Stock Index Fund. Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 840 common stocks of companies located in emerging markets around the world. As of October 31, 2006, the largest markets covered in the Index were South Korea, Taiwan, Brazil, China, and Russia (which made up 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization). Primary Risks - -For Emerging Markets ETF Shares, the total return, like stock prices generally, will fluctuate within a wide range, so an investor could lose money over short or even long periods. - -Emerging Markets ETF Shares are 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. - -Emerging Markets ETF Shares are subject to 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. The Index's, and therefore Emerging Markets ETF Shares', heavy exposure to South Korea, Taiwan, Brazil, China, and Russia involves a higher degree of country risk than that of more geographically diversified international funds. - -Emerging Markets ETF Shares are subject to emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the more developed foreign markets. - -Emerging Markets ETF Shares are subject to 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. 13 - -Emerging Markets ETF Shares are listed for trading on the American Stock Exchange (AMEX) and can be bought and sold on the secondary market at market prices. Although it is expected that the market price of a Emerging Markets ETF Share typically will approximate its net asset value, there may be times when the market price and the NAV vary significantly. Thus, you may pay more than NAV when buying Emerging Markets ETF Shares on the secondary market, and you may receive less than NAV when you sell those shares. - -Although Emerging Markets ETF Shares are listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of Emerging Markets ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if Emerging Markets ETF Shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" halts stock trading generally. Performance/Risk Information The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows the performance of the Fund's ETF Shares in their first full calendar year. The table shows how the average annual total returns (before and after taxes) compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how the Fund will perform in the future. Annual Total Return--ETF Shares/1/ - ------------------------------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2006 29.53% - ------------------------------------------------------------------------------- 1 Return figures assume that an investor purchased shares at net asset value, and do not reflect the transaction fee imposed on purchases and redemptions of Creation Units or the commissions that investors pay their brokers to buy and sell ETF Shares on the secondary market. During the period shown in the bar chart, the highest return for a calendar quarter was 17.23% (quarter ended December 31, 2006), and the lowest return for a quarter was -4.54% (quarter ended June 30, 2006). 14 Average Annual Total Returns for Periods Ended December 31, 2006 Since 1 Year Inception/1/ - -------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Fund ETF Shares Based on the NAV of an ETF Share - ------------------------------------------------------------------------------- Return Before Taxes 29.53% 28.24% - ------------------------------------------------------------------------------- Return After Taxes on 29.20 27.90 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale of Fund 19.64 24.33 Shares - ------------------------------------------------------------------------------- Based on the Market Price of an ETF Share 29.02% 28.69% Return Before Taxes - ------------------------------------------------------------------------------- Comparative Indexes (reflect no deduction for fees, expenses, or taxes) - ------------------------------------------------------------------------------- MSCI Emerging Markets Index/2/ 32.17% 30.82% - ------------------------------------------------------------------------------- Spliced Emerging Markets 29.73 28.86 Index/3/ - ------------------------------------------------------------------------------- 1 Since-inception returns are from March 4, 2005--the inception date of the ETF Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 3 Reflects performance of the Select Emerging Markets Index through August 23, 2006, and performance of the MSCI Emerging Markets Index thereafter. The Select Emerging Markets Index was discontinued on August 24, 2006. Note on after-tax returns. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains. State and local income taxes are not reflected in the calculations. Please note that after-tax returns will vary for a fund's other share classes and are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 15 Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Emerging Markets ETF Shares. 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 those incurred in the fiscal year ended October 31, 2006. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Transaction Fee on Purchases and Redemptions Varies/1/ - ------------------------------------------------------------------------------- Transaction Fee Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.16% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.14% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.30% - ------------------------------------------------------------------------------- 1 An investor purchasing or redeeming Creation Units of Emerging Markets ETF Shares will pay to the issuing Fund a standard transaction fee of $9,300. An additional fee may be charged for cash purchases and redemptions. Please see pages 27 and 28 for additional information. An investor buying or selling Emerging Markets ETF Shares on the secondary market will pay a commission to his or her broker in an amount established by the broker. An investor converting conventional shares into Emerging Markets ETF Shares will pay a $50 conversion fee to Vanguard; in addition, the broker may impose a conversion fee of its own. The following example is intended to help retail investors compare the cost of investing in Vanguard Emerging Markets ETF Shares with the cost of investing in other funds. It illustrates the hypothetical expenses that such investors would incur over various periods if they invest $10,000 in Emerging Markets ETF Shares. This example assumes that Emerging Markets ETF Shares provide a return of 5% a year and that operating expenses remain the same. This example does not include the brokerage commissions that retail investors will pay to buy and sell Emerging Markets ETF Shares. It also does not include the transaction fees on purchases and redemptions of Creation Units, because these fees will not be imposed on retail investors. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $31 $97 $169 $381 - -------------------------------------------------------- 16 The value of an Emerging Markets ETF Creation Unit as of October 31, 2006, was approximately $7 million. Assuming an investment of $7 million, payment of the standard $9,300 transaction fee applicable to both the purchase and redemption of the Creation Unit, a 5% return each year, and no change in operating expenses, the total cost of holding an Emerging Markets ETF Creation Unit would be $40,065 if the Creation Unit were redeemed after one year and $86,069 if redeemed after three years. This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes of Vanguard Emerging Markets Stock $10.8 billion Index Fund) - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--May 4, 1994 ETF Shares--March 4, 2005 - ------------------------------------------------------------------------------- Number of Emerging Markets ETF 100,000 Shares in a Creation Unit - ------------------------------------------------------------------------------- Vanguard Fund Number 964 - ------------------------------------------------------------------------------- Cusip Number 922042858 - ------------------------------------------------------------------------------- AMEX Trading Symbol VWO - ------------------------------------------------------------------------------- 17 More on the Funds and ETF Shares The following sections explain the primary investment strategies and policies that each Fund uses in pursuit of its objective. 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 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. Under normal circumstances, each Fund will invest at least 80% of its assets in the types of stocks indicated by its name. A Fund may change its 80% policy or indexing strategy only upon 60 days' notice to shareholders. Note that each Fund's investment objective is not fundamental and may be changed without a shareholder vote. Market Exposure FLAG ETF Shares are 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 international stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 18 International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or any ETF Shares in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 19
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ---------------------------------------------------------------------------------------------------- 1997 23.80% -25.87% -11.59% 33.36% - ---------------------------------------------------------------------------------------------------- 1998 28.53 2.72 -25.34 28.58 - ---------------------------------------------------------------------------------------------------- 1999 15.89 56.65 66.41 21.04 - ---------------------------------------------------------------------------------------------------- 2000 -8.39 -25.78 -30.61 -9.10 - ---------------------------------------------------------------------------------------------------- 2001 -19.90 -25.40 -2.62 -11.89 - ---------------------------------------------------------------------------------------------------- 2002 -18.38 -9.29 -6.17 -22.10 - ---------------------------------------------------------------------------------------------------- 2003 38.54 38.48 55.82 28.68 - ---------------------------------------------------------------------------------------------------- 2004 20.88 18.98 25.55 10.88 - ---------------------------------------------------------------------------------------------------- 2005 9.42 22.64 34.00 4.91 - ---------------------------------------------------------------------------------------------------- 2006 33.72 12.20 32.17 15.79 - ---------------------------------------------------------------------------------------------------- 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes or from any ETF Shares in particular. FLAG Each 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. Security Selection Each Fund attempts to track the investment performance of a benchmark index using the replication method of indexing, meaning that each Fund holds the same stocks as its target index in approximately the same proportion as represented in the index itself. European Stock Index Fund. The Fund invests in the common stocks included in the MSCI Europe Index, which is made up of approximately 603 common stocks of companies located in 16 European countries. Four countries--the United Kingdom, France, Germany, and Switzerland--dominate the Index. These four countries made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 12 countries--Austria, Belgium, Denmark, Finland, 20 Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden--are much less significant to the Index and, consequently, to the Fund. The Fund's heavy exposure to just four countries subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $55.2 billion. Pacific Stock Index Fund. The Fund invests in the common stocks included in the MSCI Pacific Index, which is made up of approximately 562 common stocks of Pacific Basin companies. The Index is dominated by the Japanese stock market, which represented 74% of the Index's market capitalization as of October 31, 2006. The other three markets represented in the Index are Australia, Hong Kong, and Singapore. The Fund's large investment in the Japanese stock market subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $17 billion. Emerging Markets Stock Index Fund. The Fund invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, which is made up of approximately 840 common stocks of companies located in 25 emerging markets of Europe, Asia, Africa, and Latin America. (The depositary receipt for a common stock will be considered to be a common stock for the purposes of meeting this percentage test.) Five countries--South Korea, Taiwan, Brazil, China, and Russia--collectively represent a majority of the Index, with 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 20 countries are Argentina, Chile, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, South Africa, Thailand, and Turkey. The Fund's advisor employs a sampling technique, using its discretion--based on an analysis that considers liquidity, repatriation of capital, and entry barriers in various markets--to determine whether or not to invest in particular securities. Emerging markets can be substantially more volatile, and substantially less liquid, than both U.S. and more developed foreign markets. In addition, the smaller-capitalization stocks in which the Emerging Markets Stock Index Fund typically invests often perform quite differently from the large-cap stocks that dominate the overall stock market. Therefore, the Fund may expose investors to a higher degree of volatility and illiquidity than funds that invest in more developed markets. As of October 31, 2006, the MSCI Emerging Markets Index had an asset-weighted median market capitalization of $12.2 billion. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. 21 Depositary Receipts. Each Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, each Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, a Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. A Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. Each Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. Other Investment Policies and Risks Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund's agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same market segment as the current index. Each Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Each Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Funds may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. 22 Cash Management Vanguard may invest each Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Special Risks of Exchange-Traded Shares FLAG ETF Shares are not individually redeemable. They can be redeemed with the issuing Fund at NAV only in large blocks known as Creation Units. You would incur brokerage costs in purchasing enough ETF Shares to constitute a Creation Unit. FLAG The market price of ETF Shares may differ from net asset value. ETF Shares are listed for trading on the AMEX and can be bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more than NAV when you buy ETF Shares on the secondary market, and you may receive less than NAV when you sell those shares. The market price of ETF Shares, like the price of any exchange-traded security, includes a "bid-asked spread" charged by the exchange specialist and other market- makers that cover the particular security. In times of severe market disruption, the bid-asked spread can increase significantly. This means that ETF Shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest, when the price of ETF Shares is falling fastest--and this may be the time that you most want to sell ETF Shares. 23 The following table shows the number of times the Funds' ETF Shares traded at a premium or discount to NAV as well as the size of the premium or discount.
Premium/Discount Information as of the Most Recent Calendar Quarter Ended December 31, 2006 Market Price Market Price Below Above or Equal to Net Asset Value Net Asset Value - ---------------------------------------------------------------------------------------------- Basis Point Number Percentage of Number Percentage of Differential/1/ of Days Total Days of Days Total Days - ---------------------------------------------------------------------------------------------- Vanguard European ETF (Beginning March 4, 2005) - ---------------------------------------------------------------------------------------------- 0-24.9 70 15.18% 11 2.39% - ---------------------------------------------------------------------------------------------- 25-49.9 122 26.46 2 0.43 - ---------------------------------------------------------------------------------------------- 50-74.9 131 28.42 0 0.00 - ---------------------------------------------------------------------------------------------- 75-100 76 16.49 0 0.00 - ---------------------------------------------------------------------------------------------- >100 49 10.63 0 0.00 - ---------------------------------------------------------------------------------------------- Total 448 97.18% 13 2.82% - ---------------------------------------------------------------------------------------------- Vanguard Pacific ETF (Beginning March 4, 2005) - ---------------------------------------------------------------------------------------------- 0-24.9 61 13.23% 19 4.11% - ---------------------------------------------------------------------------------------------- 25-49.9 111 24.08 8 1.74 - ---------------------------------------------------------------------------------------------- 50-74.9 121 26.25 0 0.00 - ---------------------------------------------------------------------------------------------- 75-100 76 16.49 1 0.22 - ---------------------------------------------------------------------------------------------- >100 64 13.88 0 0.00 - ---------------------------------------------------------------------------------------------- Total 433 93.93% 28 6.07% - ---------------------------------------------------------------------------------------------- Vanguard Emerging Markets ETF (Beginning March 4, 2005) - ---------------------------------------------------------------------------------------------- 0-24.9 79 17.14% 43 9.33% - ---------------------------------------------------------------------------------------------- 25-49.9 87 18.87 22 4.77 - ---------------------------------------------------------------------------------------------- 50-74.9 89 19.31 12 2.60 - ---------------------------------------------------------------------------------------------- 75-100 57 12.36 10 2.17 - ---------------------------------------------------------------------------------------------- >100 45 9.76 17 3.69 - ---------------------------------------------------------------------------------------------- Total 357 77.44% 104 22.56% - ---------------------------------------------------------------------------------------------- 1 One basis point equals 1/100th of 1%.
24 The following table shows the cumulative (not annual) total returns of each Fund's ETF Shares, based on the shares' NAV and market price, and of the Fund's target index. Returns as of the Most Recent Calendar Quarter Ended December 31, 2006 Since 1 Year Inception/1/ - ------------------------------------------------------------------------------- Vanguard European ETF - ------------------------------------------------------------------------------- Return Based on the NAV 33.57% 40.03% of an ETF Share - ------------------------------------------------------------------------------- Return Based on the Market Price of an ETF 33.08 41.08 Share - ------------------------------------------------------------------------------- MSCI Europe Index 33.72 40.25 - ------------------------------------------------------------------------------- Vanguard Pacific ETF - ------------------------------------------------------------------------------- Return Based on the NAV 12.10% 34.78% of an ETF Share - ------------------------------------------------------------------------------- Return Based on the Market Price of an ETF 11.72 36.02 Share - ------------------------------------------------------------------------------- MSCI Pacific Index 12.20 35.42 - ------------------------------------------------------------------------------- Vanguard Emerging Markets ETF - ------------------------------------------------------------------------------- Return Based on the NAV 29.53% 57.54% of an ETF Share - ------------------------------------------------------------------------------- Return Based on the Market Price of an ETF 29.02 58.56 Share - ------------------------------------------------------------------------------- MSCI Emerging Markets 32.17 63.39 Index - ------------------------------------------------------------------------------- 1 Since-inception returns are from March 4, 2005--the inception date of the ETF Shares--through December 31, 2006. Note: Vanguard's website will show the prior day's closing NAV and closing market price for each Fund's ETF Shares. The website also will disclose how frequently each Fund's ETF Shares traded at a premium or discount to NAV (based on closing NAVs and market prices) and the magnitudes of such premiums and discounts. FLAG An active trading market may not exist. Although ETF Shares are listed on the AMEX, it is possible that an active trading market may not be maintained. 25 FLAG Trading may be halted. Trading of ETF Shares on the AMEX will be halted whenever trading in equity securities generally is halted by the activation of marketwide "circuit breakers," which are tied to large decreases in the Dow Jones Industrial Average. Trading of ETF Shares also will be halted if (1) the shares are delisted from the AMEX without first being listed on another exchange, or (2) AMEX officials determine that such action is appropriate in the interest of a fair and orderly market or to protect investors. Note: If trading of ETF Shares on the AMEX is halted, eligible investors (see the following section) will still be able to purchase Creation Units of ETF Shares directly from an issuing Fund and redeem such units with the Fund. Purchasing Vanguard ETF Shares From an Issuing Fund You can purchase ETF Shares from an issuing Fund if you meet the following criteria and comply with the following procedures: - -Eligible Investors. To purchase ETF Shares from a Fund, you must be an Authorized Participant or you must purchase 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 the Fund's Distributor. Most Authorized Participants are expected to be brokerage firms. - -Creation Units. You must purchase ETF Shares in large blocks known as "Creation Units." The number of ETF Shares in a Creation Unit is 100,000 and will not change over time, except in the event that a Fund splits or revalues its shares. The Funds will not issue fractional Creation Units. - -In-Kind Creation Basket. To purchase ETF Shares directly from a Fund, you must tender to the Fund a basket of securities. Each business day, prior to the opening of trading on the AMEX, the Fund's advisor will make available, on the National Securities Clearing Corporation (NSCC) bulletin board, a list identifying the name and number of shares of each security to be included in that day's creation basket. Each Fund reserves the right to accept a nonconforming creation basket. A portion of a Fund's creation basket may include American Depositary Receipts (ADRs). - -Cash Purchases. The Funds reserve the right to require cash rather than in-kind securities in certain markets. As of the date of this prospectus, cash will be required for securities traded in Brazil, Chile, India, Malaysia, South Korea, and Taiwan. - -Balancing Amount. In addition to the in-kind deposit of securities, you will either pay to, or receive from, the Fund an amount of cash (the Balancing Amount) equal to the difference between the NAV of a Creation Unit and the value of the securities in the creation basket. The Balancing Amount ensures that the consideration paid by an investor for a Creation Unit is exactly equal to the value of the Creation Unit. The Fund's advisor will publish, on a daily basis, information about the previous day's 26 Balancing Amount. You also must pay a transaction fee in cash. The Balancing Amount and the transaction fee, taken together, are referred to as the "Cash Component." - -Placement of Purchase Orders. All purchase orders must be placed with Vanguard by or through an Authorized Participant. A purchase order must be received by the Fund's Distributor prior to the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the day the order is placed, and all other procedures set forth in the Participant Agreement must be followed, in order for you to receive the NAV determined on that day. - -Transaction Fee on Purchase of Creation Units. The Funds impose a transaction fee on each purchase of Creation Units. The transaction fee is the same regardless of the number of units purchased. Investors permitted to tender a nonconforming creation basket may be subject to an additional charge commensurate with the additional cost to the Fund. The transaction fee is paid to the Fund, not to Vanguard or a third party. The fee protects existing shareholders of the Fund from the costs associated with issuing Creation Units. A summary of the transaction fees follows. Redeeming Vanguard ETF Shares With an Issuing Fund The redemption process is essentially the reverse of the purchase process. - -Eligible Investors. To redeem ETF Shares with a Fund, you must be an Authorized Participant or you must redeem through a broker that is an Authorized Participant. - -Creation Units. To redeem ETF Shares with a Fund, you must tender the shares in Creation Unit-size blocks. - -In-Kind Redemption Proceeds. Redemption proceeds will be paid in kind with a basket of securities. In most cases, the basket of securities you receive will be the same as that required of investors purchasing Creation Units on the same day. There will be times, however, when the creation and redemption baskets differ. The composition of the redemption basket will be available on the NSCC bulletin board. Each Fund reserves the right to honor a redemption request with a nonconforming redemption basket if the redeeming investor consents. - -Balancing Amount. Depending on whether the NAV of a Creation Unit is higher or lower than the value of the securities in the redemption basket, you will either receive from or pay to the Fund a Balancing Amount in cash. If you are due to receive a Balancing Amount, the amount you actually receive will be reduced by the amount of the applicable transaction fee. - -Placement of Redemption Orders. A redemption order is deemed received on the date of transmittal if it is received by Vanguard prior to the close of regular trading on the New York Stock Exchange on that date, and if all other procedures set forth in the Participation Agreement are followed. 27 - -Transaction Fee on Redemption of Creation Units. The Funds impose a transaction fee on each redemption of Creation Units. As with the transaction fee on purchases, the transaction fee on redemptions is paid to the Fund, not to Vanguard or a third party. The fee protects existing shareholders of the Fund from the costs associated with redeeming Creation Units. The following table summarizes each Fund's transaction fees:
Transaction Fees Transaction Fee on Purchases and Maximum Additional Maximum Additional Redemptions of Variable Charge Variable Charge Fund Creation Units for Cash Purchases/1/ for Cash Redemptions/1/ - ------------------------------------------------------------------------------------------- European ETF $9,600 2.00% 2.00% - ------------------------------------------------------------------------------------------- Pacific ETF $7,200 2.00% 2.00% - ------------------------------------------------------------------------------------------- Emerging Markets ETF $9,300 2.00% 2.00% - ------------------------------------------------------------------------------------------- 1 As a percentage of the cash in lieu of the amount invested or redeemed.
Purchasing and Selling Vanguard ETF Shares on the Secondary Market You can buy and sell ETF Shares on the secondary market in the same way you buy and sell any other exchange-traded security--through a broker. In most cases, the broker will charge you a commission to execute the transaction. The price at which you buy or sell ETF Shares (i.e., the market price) may be more or less than the NAV of the shares. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must buy. Conversion Privilege Owners of conventional shares (Investor Shares, Admiral(TM) Shares, Signal(TM) Shares, or Institutional Shares) issued by the Funds may convert those shares into ETF Shares of equivalent value of the same fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard imposes a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. Your broker may charge an additional fee to process a conversion. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Similarly, ETF Shares of one fund cannot be exchanged for ETF Shares of another fund. Unless you are an Authorized Participant, you must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, you must have 28 an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF Shares, please contact your broker. Converting conventional shares into ETF Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. Your Fund's transfer agent will reflect ownership of all ETF Shares in the name of the DTC. The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you. Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion. If you convert your conventional shares to ETF Shares through Vanguard Brokerage Services/(R)// /(Vanguard Brokerage), all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard. 29 Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into ETF Shares: - -The conversion transaction is nontaxable except, as applicable, to the limited extent as previously described. - -The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - -Until the conversion process is complete, you will remain fully invested in 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 ETF Shares. Frequent Trading and Market-Timing Unlike frequent trading of a Vanguard fund's conventional (i.e., not exchange-traded) classes of shares, frequent trading of ETF Shares does not disrupt portfolio management, increase the fund's trading costs, lead to realization of capital gains, or otherwise harm fund shareholders. The vast majority of trading in ETF Shares occurs on the secondary market. Because these trades do not involve the issuing fund directly, they do not harm the fund or its shareholders. A few institutional investors are authorized to purchase and redeem ETF Shares directly with the issuing fund. Because these trades are effected in-kind (i.e., for securities and not for cash), they do not cause any of the harmful effects (as previously noted) that may result from frequent cash trades. Moreover, the issuing fund imposes transaction fees on in-kind purchases and redemptions of ETF Shares to cover the custodial and other costs incurred by the fund in effecting in-kind trades. These fees increase if an investor substitutes cash in part or in whole for securities, reflecting the fact that the fund's trading costs increase in those circumstances. For these reasons, the board of trustees of each fund that issues ETF Shares has determined that it is not necessary to adopt policies and procedures to detect and deter frequent trading and market-timing of ETF Shares. 30 Portfolio Holdings We generally post on our website at www.vanguard.com, in the Holdings section of each Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. Precautionary Notes A precautionary note to retail investors: The DTC or its nominee will be the registered owner of all outstanding ETF Shares. Your ownership of ETF Shares will be shown on the records of the DTC and the DTC Participant broker through which you hold the shares. Vanguard will not have any record of your ownership. Your account information will be maintained by your broker, which will provide you with account statements, confirmations of your purchases and sales of ETF Shares, and tax information. Your broker also will be responsible for distributing income and capital gains distributions and for ensuring that you receive shareholder reports and other communications from the Fund whose ETF Shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services. A precautionary note to purchasers of Creation Units: You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund. Because new ETF Shares may be issued on an ongoing basis, a "distribution" of ETF Shares could be occurring at any time. Certain activities that you perform as a dealer could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933. For example, you could be deemed a statutory underwriter if you purchase Creation Units from the issuing Fund, break them down into the constituent ETF Shares, and sell those shares directly to customers, or if you choose to couple the creation of a supply of new ETF Shares with an active selling effort involving solicitation of secondary-market demand for ETF Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person's activities, and the examples 31 mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not "underwriters" but are participating in a distribution (as opposed to engaging in ordinary secondary-market transactions), and thus dealing with ETF Shares as part of an "unsold allotment" within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. A precautionary note to investment companies: For purposes of the Investment Company Act of 1940, ETF Shares are issued by registered investment companies, and the acquisition of Vanguard ETF Shares by other investment companies is subject to the restrictions of Section 12(d)(1) of that Act, except as provided by an exemption granted by the SEC that permits registered investment companies to invest in a Vanguard fund that issues ETF Shares beyond the limits of Section 12(d)(1), subject to certain terms and conditions. A note on unusual circumstances: Vanguard reserves the right to reject any purchase request at any time, for any reason, and without notice. Vanguard funds can stop selling shares or postpone payment of redemption proceeds at times when the New York Stock Exchange is closed or under any emergency circumstances as determined by the U.S. Securities and Exchange Commission. Turnover Rate Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, index-oriented funds sell securities only in response to redemption requests or changes in the composition of a target index. Because of this, the turnover rate for each Fund has been very low. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for passively managed foreign stock funds was approximately 28%, and for all foreign stock funds, the average turnover rate was approximately 76%, both as reported by Morningstar, Inc., on October 31, 2006. 32 - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. - -------------------------------------------------------------------------------- The Funds and Vanguard Each Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- Plain Talk(R) About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately 33 $808 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended October 31, 2006, the advisory expenses represented an effective annual rate of 0.01% of each Fund's average net assets. For a discussion of why the board of trustees approved each Fund's investment advisory arrangement, see the Funds' most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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 Funds' Portfolio Managers The managers primarily responsible for the day-to-day management of the Funds are: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989 and has managed the European Stock Index Fund since 1992 and the Emerging Markets Stock Index Fund since 1994. Education: B.S., LaSalle University. Michael H. Buek, Principal of Vanguard. He has been with Vanguard since 1987 and has managed the Pacific Stock Index Fund since 1997. Education: B.S., University of Vermont; M.B.A., Villanova University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Funds. 34 Dividends, Capital Gains, and Taxes Fund Distributions Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- Reinvestment of Distributions Brokers may make available to their customers who own ETF Shares the DTC book-entry dividend reinvestment service. If this service is available and used, dividend distributions of both income and capital gains will automatically be reinvested in additional whole and fractional ETF Shares of the same Fund. Without this service, investors would receive their distributions in cash. To determine whether the dividend reinvestment service is available and whether there is a commission or other charge for using this service, consult your broker. As with all exchange-traded funds, reinvestment of dividend and capital gains distributions in additional ETF Shares will occur four business days or more after the ex-dividend date (the date when a distribution of dividends or capital gains is deducted from the price of the fund's shares). The exact number of days depends on your broker. During that time, the amount of your distribution will not be invested in the Fund and therefore will not share in the Fund's income, gains, and losses. Basic Tax Points 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 ETF 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. 35 - -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 ETF Shares. - -Capital gains distributions may vary considerably from year to year as a result of the Funds' normal investment activities and cash flows. - -A sale of ETF 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 ETF Shares, may be subject to state and local income taxes. - -Each Fund may be subject to foreign taxes or foreign tax withholding on dividends, interest, and some capital gains that the Fund receives on foreign securities. You may qualify for an offsetting credit or deduction under U.S. tax laws for your portion of a Fund's foreign tax obligations, provided that you meet certain requirements. See your tax advisor or IRS publications for more information. Note: 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 any tax consequences for you. Daily Pricing The net asset value, or NAV, of each Fund's ETF Shares 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 shares outstanding for that class. Remember: If you buy or sell ETF Shares on the secondary market, you will pay or receive the market price, which may be higher or lower than NAV. Your transaction will be priced at NAV only if you purchase or redeem your ETF Shares in Creation Unit blocks, or if you convert your conventional fund shares into ETF Shares. 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 36 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 NAV's 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 Vanguard ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard's website will show the previous day's closing NAV and closing market price for each Fund's ETF Shares. The previous day's closing market price also will be published in the business section of most major newspapers in the listing of securities traded on the AMEX. 37 Financial Highlights The following financial highlights tables are intended to help you understand the ETF Shares' financial performance for the periods shown, and certain information reflects financial results for a single ETF Share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the ETF Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with each Fund's financial statements--is included in the Funds' most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Table This explanation uses the European Stock Index Fund's ETF Shares as an example. The ETF Shares began fiscal year 2006 with a net asset value (price) of $50.80 per share. During the year, each ETF Share earned $1.80 from investment income (interest and dividends) and $13.99 from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $1.38 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $65.21, reflecting earnings of $15.79 per share and distributions of $1.38 per share. This was an increase of $14.41 per share (from $50.80 at the beginning of the year to $65.21 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was 31.75% for the year. As of October 31, 2006, the ETF Shares had approximately $1.2 billion in net assets. For the year, the expense ratio was 0.18% ($1.80 per $1,000 of net assets), and the net investment income amounted to 3.44% of average net assets. The Fund sold and replaced securities valued at 6% of its net assets. - -------------------------------------------------------------------------------- 38 European Stock Index Fund ETF Shares Year Ended Mar. 4/1/ to Oct.31, Oct. 31, 2006 2005 - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $50.80 $50.96 - ------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------- Net Investment Income 1.80 1.04 - ------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 13.99 (1.20) - ------------------------------------------------------------------------------- Total from Investment Operations 15.79 (.16) - ------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------- Dividends from Net Investment Income (1.38) -- - ------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- - ------------------------------------------------------------------------------- Total Distributions (1.38) -- - ------------------------------------------------------------------------------- Net Asset Value, End of Period $65.21 $50.80 - ------------------------------------------------------------------------------- Total Return 31.75% -0.31% - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,205 $178 - ------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets 0.18% 0.18%/2/ - ------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 3.44% 2.93%/2/ - ------------------------------------------------------------------------------- Turnover Rate/3/ 6% 5% - ------------------------------------------------------------------------------- 1 Inception. 2 Annualized. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units. 39 Pacific Stock Index Fund ETF Shares Year Ended Mar. 4/1/ to Oct.31, Oct. 31, 2006 2005 - -------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $55.09 $50.71 - ------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------- Net Investment Income 1.06 .75 - ------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 9.02 3.63 - ------------------------------------------------------------------------------- Total from Investment Operations 10.08 4.38 - ------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------- Dividends from Net Investment Income (.93) -- - ------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- - ------------------------------------------------------------------------------- Total Distributions (.93) -- - ------------------------------------------------------------------------------- Net Asset Value, End of Period $64.24 $55.09 - ------------------------------------------------------------------------------- Total Return 18.43% 8.64% - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $693 $164 - ------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets 0.18% 0.18%/2/ - ------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.82% 1.89%/2/ - ------------------------------------------------------------------------------- Turnover Rate/3/ 2% 7% - ------------------------------------------------------------------------------- 1 Inception. 2 Annualized. 3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units. 40 Emerging Markets Stock Index Fund ETF Shares Year Ended Mar. 4/1/ to Oct.31, Oct. 31, 2006 2005 - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $53.61 $50.55 - ------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------- Net Investment Income 1.333 .87 - ------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments/2/ 16.044 2.19 - ------------------------------------------------------------------------------- Total from Investment Operations 17.377 3.06 - ------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------- Dividends from Net Investment Income (1.077) -- - ------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- - ------------------------------------------------------------------------------- Total Distributions (1.077) -- - ------------------------------------------------------------------------------- Net Asset Value, End of Period $69.91 $53.61 - ------------------------------------------------------------------------------- Total Return 32.74% 6.05% - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,582 $375 - ------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net Assets 0.30% 0.30%/3/ - ------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 2.32% 2.59%/3/ - ------------------------------------------------------------------------------- Turnover Rate/4/ 26% 15% - ------------------------------------------------------------------------------- 1 Inception. 2 Includes increases from redemption fees of $0.03 and $0.00. 3 Annualized. 4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units. Vanguard, Connect with Vanguard, Plain Talk, Admiral, Signal, Vanguard ETF, Vanguard Brokerage Services, and the ship logo are trademarks of The Vanguard Group, Inc. The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All other marks are the exclusive property of their respective owners. 41 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. Authorized Participant. Institutional investors that are permitted to purchase Creation Units directly from, and redeem Creation Units directly with, the fund. To be an Authorized Participant, an entity must be a participant in the Depository Trust Company and must enter into an agreement with the fund's Distributor. 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. 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. Country risk is especially high in emerging markets. Creation Unit. A large block of a specified number of ETF Shares. Authorized Participants may purchase and redeem ETF Shares from the fund only in Creation Unit-size aggregations. 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. ETF Shares. A class of exchange-traded shares issued by certain Vanguard mutual funds. ETF Shares can be bought and sold continuously throughout the day at market prices. Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. Investment Advisor. An organization that makes the day-to-day decisions regarding a fund's investments. 42 Median Market Cap. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. Principal. The face value of a debt instrument or the amount of money put into an investment. 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. 43 This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard International Stock ETFs, the following documents are available free upon request: Annual/Semiannual Reports to Shareholders Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Statement of Additional Information (SAI) The SAI for the issuing Funds provides more detailed information about the Funds' ETF Shares. 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 Vanguard ETF Shares, please visit www.vanguard.com or contact us as follows: The Vanguard Group Institutional Investor Information P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 866-499-8473 Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the issuing Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Funds are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. U.S. Pat. No. 6,879,964 B2 Vanguard Marketing Corporation, Distributor. P963 022007 Vanguard/(R)/ International Stock Index Funds > Prospectus Signal(TM)Shares February 28, 2007 SHIP LOGO VANGUARD(R) Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund Vanguard Emerging Markets Stock Index Fund LOGO [INDEXED TO MSCI] This prospectus contains financial data for the Funds through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - ------------------------------------------------------------------------------- An Introduction to Index Funds 1 Investing with Vanguard 34 - ------------------------------------------------------------------------------- Vanguard Fund Profiles 2 Purchasing Shares 34 - ------------------------------------------------------------------------------- European Stock Index Fund 2 Converting Shares 37 - ------------------------------------------------------------------------------- Pacific Stock Index Fund 6 Redeeming Shares 38 - ------------------------------------------------------------------------------- Emerging Markets Stock Index 10 Exchanging Shares 43 Fund - ------------------------------------------------------------------------------- More on the Funds 15 Frequent-Trading Limits 43 - ------------------------------------------------------------------------------- The Funds and Vanguard 23 Other Rules You Should Know 45 - ------------------------------------------------------------------------------- Investment Advisor 24 Fund and Account Updates 48 - ------------------------------------------------------------------------------- Dividends and Capital Gains 25 Contacting Vanguard 50 - ------------------------------------------------------------------------------- Share Price 27 ETF Shares 52 - ------------------------------------------------------------------------------- Financial Highlights 29 Glossary of Investment Terms 57 - ------------------------------------------------------------------------------- Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. Share Class Overview Each fund offers four separate classes of shares: Investor Shares, Admiral(TM) Shares, Signal Shares, and Institutional Shares. This prospectus offers the Funds' Signal Shares, which are generally for investors who invest a minimum of $1 million. A separate prospectus offers Investor Shares as well as Admiral Shares. Another prospectus offers Institutional Shares. In addition, each fund provides an exchange-traded class of shares (Vanguard ETF Shares), which are also offered through a separate prospectus. A brief description of ETF Shares and how to convert into them appears on pages 52 to 56 of this prospectus. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. 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 in This Prospectus Vanguard offers a variety of stock index funds (both U.S. and international), as well as bond and balanced index funds. This prospectus provides information about three Vanguard International Stock Index Funds. These Funds seek to track particular segments of the international stock market. Fund Seeks to Track - ------------------------------------------------------------------------------- Vanguard European Stock European stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Pacific Stock Australian and Far East stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Emerging 25 emerging stock markets in Europe, Asia, Africa, Markets Stock Index Fund and Latin America - ------------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 1 Fund Profile--Vanguard European Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index. The MSCI Europe Index is made up of approximately 603 common stocks of companies located in 16 European countries--mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization, as of October 31, 2006). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden. For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to four countries (the United Kingdom, France, Switzerland, and Germany) subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, Europe--will be hurt by political upheaval, financial troubles, or natural disasters. - -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. Both the bar chart and the table present information for the 2 Admiral Shares, because Signal Shares were not available during the time periods shown. The expense ratio of the Signal Shares is expected to be the same as that of the Admiral Shares; therefore, performance of the Signal Shares should closely match that of the Admiral Shares. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns-Admiral Shares - ----------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2002 -17.85% 2003 38.84 2004 20.96 2005 9.36 2006 33.57 - ----------------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 22.29% (quarter ended June 30, 2003), and the lowest return for a quarter was -22.85% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 Since 1 Year 5 Years Inception/1/ - ------------------------------------------------------------------------------- Vanguard European Stock Index Fund Admiral Shares - ------------------------------------------------------------------------------- Return Before Taxes 33.57% 15.05% 13.29% - ------------------------------------------------------------------------------- Return After Taxes on 33.00 14.48 12.61 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale 22.45 12.99 11.33 of Fund Shares - ------------------------------------------------------------------------------- MSCI Europe Index/2/ (reflects no deduction for fees, expenses, or 33.72% 14.87% 13.26% taxes) - ------------------------------------------------------------------------------- 1 Since- inception returns are from August 13, 2001--the inception date of the Admiral Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 3 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 after-tax returns are shown only for the Admiral Shares and will vary for a fund's other share classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Signal 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. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.13% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.04% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.17% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. It illustrates the 4 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 - -------------------------------------------------------- $17 $55 $96 $217 - -------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $23.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Signal Shares--September 8, 2006 - ------------------------------------------------------------------------------- Minimum Initial Investment $1 million - ------------------------------------------------------------------------------- Conversion Features Signal Shares--May be converted to Investor Shares if you are no longer eligible for Signal Shares - ------------------------------------------------------------------------------- Newspaper Abbreviation EuropeSgl - ------------------------------------------------------------------------------- Vanguard Fund Number 1352 - ------------------------------------------------------------------------------- Cusip Number 922042833 - ------------------------------------------------------------------------------- Ticker Symbol VESSX - ------------------------------------------------------------------------------- 5 Fund Profile--Vanguard Pacific Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of the Pacific region. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the MSCI Pacific Index. The MSCI Pacific Index consists of approximately 562 common stocks of companies located in Japan, Australia, Hong Kong, and Singapore. (As of October 31, 2006, Japan and Australia made up 74% and 18%, respectively, of the Index's market capitalization.) For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to Japan subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, the Pacific region--will be hurt by political upheaval, financial troubles, or natural disasters. - -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. Both the bar chart and the table present information for the Admiral Shares, because Signal Shares were not available during the time periods shown. The expense ratio of the Signal Shares is expected to be the same as that of the Admiral Shares; therefore, performance of the Signal Shares should closely match that of the Admiral Shares. The bar chart shows how the performance of the Fund's 6 Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns-Admiral Shares - ----------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2002 -9.22% 2003 38.58 2004 18.96 2005 22.73 2006 12.10 - ----------------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 18.83% (quarter ended September 30, 2003), and the lowest return for a quarter was -12.73% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 Since 1 Year 5 Years Inception/1/ - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Admiral Shares - ------------------------------------------------------------------------------- Return Before Taxes 12.10% 15.54% 11.25% - ------------------------------------------------------------------------------- Return After Taxes on 11.57 15.12 10.85 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale 8.19 13.49 9.66 of Fund Shares - ------------------------------------------------------------------------------- MSCI Pacific Index/2/ (reflects no deduction for fees, expenses, or 12.20% 15.51% 11.47% taxes) - ------------------------------------------------------------------------------- 1 Since-inception returns are from August 13, 2001--the inception date of the Admiral Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 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 after-tax returns are shown only for the Admiral Shares and will vary for a fund's other share 7 classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Signal 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. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.13% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.04% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.17% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the 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. 8 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $17 $55 $96 $217 - -------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $11.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Signal Shares--September 8, 2006 - ------------------------------------------------------------------------------- Minimum Initial Investment $1 million - ------------------------------------------------------------------------------- Conversion Features Signal Shares--May be converted to Investor Shares if you are no longer eligible for Signal Shares - ------------------------------------------------------------------------------- Newspaper Abbreviation PacifSgl - ------------------------------------------------------------------------------- Vanguard Fund Number 1353 - ------------------------------------------------------------------------------- Cusip Number 922042825 - ------------------------------------------------------------------------------- Ticker Symbol VPASX - ------------------------------------------------------------------------------- 9 Fund Profile--Vanguard Emerging Markets Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 840 common stocks of companies located in emerging markets around the world. As of October 31, 2006, the largest markets covered in the Index were South Korea, Taiwan, Brazil, China, and Russia (which made up 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization). For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. The Index's, and therefore the Fund's, heavy exposure to South Korea, Taiwan, Brazil, China, and Russia subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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. Both the bar chart and the table present information for the Investor Shares because Admiral Shares and Signal Shares were not available during 10 the time periods shown. The bar chart shows how the performance of the Fund's Investor Shares (including operating expenses but excluding shareholder fees) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns (including operating expenses but excluding shareholder fees) of the share classes presented compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns - Investor Shares1 - ------------------------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 1997 -16.82% 1998 -18.12 1999 61.57 2000 -27.56 2001 -2.88 2002 -7.43 2003 57.65 2004 26.12 2005 32.05 2006 29.39 - ------------------------------------------------------------------------------ 1 If applicable fees were reflected, returns would be less than those shown. During the periods shown in the bar chart, the highest return for a calendar quarter was 28.32% (quarter ended December 31, 1999), and the lowest return for a quarter was -22.03% (quarter ended September 30, 2001). 11 Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - ------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Fund Investor Shares - ------------------------------------------------------------------------------- Return Before Taxes 28.11% 25.51% 9.21% - ------------------------------------------------------------------------------- Return After Taxes on 27.80 25.17 8.58 Distributions - ------------------------------------------------------------------------------- Return After Taxes on Distributions and Sale of 18.69 22.70 7.75 Fund Shares - ------------------------------------------------------------------------------- Comparative Indexes (reflect no deduction for fees or expenses) - ------------------------------------------------------------------------------- MSCI Emerging Markets 32.17% 26.59% -- Index/1/ - ------------------------------------------------------------------------------- Spliced Emerging Markets 29.73 26.38 9.51 Index/2/ - ------------------------------------------------------------------------------- 1 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 2 Reflects performance of the Select Emerging Markets Index through August 23, 2006, and performance of the MSCI Emerging Markets Index thereafter. The Select Emerging Markets Index was discontinued on August 24, 2006. Note on after-tax returns. Actual after-tax returns depend on your tax situation and may differ from those shown in the preceding table. When after-tax returns are calculated, it is assumed that the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains. State and local income taxes are not reflected in the calculations. Please note that after-tax returns are shown only for the Investor Shares and will vary for a fund's other share classes. After-tax returns are not relevant for a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, figures captioned Return After Taxes on Distributions and Sale of Fund Shares will be higher than other figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Signal 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. 12 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.23% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.07% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.30% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following examples are intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses match our estimates, and that you redeem your shares at the end of the given period. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $133 $203 $280 $508 - -------------------------------------------------------- You would pay the following expenses if you did not redeem your shares (the difference being that the Fund's 0.5% redemption fee would not apply to any of the following periods, as it would to those in the preceding example): 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $81 $146 $218 $429 - -------------------------------------------------------- These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. 13 Additional Information As of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $10.8 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--May 4, 1994 Signal Shares--September 8, 2006 - ------------------------------------------------------------------------------- Minimum Initial Investment $1 million - ------------------------------------------------------------------------------- Conversion Features Signal Shares--May be converted to Investor Shares if you are no longer eligible for Signal Shares - ------------------------------------------------------------------------------- Newspaper Abbreviation EmMkSgl - ------------------------------------------------------------------------------- Vanguard Fund Number 1354 - ------------------------------------------------------------------------------- Cusip Number 922042817 - ------------------------------------------------------------------------------- Ticker Symbol VERSX - ------------------------------------------------------------------------------- 14 More on the Funds This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for 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 each 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. Under normal circumstances, each Fund will invest at least 80% of its assets in the types of stocks indicated by its name. A Fund may change its 80% policy or indexing strategy upon 60 days' notice to shareholders. Note that each Fund's investment objective is not fundamental and may be changed without a shareholder vote. Advantages of Index Funds Index funds typically have the following characteristics: - -Variety of investments. Most Vanguard index funds generally invest in the securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have low or no research costs and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Compared with actively managed funds, most index funds have lower turnover rates and lower capital gains distributions. However, from time to time, some index funds may pay out higher-than-expected taxable distributions. That's because index funds must adjust their holdings to reflect changes in their target indexes. In some cases, such changes may force an index fund to sell securities that have appreciated in value, thereby realizing a capital gain that must be distributed to shareholders. A security may move out of an index for a number of reasons, including a merger or acquisition, or a substantial change in the market capitalization of the issuer. Generally, these changes tend to occur more frequently with small and medium-size companies than they do with large, well-established companies. 15 Indexing Methods In seeking to track a particular index, a fund generally uses one of the following methods to select the securities in which it invests. Replication method. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in approximately the same proportion as represented in the index itself. For example, if 5% of the Standard & Poor's 500 Index were made up of the stock of a specific company, a fund tracking that index would invest approximately 5% of its assets in that company. Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund employ this method of indexing. Sampling method. Because it would be expensive and inefficient to buy and sell all securities held in certain indexes (the Dow Jones Wilshire 5000 Composite Index, for example, included more than 4,956 separate stocks as of October 31, 2006), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund selects, from the target index, a representative sample of securities that will resemble the full target index in terms of key risk factors and other characteristics. For stock funds, these factors include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. For certain stock index funds, the advisor seeks to reduce risk by using a different form of sampling--determining whether or no to invest in certain securities based on an analysis of several factors, which vary from fund to fund. Vanguard Emerging Markets Stock Index Fund employs this method of indexing. Market Exposure To track their target indexes as closely as possible, the Funds attempt to remain fully invested in the foreign stocks included in their particular indexes. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 16 FLAG Each Fund is subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. To illustrate the volatility of international stock prices, the following table shows the best, worst, and average annual total returns for foreign stock markets over various periods as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of international market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Funds in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 17
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Funds in particular. FLAG Each 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 Regional Versus Broad International Investing Regional funds are international funds that invest in a particular geographical region, such as Europe or the Pacific Basin. Because they concentrate their holdings in a single region, these funds typically have higher share-price volatility than broadly diversified international stock funds (which, by investing in many different foreign markets, may offset losses from one country with gains from another at any given time). - -------------------------------------------------------------------------------- 18 Security Selection In seeking to track their target indexes, the Funds invest in portfolios of foreign stocks selected in a manner that mirrors the weightings of their target indexes. European Stock Index Fund. The Fund invests in the common stocks included in the MSCI Europe Index, which is made up of approximately 603 common stocks of companies located in 16 European countries. Four countries--the United Kingdom, France, Germany, and Switzerland--dominate the Index. These four countries made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 12 countries--Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden--are much less significant to the Index and, consequently, to the Fund. The Fund's heavy exposure to just four countries subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $55.2 billion. Pacific Stock Index Fund. The Fund invests in the common stocks included in the MSCI Pacific Index, which is made up of approximately 562 common stocks of Pacific Basin companies. The Index is dominated by the Japanese stock market, which represented 74% of the Index's market capitalization as of October 31, 2006. The other three markets represented in the Index are Australia, Hong Kong, and Singapore. The Fund's large investment in the Japanese stock market subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $17 billion. Emerging Markets Stock Index Fund. The Fund invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, which is made up of approximately 840 common stocks of companies located in 25 emerging markets of Europe, Asia, Africa, and Latin America. (The depositary receipt for a common stock will be considered to be a common stock for the purposes of meeting this percentage test.) Five countries--South Korea, Taiwan, Brazil, China, and Russia--collectively represent a majority of the Index, with 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 20 countries are Argentina, Chile, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, South Africa, Thailand, and Turkey. The Fund's advisor employs a sampling technique, using its discretion--based on an analysis that considers liquidity, repatriation of capital, and entry barriers in various markets--to determine whether or not to invest in particular securities. Emerging markets can be substantially more volatile, and substantially less liquid, than both U.S. and more developed foreign markets. In addition, the smaller-capitalization stocks in which the Emerging Markets Stock Index Fund typically invests 19 often perform quite differently from the large-cap stocks that dominate the overall stock market. Therefore, the Fund may expose investors to a higher degree of volatility and illiquidity than funds that invest in more developed markets. As of October 31, 2006, the MSCI Emerging Markets Index had an asset-weighted median market capitalization of $12.2 billion. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. Depositary Receipts. Each Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, each Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, a Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. A Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. Each Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. Other Investment Policies and Risks Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund's agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same market segment as the current index. Each Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Each Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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 20 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Funds may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Cash Management Vanguard may invest each Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Purchase, Redemption, Account Maintenance, and Custodial Fees Vanguard Emerging Markets Stock Index Fund charges a 0.5% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 0.5% fee on redemptions of its shares, including shares redeemed by selling or by exchanging to another Vanguard fund, or when Vanguard applies the low-balance account-closure policy. Vanguard European and Pacific Stock Index Funds charge a 2% redemption fee on shares that are redeemed before they have been held two months. The 2% fee applies when shares are redeemed by selling or by exchanging to another Vanguard fund, or when Vanguard applies the low-balance account-closure policy. Shares you have held the longest will be redeemed first. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption fees are 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. 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--$10 per year--is deducted from the annual 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. 21 See the Fund Profiles and Investing With Vanguard for more information about fees. Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will use fair-value pricing as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. Do not invest with Vanguard if you are a market-timer. 22 - -------------------------------------------------------------------------------- Plain Talk About Costs of Investing Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- Turnover Rate Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, index-oriented funds sell securities only in response to redemption requests or changes in the composition of a target index. Because of this, the turnover rate for each Fund has been very low. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for passively managed foreign stock funds was approximately 28%; for all foreign stock funds, the average turnover rate was approximately 76%, as reported by Morningstar, Inc., on October 31, 2006. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. - -------------------------------------------------------------------------------- The Funds and Vanguard Each Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund 23 with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended October 31, 2006, the advisory expenses of the European, Pacific, and Emerging Markets Stock Index Funds represented an effective annual rate of 0.01% or less of each Fund's average net assets. For a discussion of why the board of trustees approved each Fund's investment advisory arrangement, see the Funds' most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. 24 - -------------------------------------------------------------------------------- Plain Talk About the Funds' Portfolio Managers The managers primarily responsible for the day-to-day management of the Funds are: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989 and has managed the European Stock Index Fund since 1992 and the Emerging Markets Stock Index Fund since 1994. Education: B.S., LaSalle University. Michael H. Buek, Principal of Vanguard. He has been with Vanguard since 1987 and has managed the Pacific Stock Index Fund since 1997. Education: B.S., University of Vermont; M.B.A., Villanova University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Funds. Dividends, Capital Gains, and Taxes Fund Distributions Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- 25 Basic Tax Points Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic tax points: - -Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. - -Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - -Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income," if any, distributed by the Fund. - -Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - -Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - -A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - -Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - -The Fund may be subject to foreign taxes or foreign tax withholding on dividends, interest, and some capital gains that it receives on foreign securities. You may qualify for an offsetting credit or deduction under U.S. tax laws for your portion of the Fund's foreign tax obligations, provided that you meet certain requirements. See your tax advisor or IRS publications for more information. - -Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 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. 26 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. - -------------------------------------------------------------------------------- Plain Talk About "Buying a Dividend" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- Share Price Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected because the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage 27 a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 28 Financial Highlights The following financial highlights table is intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Admiral share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Admiral Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. Note: This prospectus offers the Fund's Signal Shares, not the Admiral Shares. Information for the Admiral Shares is shown here because each Fund's Signal Shares had not commenced operations. However, the two share classes invest in the same portfolio of securities and will have the same financial performance, except to the extent that their operating expenses may differ. 29 - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Tables This explanation uses the European Stock Index Fund's Admiral Shares as an example. The Admiral Shares began fiscal year 2006 with a net asset value (price) of $63.44 per share. During the year, each Admiral Share earned $2.23 from investment income (interest and dividends) and $17.51 from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $1.68 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $81.50, reflecting earnings of $19.74 per share and distributions of $1.68 per share. This was an increase of $18.06 per share (from $63.44 at the beginning of the year to $81.50 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was 31.77% for the year. As of October 31, 2006, the Admiral Shares had approximately $2.2 billion in net assets. For the year, the expense ratio was 0.17% ($1.70 per $1,000 of net assets), and the net investment income amounted to 3.45% of average net assets. The Fund sold and replaced securities valued at 6% of its net assets. - -------------------------------------------------------------------------------- 30
European Stock Index Fund Admiral Shares - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended October 31, ------------------------------------------------------------------------------------ 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $63.44 $55.84 $46.82 $38.61 $45.77 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 2.23 1.611 1.308 1.070 .96 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 17.51 7.396 8.830 8.115 (7.08) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 19.74 9.007 10.138 9.185 (6.12) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $81.50 $63.44 $55.84 $46.82 $38.61 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 31.77% 16.32% 21.98% 24.42% -13.74% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $2,175 $1,360 $628 $447 $335 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.18% 0.18% 0.23% 0.23% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 3.45% 2.93% 2.76% 2.84% 2.41% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 6% 5% 5% 6% 15% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
31
Pacific Stock Index Fund Admiral Shares Year Ended October 31, 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $68.05 $56.47 $51.05 $38.63 $44.40 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.302 1.069 .835 .575 .461 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 11.185 11.583 5.318 12.318 (6.016) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 12.487 12.652 6.153 12.893 (5.555) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $79.43 $68.05 $56.47 $51.05 $38.63 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 18.46% 22.68% 12.23% 33.82% -12.55% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,128 $720 $314 $198 $102 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.20% 0.25% 0.30% 0.30% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.83% 1.90% 1.69% 1.59% 1.16% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 2% 7% 3% 3% 20% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
32 Emerging Markets Stock Index Fund Admiral Shares Jun. 23/1/ to Oct. 31, 2006 - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $25.00 - ------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------- Net Investment Income .222 - ------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 3.808 on Investments/2/ - ------------------------------------------------------------------------------- Total from Investment Operations 4.030 - ------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------- Dividends from Net Investment Income -- - ------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- - ------------------------------------------------------------------------------- Total Distributions -- - ------------------------------------------------------------------------------- Net Asset Value, End of Period $29.03 - ------------------------------------------------------------------------------- Total Return/3/ 16.12% - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,491 - ------------------------------------------------------------------------------- Ratio of Total Expenses to Average 0.30%/4/ Net Assets - ------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net 2.32%/4/ Assets - ------------------------------------------------------------------------------- Turnover Rate/5/ 26% - ------------------------------------------------------------------------------- 1 Inception. 2 Includes increases from redemption fees of $0.01. 3 Total returns do not reflect the 0.5% transaction fee on purchases and the 0.5% fee assessed on redemptions. 4 Annualized. 5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units. 33 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing Shares Account Minimums for Signal Shares To open and maintain an account $1 million for new investors. Investment minimums may differ for certain categories of investors. Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain a fund account, or to add to an existing fund account. Institutional clients should contact Vanguard for information on special rules that may apply to them. - -Institutional intermediary clients. Institutional clients that are financial intermediaries generally may hold Signal Shares only if the total amount invested across all accounts held by the intermediary in the Fund is at least $5 million. Signal Shares generally are not available to financial intermediaries that serve as retail fund supermarkets. - -Institutional clients whose accounts are not recordkept by Vanguard. Institutional clients (including but not limited to financial intermediary, defined benefit, and contribution plan clients; endowments; and foundations) whose accounts are not recordkept by Vanguard may hold Signal Shares if the total amount aggregated among all accounts held by the client and invested in a single Signal Shares fund is at least $1 million. - -Institutional clients whose accounts are recordkept by Vanguard. Institutional clients whose accounts are recordkept by Vanguard may hold Signal Shares if the client has more than $10 million in the Fund and transacts with the Fund in a cost-effective manner. Please contact your Vanguard representative to determine whether your accounts qualify. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open, convert shares to, or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. 34 How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--"Fund # . " For a list of Fund numbers (for Funds in this prospectus), see Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. 35 For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Purchase Fees The Emerging Markets Stock Index Fund charges a purchase fee of 0.5% on all share purchases, including shares purchased by exchange from other Vanguard funds. In addition, each Fund reserves the right to impose purchase fees on all share purchases. Purchase fees do not apply to shares purchased through reinvested dividends and capital gains. Other 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. 36 New accounts. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a fund's operation or performance. Large purchases. Please call Vanguard before attempting to invest a large dollar amount. No cancellations. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written, wire, check, or automatic transaction requests, Vanguard will not cancel any transaction once it has been processed. Converting Shares A conversion between share classes of the same fund is a nontaxable event. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's net asset values. At the time of conversion, the total dollar value of your "old" shares will equal the total dollar value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total dollar value of your "new" shares compared with that of your "old" shares. 37 Conversions From Investor Shares Into Signal Shares You may convert Investor Shares into Signal Shares at any time if you meet the eligibility requirements for Signal Shares. Vanguard will not automatically convert accounts holding Investor Shares that qualify for conversion into Signal Shares. You may contact Vanguard by telephone or by mail to request this transaction. See Contacting Vanguard. Conversions From Admiral Shares Into Signal Shares The Fund may convert an eligible investor's Admiral Shares into Signal Shares. The fund will notify the investor in writing before any automatic conversion into Signal Shares. You may instruct the Fund if you do not wish to convert into Signal Shares. In such cases, your Admiral Shares will be converted into Investor Shares. Mandatory Conversions Into Investor Shares If an investor no longer meets the requirements for Signal Shares, the Fund may automatically convert the investor's Signal Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. Conversions Into Institutional Shares You are eligible for a self-directed conversion from Signal Shares into Institutional Shares of the same Fund, provided that your account balance in the Fund is at least $5 million and you meet all eligibility requirements. Automatic conversions do not apply to accounts that qualify for Institutional Shares. The Fund's Institutional Shares are offered through a separate prospectus. Please contact Vanguard's Institutional Division for more information. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. 38 By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: For telephone requests received by Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime Money Market Fund), 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. 39 For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Redemption Fees Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund each charge a 2% redemption fee on shares redeemed within two months of purchase. Shares held for two months or more are not subject to the 2% fee. Vanguard Emerging Markets Stock Index Fund charges a 0.5% redemption fee. Each Fund's redemption fee applies to shares redeemed by selling or by exchanging to another fund, or when Vanguard applies the low-balance account-closure policy. The fee is withheld from redemption proceeds and is paid directly to the Fund to offset the cost of buying and selling securities. After redeeming shares that are exempt from redemption fees, shares you have held the longest will be redeemed first. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), redemption fees will not apply to the following: - -Redemptions of shares purchased with reinvested dividend and capital gains distributions (not applicable to Vanguard Emerging Markets Fund). - -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. 40 - -Section 529 college savings plans. - -For a one-year period, shares (except shares of Vanguard Emerging Markets Stock Index Fund) rolled over to an IRA held at Vanguard from a retirement plan for which Vanguard serves as recordkeeper (except for Vanguard Small Business Services retirement plans). - -Distributions by shareholders age 701/2 or older from the following (not applicable to Vanguard Emerging Markets Stock Index Fund): -Traditional IRAs. -Inherited IRAs (traditional and Roth). -Rollover IRAs. -SEP-IRAs. -SIMPLE IRAs. -Section 403(b)(7) plans served by the Vanguard Small Business Services Department. -Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee. For participants in employer-sponsored defined contribution plans (other than those serviced by the Vanguard Small Business Services Department), in addition to the exclusions previously listed, redemption fees will not apply to the following: - -Exchanges of shares purchased with participant payroll or employer contributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. Redemption fees will apply to shares exchanged out of a fund within the fund's redemption-fee period into which fund the shares had previously been exchanged, rolled over, or transferred by a participant. If Vanguard does not serve as recordkeeper for your plan, redemption fees may be applied differently. Please read your recordkeeper's plan materials carefully to learn of any other rules or fees that may apply. Also see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees by intermediaries. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or 41 retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would negatively affect the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance. Share certificates. If share certificates have been issued for your fund 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. 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 or automatic 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. 42 Exchanging Shares An exchange occurs when the assets redeemed from one Vanguard fund are used to purchase shares in an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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 trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) 43 For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, the frequent-trading policy does not apply to: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares. - -Conversions of shares from one share class to another in the same fund. Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege. Accounts Held by Intermediaries When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. 44 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. You must register for this service online. Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. Telephone Transactions Automatic. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. Tele-Account/(R)/. To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information: - -Authorization to act on the account (as the account owner or by legal documentation or other means). - -Account registration and address. - -Social Security or employer identification number. - -Fund name and account number, if applicable. - -Other information relating to the caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: 45 - -The fund name and account number. - -The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: - -Signatures of all registered owners. - -Signature guarantees, if required for the type of transaction.* - -Any supporting legal documentation that may be required. The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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 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. 46 Investing With Vanguard Through Other Firms You may purchase or sell Signal Shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment advisor. Please consult your financial intermediary to determine whether Signal Shares are available through that firm and to learn about other rules that may apply. Please see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees and monitoring of frequent trading for accounts held by intermediaries. Low-Balance Accounts Each Fund reserves the right to convert an investor's Signal Shares into Investor Shares of the Fund if the investor's fund account balance falls below the minimum initial investment. Any such conversion will be preceded by written notice to the investor. Right to Change Policies In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. 47 Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 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. 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. 48 Annual and Semiannual Reports We will send (or provide online, whichever you prefer) financial reports about Vanguard International Stock Index Funds twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - -Performance assessments and comparisons with industry benchmarks. - -Financial statements with listings of Fund holdings. 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 each Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 49 Contacting Vanguard Web - -------------------------------------------------------------------------------- Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a For fund, account, and service information week For most account transactions For literature requests - ------------------------------------------------------------------------------- Phone - ------------------------------------------------------------------------------- Vanguard Tele-Account/(R) For automated fund and account information /800-662-6273 For exchange transactions (subject to limitations) (ON-BOARD) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------- Investor Information For fund and service information 800-662-7447 (SHIP) (Text For literature requests telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., at 800-952-3335) Eastern time - ------------------------------------------------------------------------------- Client Services For account information 800-662-2739 (CREW) (Text For most account transactions telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., at 800-749-7273) Eastern time - ------------------------------------------------------------------------------- Signal Service Centers For information regarding Signal Shares For institutional intermediary clients: 800-997-2798 For institutional clients whose accounts are not recordkept at Vanguard: 888-809-8102 For institutional clients whose accounts are recordkept at Vanguard: 800-523-1188 For most Signal Share transactions Business hours only: Monday-Friday, 8 a.m. to 10 p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Institutional Division For information and services for large 888-809-8102 institutional investors Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial 800-997-2798 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 - ------------------------------------------------------------------------------- 50 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Numbers Please use the specific fund number when contacting us: Signal Shares - -------------------------------------------------------------- Vanguard European Stock Index Fund 1352 - -------------------------------------------------------------- Vanguard Pacific Stock Index Fund 1353 - -------------------------------------------------------------- Vanguard Emerging Markets Stock Index Fund 1354 - -------------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Tele-Account, Vanguard Tele-Account, Admiral, Signal, Vanguard ETF, Vanguard Small Business Online, Vanguard Brokerage Services, and the ship logo are trademarks of The Vanguard Group, Inc. The Funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All other marks are the exclusive property of their respective owners. 51 ETF Shares In addition to Signal Shares, certain Vanguard funds offer a class of shares, known as Vanguard ETF* Shares, that are listed for trading on the American Stock Exchange (AMEX). If you own Investor Shares, Admiral Shares, Signal Shares, or Institutional Shares issued by one of these funds, you may convert those shares into ETF Shares of the same fund. Note: Vanguard reserves the right to modify or terminate the conversion privilege in the future. Each Fund currently offers an ETF Share class: Fund ETF Shares Ticker Symbol - ------------------------------------------------------------------------------- Vanguard European Stock Index Fund European ETF VGK - ------------------------------------------------------------------------------- Vanguard Pacific Stock Index Fund Pacific ETF VPL - ------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index Emerging Markets ETF VWO Fund - ------------------------------------------------------------------------------- Although ETF Shares represent an investment in the same portfolio of securities as Investor Shares, Admiral Shares, Signal Shares, and Institutional Shares, they have different characteristics and may appeal to a different group of investors. It is important that you understand the differences before deciding whether to convert your shares to ETF Shares. The following material summarizes key information about ETF Shares. A separate prospectus with more complete information about ETF Shares is also available. Investors should review that prospectus before deciding whether to convert. Differences Between ETF Shares and Conventional Mutual Fund Shares Investor Shares, Admiral Shares, Signal Shares, and Institutional Shares are "conventional" mutual fund shares; that is, they can be purchased from and redeemed with the issuing fund for cash at a net asset value (NAV) calculated once a day. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund, except as noted. * U.S. Pat. No. 6,879,964 B2. 52 An organized trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on the AMEX. Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day based on the supply of, and demand for, ETF Shares and on changes in the prices of the fund's portfolio holdings. The market price of a fund's ETF Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. Buying and Selling ETF Shares Vanguard ETF Shares must be held in a brokerage account. Therefore, before acquiring ETF Shares, whether through a conversion or an open-market purchase, you must have an account with a broker. You buy and sell ETF Shares in the same way you buy and sell any other exchange-traded security--on the open market, through a broker. In most cases, the broker will charge you a commission to execute the transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must purchase. Because open-market transactions occur at market prices, you may pay more than NAV when you buy ETF Shares and receive less than NAV when you sell those shares. If you own conventional shares (Investor Shares, Admiral Shares, Signal Shares, or Institutional Shares) of a Vanguard fund that issues ETF Shares, you can convert those shares into ETF Shares of equivalent value--but you cannot convert back. See "Conversion Privilege" for a discussion of the conversion process. There is one other way to buy and sell ETF Shares. Investors can purchase and redeem ETF Shares directly from the issuing fund at NAV if they do so (1) through certain authorized broker-dealers, (2) in large blocks of 100,000 ETF Shares (depending on the fund), known as Creation Units, and (3) in exchange for baskets of securities rather than cash. However, because Creation Units will be worth millions of dollars, and because most investors prefer to transact in cash rather than with securities, it is expected that only a limited number of institutional investors will purchase and redeem ETF Shares this way. Risks ETF Shares issued by a fund are subject to the same risks as conventional shares of the same fund. ETF Shares also are subject to the following risks: 53 - -The market price of a fund's ETF Shares will vary somewhat from the NAV of those shares. Therefore, you may pay more than NAV when buying ETF Shares and you may receive less than NAV when selling them. - -ETF Shares cannot be redeemed with the Fund, except in Creation Unit aggregations. Therefore, if you no longer wish to own ETF Shares, you must sell them on the open market. Although ETF Shares will be listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of a fund's ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if the shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. Fees and Expenses When you buy and sell ETF Shares through a brokerage firm, you will pay whatever commissions the firm charges. You also will incur the cost of the "bid-asked spread," which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. If you convert from conventional shares to ETF Shares, you will not pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50 for each conversion transaction, and your broker may impose its own conversion fees as well. The total annual operating expenses (the expense ratio) for each type of ETF Share are: ETF Shares Expense Ratio - --------------------------------------- European ETF 0.18% - --------------------------------------- Pacific ETF 0.18 - --------------------------------------- Emerging Markets ETF 0.30 - --------------------------------------- Account Services Because you hold ETF Shares through a brokerage account, Vanguard will have no record of your ownership unless you hold the shares through Vanguard Brokerage Services/(R)/ (Vanguard Brokerage). Your broker will service your account. For example, the broker will provide account statements, confirmations of your purchases and sales of ETF Shares, and year-end tax information. The broker also will be responsible for ensuring that you receive shareholder reports and other communications from the fund whose ETF Shares you own. You will receive certain services (e.g., dividend reinvestment and average-cost information) only if your broker offers those services. 54 Conversion Privilege Owners of conventional shares (Investor Shares, Admiral Shares, Signal Shares, or Institutional Shares) issued by a Vanguard Fund that offers ETF Shares may convert those shares into ETF Shares of equivalent value of the same fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard imposes a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. Your broker may charge an additional fee to process a conversion. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Unless you are an Authorized Participant, you must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, you must have an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF Shares, please contact your broker. Converting conventional shares into ETF Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. Your Fund's transfer agent will reflect ownership of all ETF Shares in the name of the Depository Trust Company (DTC). The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you. Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on 55 how it will handle the conversion process, including whether it will impose a fee to process a conversion. If you convert your conventional shares to ETF Shares through Vanguard Brokerage Services, all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into ETF Shares: - -The conversion transaction is nontaxable except, as applicable, to the limited extent as previously described. - -The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - -Until the conversion process is complete, you will remain fully invested in the Funds' conventional shares, and your investment will increase or decrease in value in tandem with the net asset value of those shares. - -During the conversion process, you will be able to liquidate all or part of your investment by instructing Vanguard or your broker (depending on who maintains records of your share ownership) to redeem your conventional shares. After the conversion process is complete, you will be able to liquidate all or part of your investment by instructing your broker to sell your ETF Shares. 56 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. Country Risk. The chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. Currency Risk. The chance that the value of a foreign investment, measured in U.S. dollars, will decrease because of unfavorable changes in currency exchange rates. Dividend Distribution. Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 57 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. 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. 58 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard International Stock Index Funds, the following documents are available free upon request: Annual/Semiannual Reports to Shareholders Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Statement of Additional Information (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Funds or other Vanguard funds, please visit www.vanguard.com or contact us as follows: The Vanguard Group Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-662-7447 (SHIP) Text Telephone for the hearing impaired: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone for the hearing impaired: 800-749-7273 Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Funds are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P1353 022007 Vanguard/(R)/ International Stock Index Funds > Prospectus Signal(TM)Shares for Participants February 28, 2007 SHIP LOGO VANGUARD(R) Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund Vanguard Emerging Markets Stock Index Fund LOGO [INDEXED TO MSCI] This prospectus contains financial data for the Funds through the fiscal year ended October 31, 2006. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Contents - ------------------------------------------------------------------------------- An Introduction to 1 Financial Highlights 26 Index Funds - ------------------------------------------------------------------------------- Vanguard Fund Profiles 2 Investing With Vanguard 30 - ------------------------------------------------------------------------------- European Stock Index 2 Accessing Fund Information by Computer 33 Fund - ------------------------------------------------------------------------------- Pacific Stock Index 6 Glossary of Investment Terms 34 Fund - ------------------------------------------------------------------------------- Emerging Markets 10 Stock Index Fund - ------------------------------------------------------------------------------- More on the Funds 14 - ------------------------------------------------------------------------------- The Funds and Vanguard 22 - ------------------------------------------------------------------------------- Investment Advisor 23 - ------------------------------------------------------------------------------- Dividends, Capital 24 Gains, and Taxes - ------------------------------------------------------------------------------- Share Price 25 - ------------------------------------------------------------------------------- Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. This prospectus offers the Funds' Signal Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 800-662-7447. 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 in This Prospectus Vanguard offers a variety of stock index funds (both U.S. and international), as well as bond and balanced index funds. This prospectus provides information about three Vanguard International Stock Index Funds. These Funds seek to track particular segments of the international stock market. Fund Seeks to Track - ------------------------------------------------------------------------------- Vanguard European Stock European stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Pacific Stock Australian and Far East stock markets Index Fund - ------------------------------------------------------------------------------- Vanguard Emerging 25 emerging stock markets in Europe, Asia, Africa, Markets Stock Index Fund and Latin America - ------------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 1 Fund Profile--Vanguard European Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of Europe. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index. The MSCI Europe Index is made up of approximately 603 common stocks of companies located in 16 European countries--mostly companies in the United Kingdom, France, Germany, and Switzerland (which made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization, as of October 31, 2006). Other countries represented in the Index include Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden. For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. Primary Risk 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to four countries (the United Kingdom, France, Germany, and Switzerland) subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, Europe--will be hurt by political upheaval, financial troubles, or natural disasters. - -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. Both the bar chart and the table present information for the 2 Admiral Shares, because Signal Shares were not available during the time periods shown. The expense ratio of the Signal Shares is expected to be the same as that of the Admiral Shares; therefore, performance of the Signal Shares should closely match that of the Admiral Shares. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Admiral Shares compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns-Admiral Shares - ----------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2002 -17.85% 2003 38.84 2004 20.96 2005 9.36 2006 33.57 - ----------------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 22.29% (quarter ended June 30, 2003), and the lowest return for a quarter was -22.85% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 Since Inception/1/ 1 Year 5 Years - ------------------------------------------------------------------------------- Vanguard European 33.57% 15.05% 13.29% Stock Index Fund Admiral Shares - ------------------------------------------------------------------------------- MSCI Europe Index/2/ (reflects no deduction 33.72 14.87 13.26 for fees or expenses) - ------------------------------------------------------------------------------- 1 Since-inception returns are from August 13, 2001--the inception of the Admiral Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Signal 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, 3 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. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.13% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.04% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.17% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the 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 - -------------------------------------------------------- $17 $55 $96 $217 - -------------------------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. 4 Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $23.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Signal Shares--September 8, 2006 - ------------------------------------------------------------------------------- Newspaper Abbreviation EuropeSgl - ------------------------------------------------------------------------------- Vanguard Fund Number 1352 - ------------------------------------------------------------------------------- Cusip Number 922042833 - ------------------------------------------------------------------------------- Ticker Symbol VESSX - ------------------------------------------------------------------------------- 5 Fund Profile--Vanguard Pacific Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in the major markets of the Pacific region. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing all, or substantially all, of its assets in the common stocks included in the MSCI Pacific Index. The MSCI Pacific Index consists of approximately 562 common stocks of companies located in Japan, Australia, Hong Kong, and Singapore. (As of October 31, 2006, Japan and Australia made up 74% and 18%, respectively, of the Index's market capitalization.) For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. The Index's, and therefore the Fund's, heavy exposure to Japan subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Regional risk, which is the chance that an entire region--namely, the Pacific region--will be hurt by political upheaval, financial troubles, or natural disasters. - -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. Both the bar chart and the table present information for the Admiral Shares, because Signal Shares were not available during the time periods shown. The expense ratio of the Signal Shares is expected to be the same as that of the Admiral Shares; therefore, performance of the Signal Shares should closely match that of the Admiral Shares. The bar chart shows how the performance of the Fund's 6 Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns of the Admiral Shares compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns-Admiral Shares - ----------------------------------------------------------- BAR CHART RANGE -40% TO 80% 2002 -9.22% 2003 38.58 2004 18.96 2005 22.73 2006 12.10 - ----------------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 18.83% (quarter ended September 30, 2003), and the lowest return for a quarter was -12.73% (quarter ended September 30, 2002). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years Since Inception/1/ - ------------------------------------------------------------------------------- Vanguard Pacific Stock 12.10% 15.54% 11.25% Index Fund Admiral Shares - ------------------------------------------------------------------------------- MSCI Pacific Index/2/ (reflects no deduction 12.20 15.51 11.47 for fees or expenses) - ------------------------------------------------------------------------------- 1 Since-inception returns are from August 13, 2001--the inception date of the Admiral Shares--through December 31, 2006. 2 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Signal 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. 7 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/1/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.13% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.04% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.17% - ------------------------------------------------------------------------------- 1 The 2% fee applies to shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the 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 - -------------------------------------------------------- $17 $55 $96 $217 - -------------------------------------------------------- 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. 8 Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share classes) $11.4 billion - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date Investor Shares--June 18, 1990 Signal Shares--September 8, 2006 - ------------------------------------------------------------------------------- Newspaper Abbreviation PacifSgl - ------------------------------------------------------------------------------- Vanguard Fund Number 1353 - ------------------------------------------------------------------------------- Cusip Number 922042825 - ------------------------------------------------------------------------------- Ticker Symbol VPASX - ------------------------------------------------------------------------------- 9 Fund Profile--Vanguard Emerging Markets Stock Index Fund Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks issued by companies located in emerging market countries. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach by investing substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, while employing a form of sampling to reduce risk. The MSCI Emerging Markets Index includes approximately 840 common stocks of companies located in emerging markets around the world. As of October 31, 2006, the largest markets covered in the Index were South Korea, Taiwan, Brazil, China, and Russia (which made up 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization). For more information about passive management, see "Advantages of Index Funds" and "Indexing Methods" under More on the Funds. 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. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. - -Country risk, which is the chance that domestic events--such as political upheaval, financial troubles, or natural disasters--will weaken a country's securities markets. Country risk is especially high in emerging markets. The Index's, and therefore the Fund's, heavy exposure to South Korea, Taiwan, Brazil, China, and Russia subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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. Both the bar chart and the table present information for the Investor Shares because Admiral Shares and Signal Shares were not available during 10 the time periods shown. The bar chart shows how the performance of the Fund's Investor Shares (including operating expenses but excluding shareholder fees) has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns (including operating expenses but excluding shareholder fees) of the Investor Shares compare with those of the Fund's target index. Keep in mind that the Fund's past performance (before and after taxes) does not indicate how the Fund will perform in the future. Annual Total Returns - Investor Shares1 - ------------------------------------------------------------------------------ BAR CHART RANGE -40% TO 80% 1997 -16.82% 1998 -18.12 1999 61.57 2000 -27.56 2001 -2.88 2002 -7.43 2003 57.65 2004 26.12 2005 32.05 2006 29.39 - ------------------------------------------------------------------------------ 1 If applicable fees were reflected, returns would be less than those shown. During the periods shown in the bar chart, the highest return for a calendar quarter was 28.32% (quarter ended December 31, 1999), and the lowest return for a quarter was -22.03% (quarter ended September 30, 2001). Average Annual Total Returns for Periods Ended December 31, 2006 1 Year 5 Years 10 Years - -------------------------------------------------------------------------------- Vanguard Emerging Markets Stock Index 28.11% 25.51% 9.21% Fund Investor Shares - ------------------------------------------------------------------------------- Comparative Indexes (reflect no deduction for fees or expenses) - ------------------------------------------------------------------------------- MSCI Emerging Markets 32.17% 26.59% -- Index/1/ - ------------------------------------------------------------------------------- Spliced Emerging 29.73 26.38 9.51 Markets Index/2/ - ------------------------------------------------------------------------------- 1 MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 2 Select Emerging Markets Index through August 23, 2006; MSCI Emerging Markets Index thereafter. The Select Emerging Markets Index was discontinued on August 24, 2006. Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Signal Shares of the Fund. As is the case with all mutual funds, transaction costs 11 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. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee 0.5%/1/ - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested None Dividends - ------------------------------------------------------------------------------- Redemption Fee 0.5%/2/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted directly from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.23% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.07% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.30% - ------------------------------------------------------------------------------- 1 The purchase fee is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains. 2 The 0.5% fee applies to shares redeemed by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. The following examples are intended to help you compare the cost of investing in the Fund's Signal Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. The first example assumes that the Fund provides a return of 5% a year, that operating expenses match our estimates, and that you redeem your shares at the end of the given period. 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $133 $203 $280 $508 - -------------------------------------------------------- You would pay the following expenses if you did not redeem your shares (the difference being that the Fund's 0.5% redemption fee would not apply to any of the following periods, as it would to those in the preceding example): 1 Year 3 Years 5 Years 10 Years - -------------------------------------------------------- $81 $146 $218 $429 - -------------------------------------------------------- 12 These examples should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information as of October 31, 2006 - ------------------------------------------------------------------------------- Net Assets (all share $10.8 billion classes) - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Distributed annually in December Gains - ------------------------------------------------------------------------------- Inception Date Investor Shares--May 4, 1994 Signal Shares--September 8, 2006 - ------------------------------------------------------------------------------- Newspaper Abbreviation EmMkSgl - ------------------------------------------------------------------------------- Vanguard Fund Number 1354 - ------------------------------------------------------------------------------- Cusip Number 922042817 - ------------------------------------------------------------------------------- Ticker Symbol VERSX - ------------------------------------------------------------------------------- 13 More on the Funds This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for 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 each 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. Under normal circumstances, each Fund will invest at least 80% of its assets in the types of stocks indicated by its name. A Fund may change its 80% policy or indexing strategy upon 60 days' notice to shareholders. Note that each Fund's investment objective is not fundamental and may be changed without a shareholder vote. Advantages of Index Funds Index funds typically have the following characteristics: - -Variety of investments. Most Vanguard index funds generally invest in the securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have low or no research costs and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Indexing Methods In seeking to track a particular index, a fund generally uses one of the following methods to select the securities in which it invests. Replication method. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in approximately the same proportion as represented in the index itself. For example, if 5% of the Standard & Poor's 500 Index were made up of the stock of a specific company, a fund tracking that index would invest approximately 5% of its assets in that company. Vanguard European Stock Index Fund and Vanguard Pacific Stock Index Fund employ this method of indexing. 14 Sampling method. Because it would be expensive and inefficient to buy and sell all securities held in certain indexes (the Dow Jones Wilshire 5000 Composite Index, for example, included more than 4,956 separate stocks as of October 31, 2006), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund selects, from the target index, a representative sample of securities that will resemble the full target index in terms of key risk factors and other characteristics. For stock funds, these factors include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. For certain stock index funds, the advisor seeks to reduce risk by using a different form of sampling--determining whether or no to invest in certain securities based on an analysis of several factors, which vary from fund to fund. Vanguard Emerging Markets Stock Index Fund employs this method of indexing. Market Exposure To track their target indexes as closely as possible, the Funds attempt to remain fully invested in the foreign stocks included in their particular indexes. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- FLAG Each Fund is subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. To illustrate the volatility of international stock prices, the following table shows the best, worst, and average annual total returns for foreign stock markets over various periods as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of international market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses 15 that a real-world investment portfolio would incur. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Funds in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 16
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Funds in particular. FLAG Each 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 Regional Versus Broad International Investing Regional funds are international funds that invest in a particular geographical region, such as Europe or the Pacific Basin. Because they concentrate their holdings in a single region, these funds typically have higher share-price volatility than broadly diversified international stock funds (which, by investing in many different foreign markets, may offset losses from one country with gains from another at any given time). - -------------------------------------------------------------------------------- 17 Security Selection In seeking to track their target indexes, the Funds invest in portfolios of foreign stocks selected in a manner that mirrors the weightings of their target indexes. European Stock Index Fund. The Fund invests in the common stocks included in the MSCI Europe Index, which is made up of approximately 603 common stocks of companies located in 16 European countries. Four countries--the United Kingdom, France, Germany, and Switzerland--dominate the Index. These four countries made up 35%, 14%, 11%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 12 countries--Austria, Belgium, Denmark, Finland, Greece, Ireland, Italy, the Netherlands, Norway, Portugal, Spain, and Sweden--are much less significant to the Index and, consequently, to the Fund. The Fund's heavy exposure to just four countries subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $55.2 billion. Pacific Stock Index Fund. The Fund invests in the common stocks included in the MSCI Pacific Index, which is made up of approximately 562 common stocks of Pacific Basin companies. The Index is dominated by the Japanese stock market, which represented 74% of the Index's market capitalization as of October 31, 2006. The other three markets represented in the Index are Australia, Hong Kong, and Singapore. The Fund's large investment in the Japanese stock market subjects the Fund to a higher degree of country risk than that of more geographically diversified international funds. As of October 31, 2006, the Fund had an asset-weighted median market capitalization of $17 billion. Emerging Markets Stock Index Fund. The Fund invests substantially all (normally about 95%) of its assets in the common stocks included in the MSCI Emerging Markets Index, which is made up of approximately 840 common stocks of companies located in 25 emerging markets of Europe, Asia, Africa, and Latin America. (The depositary receipt for a common stock will be considered to be a common stock for the purposes of meeting this percentage test.) Five countries--South Korea, Taiwan, Brazil, China, and Russia--collectively represent a majority of the Index, with 17%, 12%, 10%, 10%, and 10%, respectively, of the Index's market capitalization as of October 31, 2006. The other 20 countries are Argentina, Chile, Colombia, the Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Malaysia, Mexico, Morocco, Pakistan, Peru, the Philippines, Poland, South Africa, Thailand, and Turkey. The Fund's advisor employs a sampling technique, using its discretion--based on an analysis that considers liquidity, repatriation of capital, and entry barriers in various markets--to determine whether or not to invest in particular securities. Emerging markets can be substantially more volatile, and substantially less liquid, than both U.S. and more developed foreign markets. In addition, the smaller-capitalization stocks in which the Emerging Markets Stock Index Fund typically invests 18 often perform quite differently from the large-cap stocks that dominate the overall stock market. Therefore, the Fund may expose investors to a higher degree of volatility and illiquidity than funds that invest in more developed markets. As of October 31, 2006, the MSCI Emerging Markets Index had an asset-weighted median market capitalization of $12.2 billion. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. Depositary Receipts. Each Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, each Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, a Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. A Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. Each Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. Other Investment Policies and Risks Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, if the Fund's agreement with the sponsor of its target index is terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same market segment as the current index. Each Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Funds to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Funds will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Each Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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 19 90 days in the future. In other words, the contract guarantees an exchange rate on a given date. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Funds may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Cash Management Vanguard may invest each Fund's daily cash balance in one or more Vanguard CMT Funds, which are very low-cost money market funds. When investing in a Vanguard CMT Fund, each Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. Purchase and Redemption Fees Vanguard Emerging Markets Stock Index Fund charges a 0.5% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 0.5% fee on redemptions of its shares, including shares redeemed by exchanging to another Vanguard fund. Participants who exchange into Vanguard European and Pacific Stock Index Funds will be subject to a 2% redemption fee if they subsequently exchange those shares out of the Fund within two months. When shares are exchanged out of the European and Pacific Stock Index Funds, Vanguard first exchanges shares that are exempt from redemption fees (such as shares purchased with dividend or capital gains distributions and shares purchased with plan participant payroll or employer contributions). Shares a participant has held the longest will be redeemed next. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption fees are designed to ensure that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. See the Fund Profiles and Investing With Vanguard for more information about fees. Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is 20 shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, a participant from exchanging into a fund account for 60 calendar days after the participant exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 21 Turnover Rate Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, index-oriented funds sell securities only in response to redemption requests or changes in the composition of a target index. Because of this, the turnover rate for each Fund has been very low. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. The average turnover rate for passively managed foreign stock funds was approximately 28%; for all foreign stock funds, the average turnover rate was approximately 76%, as reported by Morningstar, Inc., on October 31, 2006. The Financial Highlights section of this prospectus shows historical turnover rates for the Funds. - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs, which are not included in the fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. - -------------------------------------------------------------------------------- The Funds and Vanguard Each Fund is a member of The Vanguard Group, a family of 36 investment companies with more than 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. 22 - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Funds through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended October 31, 2006, the advisory expenses of the European, Pacific, and Emerging Markets Stock Index Funds represented an effective annual rate of 0.01% or less of each Fund's average net assets. For a discussion of why the board of trustees approved each Fund's investment advisory arrangement, see the Funds' most recent semiannual report to shareholders covering the fiscal period that ends on April 30 each year. 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. 23 - -------------------------------------------------------------------------------- Plain Talk About the Funds' Portfolio Managers The managers primarily responsible for the day-to-day management of the Funds are: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989 and has managed the European Stock Index Fund since 1992 and the Emerging Markets Stock Index Fund since 1994. Education: B.S., LaSalle University. Michael H. Buek, Principal of Vanguard. He has been with Vanguard since 1987 and has managed the Pacific Stock Index Fund since 1997. Education: B.S., University of Vermont; M.B.A., Villanova University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about each portfolio manager's compensation, other accounts under management, and ownership of securities in the Funds. Dividends, Capital Gains, and Taxes Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax advisor about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- 24 Share Price Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected because the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 25 Financial Highlights The following financial highlights table is intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Admiral share. The total returns in the table represent the rate that an investor would have earned or lost each period on an investment in the Admiral Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report--along with the Fund's financial statements--is included in the Fund's most recent annual report to shareholders. To receive a free copy of the latest annual or semiannual report, you may access a report online at www.vanguard.com, or you may contact Vanguard by telephone or by mail. Note: This prospectus offers the Fund's Signal Shares, not the Admiral Shares. Information for the Admiral Shares is shown here because each Fund's Signal Shares had not commenced operations. However, the two share classes invest in the same portfolio of securities and will have the same financial performance, except to the extent that their operating expenses may differ. - -------------------------------------------------------------------------------- Plain Talk About How to Read the Financial Highlights Tables This explanation uses the European Stock Index Fund's Admiral Shares as an example. The Admiral Shares began fiscal year 2006 with a net asset value (price) of $63.44 per share. During the year, each Admiral Share earned $2.23 from investment income (interest and dividends) and $17.51 from investments that had appreciated in value or that were sold for higher prices than the Fund paid for them. Shareholders received $1.68 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $81.50, reflecting earnings of $19.74 per share and distributions of $1.68 per share. This was an increase of $18.06 per share (from $63.44 at the beginning of the year to $81.50 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was 31.77% for the year. As of October 31, 2006, the Admiral Shares had approximately $2.2 billion in net assets. For the year, the expense ratio was 0.17% ($1.70 per $1,000 of net assets), and the net investment income amounted to 3.45% of average net assets. The Fund sold and replaced securities valued at 6% of its net assets. - -------------------------------------------------------------------------------- 26
European Stock Index Fund Admiral Shares - ----------------------------------------------------------------------------------------------------------------------------------- Year Ended October 31, ------------------------------------------------------------------------------------ 2006 2005 2004 2003 2002 - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $63.44 $55.84 $46.82 $38.61 $45.77 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 2.23 1.611 1.308 1.070 .96 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) on Investments 17.51 7.396 8.830 8.115 (7.08) - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 19.74 9.007 10.138 9.185 (6.12) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.68) (1.407) (1.118) (.975) (1.04) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $81.50 $63.44 $55.84 $46.82 $38.61 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 31.77% 16.32% 21.98% 24.42% -13.74% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $2,175 $1,360 $628 $447 $335 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.18% 0.18% 0.23% 0.23% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 3.45% 2.93% 2.76% 2.84% 2.41% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 6% 5% 5% 6% 15% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
27
Pacific Stock Index Fund Admiral Shares Year Ended October 31, 2006 2005 2004 2003 2002 -------------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $68.05 $56.47 $51.05 $38.63 $44.40 - ----------------------------------------------------------------------------------------------------------------------------------- Investment Operations - ----------------------------------------------------------------------------------------------------------------------------------- Net Investment Income 1.302 1.069 .835 .575 .461 - ----------------------------------------------------------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 11.185 11.583 5.318 12.318 (6.016) on Investments - ----------------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 12.487 12.652 6.153 12.893 (5.555) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions - ----------------------------------------------------------------------------------------------------------------------------------- Dividends from Net Investment Income (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- -- -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Total Distributions (1.107) (1.072) (.733) (.473) (.215) - ----------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $79.43 $68.05 $56.47 $51.05 $38.63 - ----------------------------------------------------------------------------------------------------------------------------------- Total Return/1/ 18.46% 22.68% 12.23% 33.82% -12.55% - ----------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data - ----------------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,128 $720 $314 $198 $102 - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Total Expenses to Average Net 0.17% 0.20% 0.25% 0.30% 0.30% Assets - ----------------------------------------------------------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net Assets 1.83% 1.90% 1.69% 1.59% 1.16% - ----------------------------------------------------------------------------------------------------------------------------------- Turnover Rate/2/ 2% 7% 3% 3% 20% - ----------------------------------------------------------------------------------------------------------------------------------- 1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months. 2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units.
28 Emerging Markets Stock Index Fund Admiral Shares Jun. 23/1/ to Oct. 31, 2006 - ------------------------------------------------------------------------------- Net Asset Value, Beginning of Period $25.00 - ------------------------------------------------------------------------------- Investment Operations - ------------------------------------------------------------------------------- Net Investment Income .222 - ------------------------------------------------------------------------------- Net Realized and Unrealized Gain (Loss) 3.808 on Investments/2/ - ------------------------------------------------------------------------------- Total from Investment Operations 4.030 - ------------------------------------------------------------------------------- Distributions - ------------------------------------------------------------------------------- Dividends from Net Investment Income -- - ------------------------------------------------------------------------------- Distributions from Realized Capital Gains -- - ------------------------------------------------------------------------------- Total Distributions -- - ------------------------------------------------------------------------------- Net Asset Value, End of Period $29.03 - ------------------------------------------------------------------------------- Total Return/3/ 16.12% - ------------------------------------------------------------------------------- Ratios/Supplemental Data - ------------------------------------------------------------------------------- Net Assets, End of Period (Millions) $1,491 - ------------------------------------------------------------------------------- Ratio of Total Expenses to Average 0.30%/4/ Net Assets - ------------------------------------------------------------------------------- Ratio of Net Investment Income to Average Net 2.32%/4/ Assets - ------------------------------------------------------------------------------- Turnover Rate/5/ 26% - ------------------------------------------------------------------------------- 1 Inception. 2 Includes increases from redemption fees of $0.01. 3 Total returns do not reflect the 0.5% transaction fee on purchases and the 0.5% fee assessed on redemptions. 4 Annualized. 5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the Fund's capital shares, including ETF Creation Units. 29 Investing With Vanguard Your retirement or savings plan investment options include one or both of the Funds. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect a Fund as an investment option. - -If you have any questions about a Fund or Vanguard, including those about a Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 800-523-1188. - -If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. - -Be sure to carefully read each topic that pertains to your transactions with Vanguard. - -Vanguard reserves the right to change these policies without prior notice to shareholders. Investment Options and Allocations Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. Transactions Contribution, exchange, or redemption requests must be in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined NAV after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's NAV. This is known as your trade date. Redemption Fees Redemption fees apply to shares exchanged out of a fund into which they were exchanged, rolled over, or transferred by the participant within the fund's redemption-fee period. The fee is withheld from redemption proceeds and is retained by the fund. Shares held longer than the redemption-fee holding period are not subject to the fee. After exchanging shares that are exempt from redemption fees, shares you have held the longest will be exchanged first. 30 For retirement plan participants, redemption fees do not apply to the following: - -Exchanges of shares purchased with participant payroll or employer contributions. - -Exchanges of shares purchased with reinvested dividend and capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. - -Conversions of shares from one share class to another in the same fund. - -Redemptions of shares to pay fund or account fees. - -Re-registration of shares in the same fund. Exchanges The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard places certain limits on the exchange privilege. If you are exchanging out of any Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares), the following policy applies, regardless of the dollar amount: - -You must wait 60 days before exchanging back into the fund. - -The 60-day clock restarts after every exchange out of the fund. The policy does not apply to the following: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares within the same fund. - -Conversions of shares from one share class to another in the same fund. 31 - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. Before making an exchange to or from another fund available in your plan, consider the following: - -Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. - -Be sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 800-523-1188 for a copy. - -Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on other exchange policies that apply to your plan. Plans for which Vanguard does not serve as recordkeeper: If Vanguard does not serve as recordkeeper for your plan, your plan's recordkeeper will establish accounts in Vanguard funds. In such accounts, we cannot always monitor the trading activity of individual clients. However, we review trading activity at the omnibus level, and if we detect suspicious activity, we will 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 participants' trading activity in the Vanguard funds. For those Vanguard funds that charge purchase or redemption fees, intermediaries that establish accounts in the Vanguard funds will be asked to assess purchase or redemption fees on participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase or redemption fees or administer frequent-trading policies. If a firm other than Vanguard serves as recordkeeper for your plan, please read that firm's materials carefully to learn of any other rules or fees that may apply. Portfolio Holdings We generally post on our website at www.vanguard.com, in the Holdings section of each Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. These postings generally remain until replaced by new postings as previously described. Please 32 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. Accessing Fund Information by Computer Vanguard on the World Wide Web WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. Vanguard, Connect with Vanguard, PlainTalk, Admiral, Signal, Vanguard ETF, and the ship logo are trademarks of The Vanguard Group, Inc. The Funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For any such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group and any related funds. All other marks are the exclusive property of their respective owners. 33 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. 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. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 34 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. 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. 35 This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard International Stock Index Funds, the following documents are available free upon request: Annual/Semiannual Reports to Shareholders Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. Statement of Additional Information (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about the Funds or other Vanguard funds, please visit www.vanguard.com or contact us as follows: The Vanguard Group Participant Access Center P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 800-523-1188 Text Telephone for the hearing impaired: 800-749-7273 Information Provided by the Securities and Exchange Commission (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 202-551-8090. Reports and other information about the Funds are also available in the EDGAR database on the SEC's Internet site at www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I1353 022007 Vanguard/(R)/ FTSE All-World ex-US Index Fund > Prospectus Investor Shares February 28, 2007 SHIP LOGO VANGUARD(R) This is the Fund's initial prospectus, so it 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. Contents - -------------------------------------------------------------------------------- Fund Profile 1 Investing With Vanguard 16 - ------------------------------------------------------------------------------- An Introduction to Index Funds 4 Purchasing 16 Shares - ------------------------------------------------------------------------------- More on the Fund 5 Converting Shares 19 - ------------------------------------------------------------------------------- The Fund and Vanguard 11 Redeeming Shares 19 - ------------------------------------------------------------------------------- Investment Advisor 11 Exchanging Shares 23 - ------------------------------------------------------------------------------- Dividends, Capital Gains, and 12 Frequent-Trading Limits 24 Taxes - ------------------------------------------------------------------------------- Share Price 15 Other Rules You Should Know 25 - ------------------------------------------------------------------------------- Fund and Account Updates 29 - ------------------------------------------------------------------------------- Contacting Vanguard 31 - ------------------------------------------------------------------------------- ETF Shares 33 - ------------------------------------------------------------------------------- Glossary of Investment Terms 38 - ------------------------------------------------------------------------------- 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 three separate classes of shares: Investor Shares, Institutional Shares, and ETF Shares. This prospectus offers the Fund's Investor Shares. A separate prospectus offers the Fund's Institutional Shares, which are for investors who generally do not require special employee benefit plan services and who invest a minimum of $5 million. In addition, the Fund provides an exchange-traded class of shares (Vanguard ETF Shares), which are also offered through a separate prospectus. A brief description of ETF Shares and how to convert into them appears on pages 33 to 37 of this prospectus. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. Fund Profile Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks of companies located in developed and emerging markets around the world. Primary Investment Strategies The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the FTSE/(R)/ All-World ex US Index, a free-float- adjusted, market-capitalization-weighted index designed to measure equity market performance of international markets. The Index includes approximately 2,200 stocks of companies located in 47 countries, including both developed and emerging markets. As of October 31, 2006, the United Kingdom, Japan, France, Germany, and Switzerland made up 18%, 17%, 8%, 6%, and 5%, respectively, of the Index's market capitalization. The Fund typically holds 1,200-1,300 stocks in its target index (covering nearly 95% of the Index's total market capitalization) and a representative sample of the remaining stocks. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/ earnings ratio and dividend yield. For additional information on the Fund's investment strategies, 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. - -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. Country risk is especially high in emerging markets. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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 Fund began operations on March 8, 2007, so performance information is not yet available. 1 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. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee 0.25%/1/ - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/2/ - ------------------------------------------------------------------------------- Account Maintenance Fee (for accounts under $10,000) $10/year/3/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.28% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.12% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.40% - ------------------------------------------------------------------------------- 1 The purchase fee is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains. 2 The 2% fee applies to shares redeemed within two months of purchase. The fee applies to shares redeemed 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 two months or more are not subject to the 2% fee. 3 If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, a fraction of a share may be automatically redeemed to make up the difference. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the 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. 2 1 Year 3 Years - -------------------------- $66 $153 - -------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. - -------------------------------------------------------------------------------- Plain Talk About 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 - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - -------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - -------------------------------------------------------------------------------- Suitable for IRAs Yes - -------------------------------------------------------------------------------- Inception Date March 8, 2007 - -------------------------------------------------------------------------------- Minimum Initial Investment $3,000 - -------------------------------------------------------------------------------- Newspaper Abbreviation FTAlWldIn - -------------------------------------------------------------------------------- Vanguard Fund Number 770 - -------------------------------------------------------------------------------- Cusip Number 922042791 - -------------------------------------------------------------------------------- Ticker Symbol VFWIX - -------------------------------------------------------------------------------- 3 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 securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low 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. 4 More on the Fund This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this FLAG symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. 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 located in developed and emerging markets around the world. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. 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. 5 (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. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Fund in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 6
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ---------------------------------------------------------------------------------------------------------- 1997 23.80% -25.87% -11.59% 33.36% - ----------------------------------------------------------------------------------------------------------- 1998 28.53 2.72 -25.34 28.58 - ----------------------------------------------------------------------------------------------------------- 1999 15.89 56.65 66.41 21.04 - ----------------------------------------------------------------------------------------------------------- 2000 -8.39 -25.78 -30.61 -9.10 - ----------------------------------------------------------------------------------------------------------- 2001 -19.90 -25.40 -2.62 -11.89 - ----------------------------------------------------------------------------------------------------------- 2002 -18.38 -9.29 -6.17 -22.10 - ----------------------------------------------------------------------------------------------------------- 2003 38.54 38.48 55.82 28.68 - ----------------------------------------------------------------------------------------------------------- 2004 20.88 18.98 25.55 10.88 - ----------------------------------------------------------------------------------------------------------- 2005 9.42 22.64 34.00 4.91 - ----------------------------------------------------------------------------------------------------------- 2006 33.72 12.20 32.17 15.79 - ----------------------------------------------------------------------------------------------------------- 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Fund in particular. FLAG 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. Security Selection The Fund attempts to track the investment performance of a benchmark index consisting of common stocks of companies located in developed and emerging markets around the world. The Fund's investment in the Index will be within the capitalization range of the companies included in the FTSE All-World ex US Index ($45 million to $222 billion as of October 31, 2006). While the Index tracks stocks that are predominantly large-cap, it also tracks mid- and small-cap stocks to a lesser extent. Historically, these stocks have been more volatile than--and at times have performed quite differently from--large-cap stocks. In the future, the Index's market-capitalization range may be higher or lower, and the Fund's investments may track a different index. Such changes may occur at any time and without notice to Fund shareholders. 7 Indexing Strategy. The Fund uses the sampling method of indexing, meaning that the Fund's advisor, using sophisticated computer programs, selects from the target index a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. These include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. Depositary Receipts. The Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, the Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, the Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. The Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. The Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. The FTSE All-World ex US Index. The FTSE All-World ex US Index is maintained by FTSE Group (FTSE), a widely known global index provider that currently manages and calculates more than 60,000 indexes daily. 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. When investing in a Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. 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, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater 8 than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Fund may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Fund is generally managed without regard to tax ramifications. Purchase, Redemption, Account Maintenance, and Custodial Fees The Fund charges a 0.25% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 2% redemption fee on shares that are redeemed before they have been held for two months. The fee applies when shares are redeemed by selling or by exchanging to another Vanguard fund, or when Vanguard applies the low-balance account closure policy. Shares you have held the longest will be redeemed first. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption 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. 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--$10 per year--is deducted from the annual 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. 9 Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will use fair-value pricing as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. Do not invest with Vanguard if you are a market-timer. 10 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 a fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by a 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 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative 11 Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 billion in assets. Vanguard manages the Fund on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Fund. For a discussion of why the board of trustees approved the Fund's investment advisory arrangement, see the Fund's semiannual report to shareholders covering the fiscal period ended April 30, 2007, which will be available 60 days after that date. 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: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989; has managed stock portfolios since 1992; and has managed the Fund since its inception. Education: B.S., LaSalle University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about the portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund. Dividends, Capital Gains, and Taxes Fund Distributions The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. 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. 12 - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- Basic Tax Points Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic tax points: - -Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. - -Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - -Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income," if any, distributed by the Fund. - -Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - -Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - -A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - -Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - -The Fund may be subject to foreign taxes or foreign tax withholding on dividends, interest, and some capital gains that it receives on foreign securities. You may qualify for an offsetting credit or deduction under U.S. tax laws for your portion of the Fund's 13 foreign tax obligations, provided that you meet certain requirements. See your tax advisor or IRS publications for more information. - -Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. - -------------------------------------------------------------------------------- Plain Talk About "Buying a Dividend" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- General Information Backup withholding. By law, Vanguard must withhold 28% of any taxable distributions or redemptions from your account if you do not: - -Provide us with your correct taxpayer identification number; - -Certify that the taxpayer identification number is correct; and - -Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. Foreign investors. Vanguard funds generally are not sold outside the United States, except to certain qualified investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. Invalid addresses. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. Tax consequences. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you. 14 Share Price The Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 15 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing Shares Account Minimums To open and maintain an account. $3,000. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or 16 whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--770. See Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. 17 Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Purchase Fees The Fund charges a purchase fee of 0.25% on all share purchases, including shares purchased by exchange from other Vanguard funds. Purchase fees do not apply to shares purchased through reinvested dividends and capital gains. Other 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, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a fund's operation or performance. Large purchases. Please call Vanguard before attempting to invest a large dollar amount. No cancellations. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written, wire, check, or automatic transaction requests, Vanguard will not cancel any transaction once it has been processed. 18 Converting Shares A conversion between share classes of the same fund is a nontaxable event. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's net asset values. At the time of conversion, the total dollar value of your "old" shares will equal the total dollar value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total dollar value of your "new" shares compared with that of your "old" shares. Conversions Into Institutional Shares You are eligible for a self-directed conversion from Investor Shares into Institutional Shares of the Fund, provided that your account balance in the Fund is at least $5 million. Registered users of our website, www.vanguard.com, may request a conversion online, or you may contact Vanguard by telephone or by mail to request this transaction. Mandatory Conversions Into Investor Shares If an investor no longer meets the requirements for Institutional Shares, the Fund may automatically convert the investor's Institutional Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. 19 Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: For telephone requests received by Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime 20 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Redemption Fees The Fund charges a 2% fee on shares redeemed within two months of purchase by selling or by exchanging to another fund, or when Vanguard applies the low-balance account-closure policy. The fee is withheld from redemption proceeds and is paid directly to the Fund to offset the cost of buying and selling securities. Shares held for two months or more are not subject to the 2% fee. After redeeming shares that are exempt from redemption fees, shares you have held the longest will be redeemed first. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), redemption fees will not apply to the following: - -Redemptions of shares purchased with reinvested dividend and capital gains distributions. - -Share transfers, rollovers, or re-registrations within the same fund. 21 - -Conversions of shares from one share class to another in the same fund. - -Redemptions of shares to pay fund or account fees. - -Section 529 college savings plans. - -For a one-year period, shares rolled over to an IRA held at Vanguard from a retirement plan for which Vanguard serves as recordkeeper (except for Vanguard Small Business Services retirement plans). -Distributions by shareholders age 701/2 or older from the following: -Traditional IRAs. -Inherited IRAs (traditional and Roth). -Rollover IRAs. -SEP-IRAs. -SIMPLE IRAs. -Section 403(b)(7) plans served by the Vanguard Small Business Services Department. -Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee. For participants in employer-sponsored defined contribution plans (other than those serviced by the Vanguard Small Business Services Department), in addition to the exclusions previously listed, redemption fees will not apply to the following: - -Exchanges of shares purchased with participant payroll or employer contributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. Redemption fees will apply to shares exchanged out of a fund within the fund's redemption-fee period into which fund the shares had previously been exchanged, rolled over, or transferred by a participant. If Vanguard does not serve as recordkeeper for your plan, redemption fees may be applied differently. Please read that your recordkeeper's plan materials carefully to learn of any other rules or fees that may apply. Also see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees by intermediaries. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or 22 retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would negatively affect the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance. Address change. If you change your address online or by telephone, there may be a 15-day 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 or automatic 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 an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. 23 Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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 trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, the frequent-trading policy does not apply to: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. 24 - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares. - -Conversions of shares from one share class to another in the same fund. Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege. Accounts Held by Intermediaries When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. 25 Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. Telephone Transactions Automatic. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. Tele-Account/(R)/. To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information: - -Authorization to act on the account (as the account owner or by legal documentation or other means). - -Account registration and address. - -Social Security or employer identification number. - -Fund name and account number, if applicable. - -Other information relating to the caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: - -The fund name and account number. - -The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: - -Signatures of all registered owners. - -Signature guarantees, if required for the type of transaction.* - -Any supporting legal documentation that may be required. 26 The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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 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. 27 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, without prior notice, to liquidate any investment-only retirement-plan fund account or any nonretirement fund account whose balance falls below the minimum initial investment. Shares redeemed in accordance with this policy will be subject to applicable redemption fees. 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 (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. 28 Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 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 FTSE All-World ex-US Index Fund twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - -Performance assessments and comparisons with industry benchmarks. - -Financial statements with listings of Fund holdings. 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 ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. 30 Contacting Vanguard Web - ------------------------------------------------------------------------------- Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a For fund, account, and service information week For most account transactions For literature requests - ------------------------------------------------------------------------------- Phone - ------------------------------------------------------------------------------- Vanguard Tele-Account(R) For automated fund and account information 800-662-6273 For exchange transactions (subject to limitations) (ON-BOARD) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------- Investor Information For fund and service information 800-662-7447 (SHIP) (Text For literature requests telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired at 800-952-3335) p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Client Services For account information 800-662-2739 (CREW) (Text For most account transactions telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired at 800-749-7273) p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Institutional Division For information and services for large 888-809-8102 institutional investors Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial 800-997-2798 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 - ------------------------------------------------------------------------------- 31 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Number Please use the specific fund number when contacting us: Investor Shares - -------------------------------------------------------------- Vanguard FTSE All-World ex-US Index Fund 770 - -------------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Vanguard Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business Online, and the ship logo are trademarks of The Vanguard Group, Inc. The Vanguard FTSE All-World ex-US Index Fund is not in any way sponsored, endorsed, sold or promoted by FTSE International Limited (FTSE) or by the London Stock Exchange Plc (the Exchange) or by The Financial Times Limited (FT), and neither FTSE nor the Exchange nor FT makes any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE All-World ex US Index (the Index) and/or the figure at which the said Index stands at any particular time on any particular day or otherwise. The Index is compiled and calculated by FTSE. However, neither FTSE nor the Exchange nor FT shall be liable (whether in negligence or otherwise) to any person for any error in the Index and neither FTSE nor the Exchange nor FT shall be under any obligation to advise any person of any error therein. "FTSE/(R)/" is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under license. "All-World" is a trademark of FTSE International Limited. 32 ETF Shares In addition to Investor Shares, certain Vanguard funds offer a class of shares, known as Vanguard ETF* Shares, that are listed for trading on the American Stock Exchange (AMEX). If you own Investor Shares issued by one of these funds, you may convert those shares into ETF Shares of the same fund. Note: Vanguard reserves the right to modify or terminate the conversion privilege in the future. Although ETF 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 ETF Shares. The following material summarizes key information about ETF Shares. A separate prospectus with more complete information about ETF Shares is also available. Investors should review that prospectus before deciding whether to convert. Differences Between ETF 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. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund, except as noted. An organized trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on the AMEX. Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day based on the supply of, and demand for, ETF Shares and on changes in the prices of the fund's portfolio holdings. The market price of a fund's ETF Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. * U.S. Pat. No. 6,879,964 B2. 33 Buying and Selling ETF Shares Vanguard ETF Shares must be held in a brokerage account. Therefore, before acquiring ETF Shares, whether through a conversion or an open-market purchase, you must have an account with a broker. You buy and sell ETF Shares in the same way you buy and sell any other exchange-traded security--on the open market, through a broker. In most cases, the broker will charge you a commission to execute the transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must purchase. Because open-market transactions occur at market prices, you may pay more than NAV when you buy ETF Shares and receive less than NAV when you sell those shares. If you own conventional shares (Investor Shares or Institutional Shares) of a Vanguard fund that issues ETF Shares, you can convert those shares into ETF Shares of equivalent value--but you cannot convert back. See "Conversion Privilege" for a discussion of the conversion process. There is one other way to buy and sell ETF Shares. Investors can purchase and redeem ETF Shares directly from the issuing fund at NAV if they do so (1) through certain authorized broker-dealers, (2) in large blocks of 50,000 or 100,000 ETF Shares (depending on the fund), known as Creation Units, and (3) in exchange for baskets of securities rather than cash. However, because Creation Units will be worth millions of dollars, and because most investors prefer to transact in cash rather than with securities, it is expected that only a limited number of institutional investors will purchase and redeem ETF Shares this way. Risks ETF Shares issued by a fund are subject to the same risks as conventional shares of the same fund. ETF Shares also are subject to the following risks: - -The market price of a fund's ETF Shares will vary somewhat from the NAV of those shares. Therefore, you may pay more than NAV when buying ETF Shares and you may receive less than NAV when selling them. - -ETF Shares cannot be redeemed with the Fund, except in Creation Unit aggregations. Therefore, if you no longer wish to own ETF Shares, you must sell them on the open market. Although ETF Shares will be listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of a fund's ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if the shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. 34 Fees and Expenses When you buy and sell ETF Shares through a brokerage firm, you will pay whatever commissions the firm charges. You also will incur the cost of the "bid-asked spread," which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. If you convert from conventional shares to ETF Shares, you will not pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50 for each conversion transaction, and your broker may impose its own conversion fees as well. The estimated total annual operating expenses (the expense ratio) for the Fund's ETF Shares is 0.25%. Account Services Because you hold ETF Shares through a brokerage account, Vanguard will have no record of your ownership unless you hold the shares through Vanguard Brokerage Services/(R)/ (Vanguard Brokerage). Your broker will service your account. For example, the broker will provide account statements, confirmations of your purchases and sales of ETF Shares, and year-end tax information. The broker also will be responsible for ensuring that you receive shareholder reports and other communications from the fund whose ETF Shares you own. You will receive certain services (e.g., dividend reinvestment and average-cost information) only if your broker offers those services. Conversion Privilege Owners of conventional shares (Investor Shares or Institutional Shares) issued by the Fund may convert those shares into ETF Shares of equivalent value of the same fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard imposes a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. Your broker may charge an additional fee to process a conversion. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Unless you are an Authorized Participant, you must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, you must have an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF Shares, please contact your broker. Converting conventional shares into ETF Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, 35 Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. Your Fund's transfer agent will reflect ownership of all ETF Shares in the name of the Depository Trust Company (DTC). The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you. Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion. If you convert your conventional shares to ETF Shares through Vanguard Brokerage Services, all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into ETF Shares: - -The conversion transaction is nontaxable except, as applicable, to the limited extent as previously described. - -The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - -Until the conversion process is complete, you will remain fully invested in the Fund's conventional shares, and your investment will increase or decrease in value in tandem with the net asset value of those shares. 36 - -During the conversion process, you will be able to liquidate all or part of your investment by instructing Vanguard or your broker (depending on who maintains records of your share ownership) to redeem your conventional shares. After the conversion process is complete, you will be able to liquidate all or part of your investment by instructing your broker to sell your ETF Shares. 37 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. 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. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 38 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. Price/Earnings (P/E) Ratio. The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. Principal. The face value of a debt instrument or the amount of money put into an investment. Securities. Stocks, bonds, money market instruments, and other investment vehicles. Total Return. A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. 39 This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) P.O. Box 2600 Valley Forge, PA 19482-2600 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard FTSE All-World ex-US 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 visit www.vanguard.com or contact us as follows: The Vanguard Group Investor Information Department P.O. Box 2600 Valley Forge, PA 19482-2600 Telephone: 800-662-7447 (SHIP) Text Telephone for the hearing impaired: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone for the hearing impaired: 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: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P770 022007 Vanguard/(R)/ FTSE All-World ex-US Index Fund > Prospectus Institutional Shares February 28, 2007 SHIP LOGO VANGUARD(R) This is the Fund's initial prospectus, so it 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. Contents - ------------------------------------------------------------------------------- Fund Profile 1 Investing With Vanguard 16 - ------------------------------------------------------------------------------- An Introduction to Index Funds 4 Purchasing 16 Shares - ------------------------------------------------------------------------------- More on the Fund 5 Converting Shares 19 - ------------------------------------------------------------------------------- The Fund and Vanguard 11 Redeeming Shares 19 - ------------------------------------------------------------------------------- Investment Advisor 11 Exchanging Shares 23 - ------------------------------------------------------------------------------- Dividends, Capital Gains, and 12 Frequent-Trading Limits 24 Taxes - ------------------------------------------------------------------------------- Share Price 15 Other Rules You Should Know 25 - ------------------------------------------------------------------------------- Fund and Account Updates 28 - ------------------------------------------------------------------------------- Contacting Vanguard 30 - ------------------------------------------------------------------------------- ETF Shares 32 - ------------------------------------------------------------------------------- Glossary of Investment Terms 37 - ------------------------------------------------------------------------------- Why Reading This Prospectus Is Important This prospectus explains the investment objective, policies, strategies, and risks associated with the Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether the Fund is the right investment for you. We suggest that you keep this prospectus for future reference. Share Class Overview This prospectus offers the Fund's Institutional Shares, which are for investors who generally do not require special employee benefit plan services and who invest a minimum of $5 million. A separate prospectus offers the Fund's Investor Shares, which have an investment minimum of $3,000. In addition, the Fund provides an exchange-traded class of shares (Vanguard ETF Shares), which are also offered through a separate prospectus. A brief description of ETF Shares and how to convert into them appears on pages 32 to 36 of this prospectus. The Fund's separate share classes have different expenses; as a result, their investment performances will differ. Fund Profile Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks of companies located in developed and emerging markets around the world. Primary Investment Strategies The Fund employs a "passive management" --or indexing--investment approach designed to track the performance of the FTSE/(R)/ All-World ex US Index, a free-float- adjusted, market-capitalization-weighted index designed to measure equity market performance of international markets. The Index includes approximately 2,200 stocks of companies located in 47 countries, including both developed and emerging markets. As of October 31, 2006, the United Kingdom, Japan, France, Germany, and Switzerland made up 18%, 17%, 8%, 6%, and 5%, respectively, of the Index's market capitalization. The Fund typically holds 1,200-1,300 stocks in its target index (covering nearly 95% of the Index's total market capitalization) and a representative sample of the remaining stocks. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, 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. - -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. Country risk is especially high in emerging markets. - -Emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the 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 Fund began operations on March 8, 2007, so performance information is not yet available. 1 Fees and Expenses The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. As is the case with all mutual funds, transaction costs incurred by the Fund for buying and selling securities are not reflected in the table, 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. Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Purchase Fee 0.25%/1/ - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Redemption Fee 2%/2/ - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.05% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.10% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.15% - ------------------------------------------------------------------------------- 1 The purchase fee is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains. 2 The 2% fee applies to shares redeemed within two months of purchase. The fee applies to shares redeemed by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and retained by the Fund. Shares held for two months or more are not subject to the 2% fee. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the 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 - -------------------------- $40 $73 - -------------------------- 2 This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. - -------------------------------------------------------------------------------- Plain Talk About 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 - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date March 8, 2007 - ------------------------------------------------------------------------------- Minimum Initial Investment $5 million - ------------------------------------------------------------------------------- Newspaper Abbreviation FTAlWldIst - ------------------------------------------------------------------------------- Vanguard Fund Number 881 - ------------------------------------------------------------------------------- Cusip Number 922042783 - ------------------------------------------------------------------------------- Ticker Symbol VFWSX - ------------------------------------------------------------------------------- 3 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 securities of a wide variety of companies and industries. - -Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - -Low 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. 4 More on the Fund This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for fluctuations in the securities markets. Look for this FLAG symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. The Fund's board of trustees, which oversees the Fund's management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. 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 located in developed and emerging markets around the world. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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. 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. 5 (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. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Fund in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes. 6
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Fund in particular. FLAG 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. Security Selection The Fund attempts to track the investment performance of a benchmark index consisting of common stocks of companies located in developed and emerging markets around the world. The Fund's investment in the Index will be within the capitalization range of the companies included in the FTSE All-World ex US Index ($45 million to $222 billion as of October 31, 2006). While the Index tracks stocks that are predominantly large-cap, it also tracks mid- and small-cap stocks to a lesser extent. Historically, these stocks have been more volatile than--and at times have performed quite differently from--large-cap stocks. In the future, the Index's market-capitalization range may be higher or lower, and the Fund's investments may track a different index. Such changes may occur at any time and without notice to Fund shareholders. 7 Indexing Strategy. The Fund uses the sampling method of indexing, meaning that the Fund's advisor, using sophisticated computer programs, selects from the target index a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. These include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. Depositary Receipts. The Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, the Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, the Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. The Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. The Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. The FTSE All-World ex US Index. The FTSE All-World ex US Index is maintained by FTSE Group (FTSE), a widely known global index provider that currently manages and calculates more than 60,000 indexes daily. 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. When investing in a Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. 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, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives 8 may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as its respective index. 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. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Fund may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Fund is generally managed without regard to tax ramifications. Purchase and Redemption Fees The Fund charges a 0.25% fee on purchases of its shares, including shares purchased by exchange from another Vanguard fund. Purchases that result from reinvested dividend or capital gains distributions are not subject to the purchase fee. In addition, the Fund charges a 2% redemption fee on shares that are redeemed before they have been held for two months. The fee applies when shares are redeemed by selling or by exchanging to another Vanguard fund. Shares you have held the longest will be redeemed first. Unlike a sales charge or a load paid to a broker or a fund management company, purchase and redemption fees are paid directly to the Fund to offset the costs of buying and selling securities. The 2% redemption fee is designed to ensure that short-term investors pay their share of the Fund's transaction costs and that long-term investors do not subsidize the activities of short-term traders. See the Fund Profile and Investing With Vanguard for more information about fees. Frequent Trading or Market-Timing Background. Some investors try to profit from strategies involving frequent trading of mutual fund shares, such as market-timing. For funds holding foreign securities, investors may try to take advantage of an anticipated difference between the price of the fund's shares and price movements in overseas markets, a practice also known as time-zone arbitrage. Investors also may try to engage in frequent trading of funds holding investments such as small-cap stocks and high-yield bonds. As money is shifted into and out of a fund by a shareholder engaging in frequent trading, a fund incurs costs for buying and selling securities, resulting in increased brokerage and 9 administrative costs. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. In addition, frequent trading may interfere with an advisor's ability to efficiently manage the fund. Policies to Address Frequent Trading. The Vanguard funds (other than money market funds, short-term bond funds, and Vanguard ETF(TM) Shares) do not knowingly accommodate frequent trading. The board of trustees of each Vanguard fund has adopted policies and procedures reasonably designed to detect and discourage frequent trading and, in some cases, to compensate the fund for the costs associated with it. Although there is no assurance that Vanguard will be able to detect or prevent frequent trading or market-timing in all circumstances, the following policies have been adopted to address these issues: - -Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--without notice and regardless of size. For example, a purchase request could be rejected if Vanguard determines that such purchase may negatively affect a fund's operation or performance or because of a history of frequent trading by the investor. - -Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) generally prohibits, except as otherwise noted in the Investing With Vanguard section, an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. - -Certain Vanguard funds charge shareholders purchase and/or redemption fees on transactions. See the Investing With Vanguard section of this prospectus for further details on Vanguard's transaction policies. Each fund (other than money market funds), in determining its net asset value, will use fair-value pricing as described in the Share Price section. Fair-value pricing may reduce or eliminate the profitability of certain frequent-trading strategies. Do not invest with Vanguard if you are a market-timer. 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. 10 - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Turnover rates give an indication of how transaction costs, which are not included in a fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by a 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 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 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. 11 For a discussion of why the board of trustees approved the Fund's investment advisory arrangement, see the Fund's semiannual report to shareholders covering the fiscal period ended April 30, 2007, which will be available 60 days after that date. 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: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989; has managed stock portfolios since 1992; and has managed the Fund since its inception. Education: B.S., LaSalle University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about the portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund. Dividends, Capital Gains, and Taxes Fund Distributions The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. 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. 12 - -------------------------------------------------------------------------------- Plain Talk About Distributions As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- Basic Tax Points Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, investors in taxable accounts should be aware of the following basic tax points: - -Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. - -Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - -Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. If you are an individual and meet certain holding-period requirements with respect to your Fund shares, you may be eligible for reduced federal tax rates on "qualified dividend income," if any, distributed by the Fund. - -Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. - -Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - -A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - -Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. - -The Fund may be subject to foreign taxes or foreign tax withholding on dividends, interest, and some capital gains that it receives on foreign securities. You may qualify for an offsetting credit or deduction under U.S. tax laws for your portion of the Fund's 13 foreign tax obligations, provided that you meet certain requirements. See your tax advisor or IRS publications for more information. - -Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. - -------------------------------------------------------------------------------- Plain Talk About "Buying a Dividend" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- General Information Backup withholding. By law, Vanguard must withhold 28% of any taxable distributions or redemptions from your account if you do not: - -Provide us with your correct taxpayer identification number; - -Certify that the taxpayer identification number is correct; and - -Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. Foreign investors. Vanguard funds generally are not sold outside the United States, except to certain qualified investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. Invalid addresses. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. Tax consequences. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you. 14 Share Price The Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange-traded fund shares, such as ETF Shares). When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 15 Investing With Vanguard This section of the prospectus explains the basics of doing business with Vanguard. Be sure to carefully read each topic that pertains to your relationship with Vanguard. Vanguard reserves the right to change the following policies, without prior notice to shareholders. Purchasing Shares Account Minimums To open and maintain an account. $5 million. Vanguard institutional clients generally may meet the minimum investment amount by aggregating up to three separate accounts within the same Fund. This policy does not apply to clients receiving special administrative services from Vanguard, nor does this policy apply to omnibus accounts maintained by financial intermediaries. To add to an existing account. $50 by Automatic Investment Plan; $100 by check, exchange, wire, or electronic bank transfer (other than Automatic Investment Plan). Vanguard reserves the right, without prior notice, to increase or decrease the minimum amount required to open or maintain a fund account, or to add to an existing fund account. Investment minimums may differ for certain categories of investors. How to Purchase Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. Online transactions. You may open certain types of accounts, request an electronic bank transfer, and make an exchange (the purchase of shares in an open fund with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a purchase of shares by wire, by electronic bank transfer, or by an exchange. You may also begin the account registration process or request that the forms be sent to you. See Contacting Vanguard. By mail. You may send your check and account registration form to open a new fund account at Vanguard. To add to an existing fund account, you may send your check with an Invest-by-Mail form (from your account statement) or with a deposit slip (available online). You may also send a written request to Vanguard to add to a fund account or to make an exchange. The request must be in good order. See How to Make a Purchase Request: By check. For a list of Vanguard addresses, see Contacting Vanguard. 16 How to Make a Purchase Request By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then purchase shares by electronic bank transfer on a regular schedule (Automatic Investment Plan) or whenever you wish. Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. Because wiring instructions vary for different types of purchases, please call Vanguard for instructions and policies on purchasing shares by wire. See Contacting Vanguard. By check. You may send a check to make initial or additional purchases to your fund account. Also see How to Purchase Shares: By mail. Make your check payable to: Vanguard--881. See Contacting Vanguard. Trade Dates You buy shares at a fund's next-determined NAV after Vanguard receives your purchase request in good order, including any special required documentation. 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 purchased at that day's NAV. This is known as your trade date. For check and wire purchases into all funds other than money market funds, and for exchanges into all funds: A purchase request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a purchase request received after that time will have a trade date of the first business day following the date of receipt. For check purchases of money market funds only: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the first business day following the date of receipt. For a request received after that time, the trade date will be 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 will always be one business day later than for other funds. For an electronic bank transfer by Automatic Investment Plan: Your trade date will be one business day before the date you designated for withdrawal from your bank account. For an electronic bank transfer (other than an Automatic Investment Plan purchase): A purchase request received by Vanguard on a business day before 10 p.m., Eastern time, will have a trade date of the following business day. 17 For further information about purchase transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your purchase request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Purchase Fees The Fund charges a purchase fee of 0.25% on all share purchases, including shares purchased by exchange from other Vanguard funds. Purchase fees do not apply to shares purchased through reinvested dividends and capital gains. Other 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, without prior notice, to close your account or take such other steps as we deem reasonable. Purchase requests. Vanguard reserves the right to stop selling shares or to reject any purchase request at any time and without prior notice, including, but not limited to, purchases requested by exchange from another Vanguard fund. This also includes the right to reject any purchase request because of a history of frequent trading by the investor or because the purchase may negatively affect a fund's operation or performance. Large purchases. Please call Vanguard before attempting to invest a large dollar amount. No cancellations. Place your transaction requests carefully. Vanguard will not cancel any transaction request received by telephone or through Vanguard.com once it has been confirmed. In the case of written, wire, check, or automatic transaction requests, Vanguard will not cancel any transaction once it has been processed. 18 Converting Shares A conversion between share classes of the same fund is a nontaxable event. A conversion request (other than a request to convert to ETF Shares) received in good order by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a conversion request received after that time will have a trade date of the first business day following the date of receipt. See Other Rules You Should Know. (Please contact Vanguard for information on conversions into ETF Shares.) Pricing of Share Class Conversions If you convert from one class of shares to another, the transaction will be based on the respective net asset values of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's net asset values. At the time of conversion, the total dollar value of your "old" shares will equal the total dollar value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total dollar value of your "new" shares compared with that of your "old" shares. Conversions From Investor Shares You are eligible for a self-directed conversion from Investor Shares into Institutional Shares of the Fund, provided that your account balance in the Fund is at least $5 million. Registered users of our website, www.vanguard.com, may request a conversion online, or you may contact Vanguard by telephone or by mail to request this transaction. Mandatory Conversions Into Investor Shares If an investor no longer meets the requirements for Institutional Shares, the Fund may automatically convert the investor's Institutional Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. Redeeming Shares How to Redeem Shares Be sure to check Exchanging Shares, Frequent-Trading Limits, and Other Rules You Should Know before initiating your request. 19 Online transactions. You may redeem shares, request an electronic bank transfer, and make an exchange (the purchase of shares with the proceeds of a redemption from another fund) through our website at www.vanguard.com. By telephone. You may call Vanguard to request a redemption of shares by wire, by electronic bank transfer, by check, or by an exchange. See Contacting Vanguard. By mail. You may send a written request to Vanguard to redeem from a fund account or to make an exchange. The request must be in good order. See Contacting Vanguard. How to Receive Redemption Proceeds By electronic bank transfer. To establish the electronic bank transfer option, you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. You can then redeem shares by electronic bank transfer on a regular schedule (Automatic Withdrawal Plan--$50 minimum) or whenever you wish ($100 minimum). Your transaction can be initiated online, by telephone, or by mail if your request is in good order. By wire. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions generally are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must designate a bank account online, complete a special form, or fill out the appropriate section of your account registration form. Vanguard charges a $5 fee for wire redemptions under $5,000. By check. Vanguard will normally mail you a redemption check within two business days of your trade date. Trade Dates You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request in good order, including any special required documentation. 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. For check redemptions and exchanges from all funds: A request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a request received after that time will have a trade date of the first business day following the date of receipt. For money market fund redemptions by wire: For telephone requests received by Vanguard before 10:45 a.m., Eastern time (2 p.m., Eastern time, for Vanguard Prime 20 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. For bond fund redemptions by wire: 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. For an electronic bank transfer by Automatic Withdrawal Plan: Proceeds of redeemed shares will be credited to your bank account two business days after your trade date. (The trade date is two business days prior to the date you designated for the proceeds to be in your bank account.) For an electronic bank transfer (other than an Automatic Withdrawal Plan redemption): A redemption request received by Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) will have a trade date of the same day, and a redemption request received after that time will have a trade date of the first business day following the date of receipt. For further information about redemption transactions, consult our website at www.vanguard.com or see Contacting Vanguard. Good order. The required information on your redemption request must be accurate and complete. See Other Rules You Should Know--Good Order. The requirements vary among types of accounts and transactions. Redemption Fees The Fund charges a 2% fee on shares redeemed within two months of purchase by selling or by exchanging to another fund. The fee is withheld from redemption proceeds and is paid directly to the Fund to offset the cost of buying and selling securities. Shares held for two months or more are not subject to the 2% fee. After redeeming shares that are exempt from redemption fees, shares you have held the longest will be redeemed first. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), redemption fees will not apply to the following: - -Redemptions of shares purchased with reinvested dividend and capital gains distributions. - -Share transfers, rollovers, or re-registrations within the same fund. 21 - -Conversions of shares from one share class to another in the same fund. - -Redemptions of shares to pay fund or account fees. - -Section 529 college savings plans. - -For a one-year period, shares rolled over to an IRA held at Vanguard from a retirement plan for which Vanguard serves as recordkeeper (except for Vanguard Small Business Services retirement plans). - -Distributions by shareholders age 701/2 or older from the following: -Traditional IRAs. -Inherited IRAs (traditional and Roth). -Rollover IRAs. -SEP-IRAs. -SIMPLE IRAs. -Section 403(b)(7) plans served by the Vanguard Small Business Services Department. -Vanguard Retirement Plans for which Vanguard Fiduciary Trust Company serves as trustee. For participants in employer-sponsored defined contribution plans (other than those serviced by the Vanguard Small Business Services Department), in addition to the exclusions previously listed, redemption fees will not apply to the following: - -Exchanges of shares purchased with participant payroll or employer contributions. - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions or transfers of shares as part of a plan termination or at the direction of the plan. - -Direct rollovers into IRAs. Redemption fees will apply to shares exchanged out of a fund within the fund's redemption-fee period into which fund the shares had previously been exchanged, rolled over, or transferred by a participant. If Vanguard does not serve as recordkeeper for your plan, redemption fees may be applied differently. Please read that your recordkeeper's plan materials carefully to learn of any other rules or fees that may apply. Also see Frequent-Trading Limits--Accounts Held by Intermediaries for information about the assessment of redemption fees by intermediaries. Other Redemption Rules You Should Know Documentation for certain accounts. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or 22 retirement accounts. Please call us before attempting to redeem from these types of accounts. Potentially disruptive redemptions. Vanguard reserves the right to pay all or part of a redemption in kind--that is, in the form of securities--if we reasonably believe that a cash redemption would negatively affect the fund's operation or performance or that the shareholder may be engaged in frequent trading. Under these circumstances, Vanguard also reserves the right to delay payment of the redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you may avoid in-kind or delayed payment of your redemption. Please see Frequent-Trading Limits for information about Vanguard's policies to limit frequent trading. Recently purchased shares. Although you can redeem shares at any time, proceeds may not be made available to you until the fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or by electronic bank transfer. If you have written a check on a fund with checkwriting privileges, that check may be rejected if your fund account does not have a sufficient available balance. Address change. If you change your address online or by telephone, there may be a 15-day 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 or automatic 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 an open Vanguard fund. You can make exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. 23 Please note that Vanguard reserves the right, without prior notice, to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Frequent-Trading Limits Because excessive transactions can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on frequent trading in the Vanguard funds. Each Vanguard fund (other than money market funds, short-term bond funds, and ETF Shares) limits an investor's purchases or exchanges into a fund account for 60 calendar days after the investor has redeemed or exchanged out of that fund account. For Vanguard fund accounts (including participants in employer-sponsored defined contribution plans that are serviced by Vanguard Small Business Services), 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 trades made by Vanguard funds that invest in other Vanguard funds. (Please note that shareholders of Vanguard's funds of funds are subject to the policy.) For participants in employer-sponsored defined contribution plans that are not serviced by Vanguard Small Business Services, the frequent-trading policy does not apply to: - -Purchases of shares with participant payroll or employer contributions or loan repayments. - -Purchases of shares with reinvested dividend or capital gains distributions. 24 - -Distributions, loans, and in-service withdrawals from a plan. - -Redemptions of shares as part of a plan termination or at the direction of the plan. - -Automated transactions executed during the first six months of a participant's enrollment in the Vanguard Managed Account Program. - -Redemptions of shares to pay fund or account fees. - -Share or asset transfers or rollovers. - -Re-registrations of shares. - -Conversions of shares from one share class to another in the same fund. Accounts Held by Institutions (Other Than Defined Contribution Plans) Vanguard will systematically monitor for frequent trading in institutional clients' accounts. If we detect suspicious trading activity, we will investigate and take appropriate action, which may include applying to a client's accounts the 60-day policy previously described, prohibiting a client's purchases of fund shares, and/or eliminating the client's exchange privilege. Accounts Held by Intermediaries When intermediaries establish accounts in Vanguard funds for their clients, we cannot always monitor the trading activity of 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. Other Rules You Should Know 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. You must register for this service online. 25 Electronic delivery. Vanguard can deliver your account statements, transaction confirmations, and fund financial reports electronically. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of these documents by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will begin to send paper copies of these documents within 30 days of receiving your notice. Telephone Transactions Automatic. When we set up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. Tele-Account/(R)/. To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account at 800-662-6273 to obtain a PIN, and allow seven days after requesting the PIN before using this service. Proof of a caller's authority. We reserve the right to refuse a telephone request if the caller is unable to provide the requested information or if we reasonably believe that the caller is not an individual authorized to act on the account. Before we allow a caller to act on an account, we may request the following information: - -Authorization to act on the account (as the account owner or by legal documentation or other means). - -Account registration and address. - -Social Security or employer identification number. - -Fund name and account number, if applicable. - -Other information relating to the caller, the account holder, or the account. Subject to revision. We reserve the right, at any time without prior notice, to revise, suspend, or terminate the ability for any or all shareholders to transact or communicate with Vanguard by telephone. Good Order We reserve the right to reject any transaction instructions that are not in "good order." Good order generally means that your instructions include: - -The fund name and account number. - -The amount of the transaction (stated in dollars, shares, or percentage). Written instructions also must include: - -Signatures of all registered owners. - -Signature guarantees, if required for the type of transaction.* - -Any supporting legal documentation that may be required. 26 The requirements vary among types of accounts and transactions. *Call Vanguard for specific signature-guarantee requirements. Vanguard reserves the right, without prior notice, to revise the requirements for good order. Future Trade-Date Requests Vanguard does not accept requests to hold a purchase, conversion, redemption, or exchange transaction for a future date. All such requests will receive trade dates as previously described in 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 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. 27 Low-Balance Accounts The Fund reserves the right to convert an investor's Institutional Shares into Investor Shares of the Fund if the investor's fund account balance falls below the minimum initial investment. Any such conversion will be preceded by written notice to the investor. No purchase or redemption fee will be imposed on share-class conversions. Right to Change Policies In addition to the rights expressly stated elsewhere in this prospectus, Vanguard reserves the right to (1) alter, add, or discontinue any conditions of purchase (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. Share Classes Vanguard reserves the right, without prior notice, to change the eligibility requirements of its share classes, including the types of clients who are eligible to purchase each share class. Fund and Account Updates Confirmation Statements We will send (or provide online, whichever you prefer) a confirmation statement confirming your trade date and the amount of your transaction when you buy, sell, exchange, or convert shares. However, we will not send confirmation statements reflecting only checkwriting redemptions or the reinvestment of dividends or capital gains distributions. For any month in which you had a checkwriting redemption, a Checkwriting Activity Statement will be sent to you itemizing the checkwriting redemptions for that month. Promptly review each confirmation statement that we 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. 28 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. Annual and Semiannual Reports We will send (or provide online, whichever you prefer) financial reports about Vanguard FTSE All-World ex-US Index Fund twice a year, in June and December. These comprehensive reports include overviews of the financial markets and provide the following specific Fund information: - -Performance assessments and comparisons with industry benchmarks. - -Financial statements with listings of Fund holdings. 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 29 interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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 Web - -------------------------------------------------------------------------------- Vanguard.com For the most complete source of Vanguard news 24 hours a day, 7 days a For fund, account, and service information week For most account transactions For literature requests - ------------------------------------------------------------------------------- Phone - ------------------------------------------------------------------------------- Vanguard Tele-Account(R) For automated fund and account information 800-662-6273 For exchange transactions (subject to limitations) (ON-BOARD) Toll-free, 24 hours a day, 7 days a week - ------------------------------------------------------------------------------- Investor Information For fund and service information 800-662-7447 (SHIP) (Text For literature requests telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired at 800-952-3335) p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Client Services For account information 800-662-2739 (CREW) (Text For most account transactions telephone for the hearing Business hours only: Monday-Friday, 8 a.m. to 10 impaired at 800-749-7273) p.m., Eastern time; Saturday, 9 a.m. to 4 p.m., Eastern time - ------------------------------------------------------------------------------- Institutional Division For information and services for large 888-809-8102 institutional investors Business hours only: Monday-Friday, 8:30 a.m. to 9 p.m., Eastern time - ------------------------------------------------------------------------------- Intermediary Sales Support For information and services for financial 800-997-2798 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 - ------------------------------------------------------------------------------- 30 Vanguard Addresses Please be sure to use the correct address, depending on your method of delivery. Use of an incorrect address could delay the processing of your transaction. Regular Mail (Individuals) The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 - ---------------------------------------------------------------------- Regular Mail (Institutions) The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 - ---------------------------------------------------------------------- Registered, Express, or Overnight The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 - ---------------------------------------------------------------------- Fund Number Please use the specific fund number when contacting us: Institutional Shares - ------------------------------------------------------------------- Vanguard FTSE All-World ex-US Index Fund 881 - ------------------------------------------------------------------- Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Vanguard Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business Online, and the ship logo are trademarks of The Vanguard Group, Inc. The Vanguard FTSE All-World ex-US Index Fund is not in any way sponsored, endorsed, sold or promoted by FTSE International Limited (FTSE) or by the London Stock Exchange Plc (the Exchange) or by The Financial Times Limited (FT), and neither FTSE nor the Exchange nor FT makes any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE All-World ex US Index (the Index) and/or the figure at which the said Index stands at any particular time on any particular day or otherwise. The Index is compiled and calculated by FTSE. However, neither FTSE nor the Exchange nor FT shall be liable (whether in negligence or otherwise) to any person for any error in the Index and neither FTSE nor the Exchange nor FT shall be under any obligation to advise any person of any error therein. "FTSE/(R)/" is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under license. "All-World" is a trademark of FTSE International Limited. 31 ETF Shares In addition to Institutional Shares, certain Vanguard funds offer a class of shares, known as Vanguard ETF* Shares, that are listed for trading on the American Stock Exchange (AMEX). If you own Institutional Shares issued by one of these funds, you may convert those shares into ETF Shares of the same fund. Note: Vanguard reserves the right to modify or terminate the conversion privilege in the future. Although ETF Shares represent an investment in the same portfolio of securities as Institutional Shares, they have different characteristics and may appeal to a different group of investors. It is important that you understand the differences before deciding whether to convert your shares to ETF Shares. The following material summarizes key information about ETF Shares. A separate prospectus with more complete information about ETF Shares is also available. Investors should review that prospectus before deciding whether to convert. Differences Between ETF Shares and Conventional Mutual Fund Shares Institutional Shares are "conventional" mutual fund shares; that is, they can be purchased from and redeemed with the issuing fund for cash at a net asset value (NAV) calculated once a day. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund, except as noted. An organized trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on the AMEX. Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day based on the supply of, and demand for, ETF Shares and on changes in the prices of the fund's portfolio holdings. The market price of a fund's ETF Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. * U.S. Pat. No. 6,879,964 B2. 32 Buying and Selling ETF Shares Vanguard ETF Shares must be held in a brokerage account. Therefore, before acquiring ETF Shares, whether through a conversion or an open-market purchase, you must have an account with a broker. You buy and sell ETF Shares in the same way you buy and sell any other exchange-traded security--on the open market, through a broker. In most cases, the broker will charge you a commission to execute the transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must purchase. Because open-market transactions occur at market prices, you may pay more than NAV when you buy ETF Shares and receive less than NAV when you sell those shares. If you own conventional shares (Investor Shares or Institutional Shares) of a Vanguard fund that issues ETF Shares, you can convert those shares into ETF Shares of equivalent value--but you cannot convert back. See "Conversion Privilege" for a discussion of the conversion process. There is one other way to buy and sell ETF Shares. Investors can purchase and redeem ETF Shares directly from the issuing fund at NAV if they do so (1) through certain authorized broker-dealers, (2) in large blocks of 50,000 or 100,000 ETF Shares (depending on the fund), known as Creation Units, and (3) in exchange for baskets of securities rather than cash. However, because Creation Units will be worth millions of dollars, and because most investors prefer to transact in cash rather than with securities, it is expected that only a limited number of institutional investors will purchase and redeem ETF Shares this way. Risks ETF Shares issued by a fund are subject to the same risks as conventional shares of the same fund. ETF Shares also are subject to the following risks: - -The market price of a fund's ETF Shares will vary somewhat from the NAV of those shares. Therefore, you may pay more than NAV when buying ETF Shares and you may receive less than NAV when selling them. - -ETF Shares cannot be redeemed with the Fund, except in Creation Unit aggregations. Therefore, if you no longer wish to own ETF Shares, you must sell them on the open market. Although ETF Shares will be listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of a fund's ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if the shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. 33 Fees and Expenses When you buy and sell ETF Shares through a brokerage firm, you will pay whatever commissions the firm charges. You also will incur the cost of the "bid-asked spread," which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. If you convert from conventional shares to ETF Shares, you will not pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50 for each conversion transaction, and your broker may impose its own conversion fees as well. The estimated total annual operating expenses (the expense ratio) for the Fund's ETF Shares is 0.25%. Account Services Because you hold ETF Shares through a brokerage account, Vanguard will have no record of your ownership unless you hold the shares through Vanguard Brokerage Services/(R)/ (Vanguard Brokerage). Your broker will service your account. For example, the broker will provide account statements, confirmations of your purchases and sales of ETF Shares, and year-end tax information. The broker also will be responsible for ensuring that you receive shareholder reports and other communications from the fund whose ETF Shares you own. You will receive certain services (e.g., dividend reinvestment and average-cost information) only if your broker offers those services. Conversion Privilege Owners of conventional shares (Investor Shares or Institutional Shares) issued by the Fund may convert those shares into ETF Shares of equivalent value of the same fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard imposes a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. Your broker may charge an additional fee to process a conversion. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Unless you are an Authorized Participant, you must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, you must have an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF Shares, please contact your broker. Converting conventional shares into ETF Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, 34 Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. Your Fund's transfer agent will reflect ownership of all ETF Shares in the name of the Depository Trust Company (DTC). The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you. Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion. If you convert your conventional shares to ETF Shares through Vanguard Brokerage Services, all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into ETF Shares: - -The conversion transaction is nontaxable except, as applicable, to the limited extent as previously described. - -The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - -Until the conversion process is complete, you will remain fully invested in the Fund's conventional shares, and your investment will increase or decrease in value in tandem with the net asset value of those shares. 35 - -During the conversion process, you will be able to liquidate all or part of your investment by instructing Vanguard or your broker (depending on who maintains records of your share ownership) to redeem your conventional shares. After the conversion process is complete, you will be able to liquidate all or part of your investment by instructing your broker to sell your ETF Shares. 36 Glossary of Investment Terms Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Cash Investments. Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills and notes, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. 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. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 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. 37 Net Asset Value (NAV). The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. Passive Management. A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a specified market benchmark or "index"; also known as indexing. Price/Earnings (P/E) Ratio. The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. Principal. The face value of a debt instrument or the amount of money put into an investment. Securities. Stocks, bonds, money market instruments, and other investment vehicles. Total Return. A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. 38 This page intentionally left blank. This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard FTSE All-World ex-US 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: If you are an individual investor: The Vanguard Group Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 800-662-7447 (SHIP) Text Telephone for the hearing impaired: 800-952-3335 If you are a client of Vanguard's Institutional Division: The Vanguard Group Institutional Investor Information Department P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 888-809-8102 Text Telephone for the hearing impaired: 800-952-3335 If you are a current Vanguard shareholder and would like information about your account, account transactions, and/or account statements, please call: Client Services Department Telephone: 800-662-2739 (CREW) Text Telephone for the hearing impaired: 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: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I881 022007 Vanguard/(R)/ FTSE All-World ex-US ETF > Prospectus Exchange-traded fund shares that are not individually redeemable February 28, 2007 SHIP LOGO VANGUARD(R) This is the Fund's initial prospectus, so it 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. Contents - ------------------------------------------------------------------------------- ETF Profile 1 Investment 17 Advisor - ------------------------------------------------------------------------------- An Introduction to 4 Dividends, Capital Gains, and Taxes 18 Vanguard ETF Shares - ------------------------------------------------------------------------------- More on the Fund and ETF 6 Daily Pricing 20 Shares - ------------------------------------------------------------------------------- The Fund and Vanguard 17 Glossary of Investment Terms 22 - ------------------------------------------------------------------------------- A Note to Retail Investors Vanguard ETF Shares can be purchased directly from the issuing Fund only in exchange for a basket of securities that is expected to be worth several million dollars. Most individual investors, therefore, will not be able to purchase ETF Shares directly from the Fund. Instead, these investors will purchase ETF Shares on the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus--such as information about purchasing and redeeming ETF Shares from the Fund and references to transaction fees imposed on purchases and redemptions--is not relevant to most individual investors. Profile--Vanguard FTSE All-World ex-US ETF The following profile summarizes key features of Vanguard FTSE All-World ex-US ETF Shares, an exchange-traded class of shares of Vanguard FTSE All-World ex-US Index Fund. Investment Objective The Fund seeks to track the performance of a benchmark index that measures the investment return of stocks of companies located in developed and emerging markets around the world. Primary Investment Strategies The Fund employs a "passive management" --or indexing--investment approach designed to track the performance of the FTSE/(R)/ All-World ex US Index, a free-float- adjusted, market-capitalization-weighted index designed to measure equity market performance of international markets. The Index includes approximately 2,200 stocks of companies located in 47 countries, including both developed and emerging markets. As of October 31, 2006, the United Kingdom, Japan, France, Germany, and Switzerland made up 18%, 17%, 8%, 6%, and 5%, respectively, of the Index's market capitalization. The Fund typically holds 1,200-1,300 stocks in its target index (covering nearly 95% of the Index's total market capitalization) and a representative sample of the remaining stocks. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, see More on the Fund. Primary Risks - -For FTSE All-World ex-US ETF Shares, the total return, like stock prices generally, will fluctuate within a wide range, so an investor could lose money over short or even long periods. - -FTSE All-World ex-US ETF Shares are 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. - -FTSE All-World ex-US ETF Shares are subject to 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. Country risk is especially high in emerging markets. 1 - -FTSE All-World ex-US ETF Shares are subject to emerging markets risk, which is the chance that the emerging markets will be substantially more volatile, and substantially less liquid, than the more developed foreign markets. - -FTSE All-World ex-US ETF Shares are subject to 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. - -FTSE All-World ex-US ETF Shares are listed for trading on the AMEX and can be bought and sold on the secondary market at market prices. Although it is expected that the market price of a FTSE All-World ex-US ETF Share typically will approximate its NAV, there may be times when the market price and the NAV vary significantly. Thus, you may pay more than NAV when you buy FTSE All-World ex-US ETF Shares on the secondary market, and you may receive less than NAV when you sell those shares. - -Although FTSE All-World ex-US ETF Shares are listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - -Trading of FTSE All-World ex-US ETF Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if FTSE All-World ex-US ETF Shares are delisted from the AMEX, or if the activation of market-wide "circuit breakers" halts stock trading generally. Performance/Risk Information The ETF Shares began operations on March 2, 2007, 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 FTSE All-World ex-US ETF Shares. 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. 2 Shareholder Fees (Fees paid directly from your investment) - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Purchases None - ------------------------------------------------------------------------------- Sales Charge (Load) Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Transaction Fee on Purchases Varies/1/ - ------------------------------------------------------------------------------- Transaction Fee Imposed on Reinvested Dividends None - ------------------------------------------------------------------------------- Annual Fund Operating Expenses (Expenses deducted from the Fund's assets) - ------------------------------------------------------------------------------- Management Expenses 0.15% - ------------------------------------------------------------------------------- 12b-1 Distribution Fee None - ------------------------------------------------------------------------------- Other Expenses 0.10% - ------------------------------------------------------------------------------- Total Annual Fund Operating Expenses 0.25% - ------------------------------------------------------------------------------- 1 An investor purchasing or redeeming Creation Units of FTSE All-World ex-US ETF Shares will pay to the issuing Fund a standard transaction fee of $22,000. An additional fee will be charged on the cash portion of any creation (purchase) or redemption transaction. Please see pages 11 and 12 for additional information. The Fund reserves the right to exempt investors providing seed capital from the purchase transaction fee. An investor buying or selling FTSE All-World ex-US ETF Shares on the secondary market will pay a commission to his or her broker in an amount established by the broker. An investor converting conventional shares into FTSE All-World ex-US ETF Shares will pay a $50 conversion fee to Vanguard; in addition, the broker may impose a conversion fee of its own. The following example is intended to help retail investors compare the cost of investing in Vanguard FTSE All-World ex-US ETF 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 FTSE All-World ex-US ETF Shares. This example assumes that FTSE All-World ex-US ETF Shares provide a return of 5% a year and that operating expenses match our estimates. This example does not include the brokerage commissions that retail investors will pay to buy and sell FTSE All-World ex-US ETF Shares. It also does not include the transaction fees on purchases and redemptions of Creation Units, because these fees will not be imposed on retail investors. 1 Year 3 Years - -------------------- $26 $80 - -------------------- The value of a FTSE All-World ex-US ETF Creation Unit as of the date of this prospectus was approximately $15 million. Assuming an investment of $15 million, payment of the standard $22,000 transaction fee applicable to both the purchase and redemption of the Creation Unit, a 5% return each year, and operating expenses that match our estimates, the total costs of holding a FTSE All-World ex-US ETF Creation Unit would be $82,334 if the Creation Unit were redeemed after one year and $164,552 if redeemed after three years. 3 This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. Additional Information - ------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc., Valley Forge, Pa., since inception - ------------------------------------------------------------------------------- Dividends and Capital Gains Distributed annually in December - ------------------------------------------------------------------------------- Inception Date March 2, 2007 - ------------------------------------------------------------------------------- Number of FTSE All-World ex-US ETF 300,000 Shares in a Creation Unit - ------------------------------------------------------------------------------- Vanguard Fund Number 991 - ------------------------------------------------------------------------------- Cusip Number 922042775 - ------------------------------------------------------------------------------- AMEX Trading Symbol VEU - ------------------------------------------------------------------------------- An Introduction to Vanguard ETF(TM)Shares What Are Vanguard ETF Shares? Vanguard ETF Shares are an exchange-traded class of shares issued by certain Vanguard mutual funds. ETF Shares represent an interest in the portfolio of stocks held by the issuing fund. This prospectus describes FTSE All-World ex-US ETF Shares, a class of shares issued by Vanguard FTSE All-World ex-US Index Fund. In addition to ETF Shares, the Fund offers two conventional (not exchange-traded) classes of shares. This prospectus, however, relates only to ETF Shares. How Are Vanguard ETF Shares Different From Conventional Mutual Fund Shares? Conventional mutual fund shares are bought from and redeemed with the issuing fund for cash at a net asset value (NAV) typically calculated once a day. ETF Shares, by contrast, cannot be purchased from or redeemed with the issuing fund except by or through Authorized Participants (defined below), and then only for an in-kind basket of securities. An organized trading market is expected to exist for ETF Shares, unlike conventional mutual fund shares, because ETF Shares are listed for trading on the American Stock Exchange (AMEX). Investors can purchase and sell ETF Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day, based on the supply of, and demand for, ETF Shares and on changes in the prices of the fund's portfolio holdings. 4 The market price of a fund's ETF Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility, the difference may become significant. How Do I Buy and Sell ETF Shares? A fund issues and redeems ETF Shares only in bundles of 300,000 shares. These bundles are 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 that has executed a Participant Agreement with the fund's Distributor. Vanguard will provide a list of Authorized Participants upon request. Because Creation Units can be purchased only in exchange for a basket of securities likely to cost millions of dollars, it is expected that only a limited number of institutional investors will purchase and redeem ETF Shares directly with an issuing fund. Investors who cannot afford to purchase a Creation Unit can acquire ETF Shares in one of two ways. If you own conventional shares of a fund that issues ETF Shares, you can, for a fee, convert those shares into ETF Shares of equivalent value. For more information about the conversion privilege, see "Conversion Privilege" under More on the Fund and ETF Shares. In addition, any investor may purchase ETF Shares on the secondary market through a broker. ETF Shares are publicly traded on the AMEX. To acquire ETF Shares through either means, you must have a brokerage account. For information about acquiring ETF Shares through conversion of conventional shares or through a secondary-market purchase, please contact your broker. If you want to sell ETF Shares, you must do so through your broker; ETF Shares cannot be converted back into conventional shares. When you buy or sell ETF Shares on the secondary market, your broker will charge a commission. You will also 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. In addition, because secondary-market transactions occur at market prices, you may pay more than NAV when you buy ETF Shares, and receive less than NAV when you sell those shares. 5 More on the Fund and ETF Shares The following sections explain the primary investment strategies and policies that the Fund uses in pursuit of its objective. 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 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 located in developed and emerging markets around the world. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- FLAG FTSE All-World ex-US ETF Shares are subject to stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. In addition, investments in foreign stock markets can be riskier than U.S. stock investments. The prices of foreign stocks and the prices of U.S. stocks have, at times, moved in opposite directions. To illustrate the volatility of international stock prices, the following table shows the best, worst, and average annual total returns for foreign stock markets over various periods as measured by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of international market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. The returns, however, are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts. 6 International Stock Market Returns (1970-2006) 1 Year 5 Years 10 Years 20 Years - ---------------------------------------------------------- Best 69.4% 36.1% 22.0% 15.5% - ---------------------------------------------------------- Worst -23.4 -2.9 4.0 8.1 - ---------------------------------------------------------- Average 12.9 10.8 11.7 12.6 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1970 through 2006. These average returns reflect past performance of international stocks; you should not regard them as an indication of future performance of either foreign markets as a whole or the Fund in particular. Note that the MSCI EAFE Index does not take into account returns for emerging markets, which can be substantially more volatile, and substantially less liquid, than the more developed markets included in the Index. In addition, because the MSCI EAFE Index tracks the European and Pacific developed markets collectively, the returns in the preceding table do not reflect the variability of returns for these markets individually. To illustrate this variability, the following table shows returns for different international markets--as well as for the U.S. market for comparison--from 1997 through 2006, as measured by their respective indexes.
Returns for Various Stock Markets/1/ European Pacific Emerging U.S. Market Market Markets Market - ------------------------------------------------------------------------------------------------------------------------------ 1997 23.80% -25.87% -11.59% 33.36% - ------------------------------------------------------------------------------------------------------------------------------ 1998 28.53 2.72 -25.34 28.58 - ------------------------------------------------------------------------------------------------------------------------------ 1999 15.89 56.65 66.41 21.04 - ------------------------------------------------------------------------------------------------------------------------------ 2000 -8.39 -25.78 -30.61 -9.10 - ------------------------------------------------------------------------------------------------------------------------------ 2001 -19.90 -25.40 -2.62 -11.89 - ------------------------------------------------------------------------------------------------------------------------------ 2002 -18.38 -9.29 -6.17 -22.10 - ------------------------------------------------------------------------------------------------------------------------------ 2003 38.54 38.48 55.82 28.68 - ------------------------------------------------------------------------------------------------------------------------------ 2004 20.88 18.98 25.55 10.88 - ------------------------------------------------------------------------------------------------------------------------------ 2005 9.42 22.64 34.00 4.91 - ------------------------------------------------------------------------------------------------------------------------------ 2006 33.72 12.20 32.17 15.79 - ------------------------------------------------------------------------------------------------------------------------------ 1 European market returns are measured by the MSCI Europe Index; Pacific market returns are measured by the MSCI Pacific Index; emerging markets returns are measured by the MSCI Emerging Markets Index; and U.S. market returns are measured by the Standard & Poor's 500 Index. The MSCI Index returns are adjusted for withholding taxes applicable to U.S.-based mutual funds organized as Delaware statutory trusts.
7 Keep in mind that these returns reflect past performance of the various indexes; you should not consider them as an indication of future performance of the indexes, or of the Fund in particular. FLAG 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. Security Selection The Fund attempts to track the investment performance of a benchmark index consisting of common stocks of companies located in developed and emerging markets around the world. The Fund's investment in the Index will be within the capitalization range of the companies included in the FTSE All-World ex US Index ($45 million to $222 billion as of October 31, 2006). While the Index tracks stocks that are predominantly large-cap, it also tracks mid- and small-cap stocks to a lesser extent. Historically, these stocks have been more volatile than--and at times have performed quite differently from--large-cap stocks. In the future, the Index's market-capitalization range may be higher or lower, and the Fund's investments may track a different index. Such changes may occur at any time and without notice to Fund shareholders. Indexing Strategy. The Fund uses the sampling method of indexing, meaning that the Fund's advisor, using sophisticated computer programs, selects from the target index a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. These include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. Depositary Receipts. The Fund, in most cases, will obtain economic exposure to stocks of its target index (component securities) by investing directly in common stocks. However, the Fund reserves the right to obtain economic exposure to component securities indirectly by purchasing depositary receipts of the component securities. 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. Generally, the Fund would hold depositary receipts only when the advisor believes that holding the depositary receipt, rather than the underlying component security, would benefit the Fund. The Fund might opt to hold depositary receipts if the foreign market in which a stock trades does not provide adequate protection to the rights of foreign investors or government regulators place restrictions on the free flow of capital or currency. The Fund treats depositary receipts that represent interests in component securities as component securities for purposes of any requirements related to the percentage of component securities held in the Fund's portfolio. 8 The FTSE All-World ex US Index. The FTSE All-World ex US Index is maintained by FTSE Group (FTSE), a widely known global index provider that currently manages and calculates more than 60,000 indexes daily. 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, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, all of which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a financial asset (such as a stock, bond, or currency), a physical asset (such as gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. The Fund may enter into forward foreign currency exchange contracts, which are types of derivative contracts, in order to maintain the same currency exposure as the Index. 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. These contracts, however, will not prevent the Fund's securities from falling in value during foreign market downswings. The Fund may use these contracts to gain currency exposure when investing in stock index futures and to settle trades in a foreign currency. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Fund is generally managed without regard to tax ramifications. 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. When investing in a Vanguard CMT Fund, the Fund bears its proportionate share of the at-cost expenses of the CMT Fund in which it invests. 9 Special Risks of Exchange-Traded Shares FLAG ETF Shares are not individually redeemable. They can be redeemed with the issuing Fund at NAV only in large blocks known as Creation Units. You would incur brokerage costs in purchasing enough ETF Shares to constitute a Creation Unit. FLAG The market price of ETF Shares may differ from net asset value. ETF Shares are listed for trading on the AMEX and can be bought and sold on the secondary market at market prices. Although it is expected that the market price of an ETF Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV differ significantly. Thus, you may pay more than NAV when you buy ETF Shares on the secondary market, and you may receive less than NAV when you sell those shares. The market price of ETF Shares, like the price of any exchange-traded security, includes a "bid-asked spread" charged by the exchange specialist and other market-makers that cover the particular security. In times of severe market disruption, the bid-asked spread can increase significantly. This means that ETF Shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest, when the price of ETF Shares is falling fastest--and this may be the time that you most want to sell ETF Shares. FLAG An active trading market may not exist. Although ETF Shares are listed on the AMEX, it is possible that an active trading market may not be maintained. FLAG Trading may be halted. Trading of ETF Shares on the AMEX will be halted whenever trading in equity securities generally is halted by the activation of marketwide "circuit breakers," which are tied to large decreases in the Dow Jones Industrial Average. Trading of ETF Shares also will be halted if (1) the shares are delisted from the AMEX without first being listed on another exchange, or (2) AMEX officials determine that such action is appropriate in the interest of a fair and orderly market or to protect investors. Note: If trading of ETF Shares on the AMEX is halted, eligible investors (see the following section) will still be able to purchase Creation Units of ETF Shares directly from an issuing Fund and redeem such units with the Fund. Purchasing Vanguard ETF Shares From an Issuing Fund You can purchase ETF Shares from an issuing Fund if you meet the following criteria and comply with the following procedures: - -Eligible Investors. To purchase ETF Shares from the Fund, you must be an Authorized Participant or you must purchase through a broker that is an Authorized 10 Participant. An Authorized Participant is a participant in the Depository Trust Company (DTC) that has executed a Participant Agreement with the Fund's Distributor. Most Authorized Participants are expected to be brokerage firms. - -Creation Units. You must purchase ETF Shares in large blocks known as "Creation Units." The number of ETF Shares in a Creation Unit is 300,000 and will not change over time, except in the event that the Fund splits or revalues its shares. The Fund will not issue fractional Creation Units. - -In-Kind Creation Basket. To purchase ETF Shares directly from the Fund, you must tender to the Fund a basket of securities. Each business day, prior to the opening of trading on the AMEX, the Fund's advisor will make available, on the National Securities Clearing Corporation (NSCC) bulletin board, a list identifying the name and number of shares of each security to be included in that day's creation basket. The Fund reserves the right to accept a nonconforming creation basket. A portion of the Fund's creation basket may include American Depository Receipts (ADRs). - -Cash Purchases. The Fund reserves the right to require cash rather than in-kind securities in certain markets. As of the date of this prospectus, cash will be required for securities traded in Brazil, Chile, India, Malaysia, South Korea, and Taiwan. - -Balancing Amount. In addition to the in-kind deposit of securities, you will either pay to, or receive from, the Fund an amount of cash (the Balancing Amount) equal to the difference between the NAV of a Creation Unit and the value of the securities in the creation basket. The Balancing Amount ensures that the consideration paid by an investor for a Creation Unit is exactly equal to the value of the Creation Unit. The Fund's advisor will publish, on a daily basis, information about the previous day's Balancing Amount. You also must pay a transaction fee in cash. The Balancing Amount and the transaction fee, taken together, are referred to as the "Cash Component." - -Placement of Purchase Orders. All purchase orders must be placed with Vanguard by or through an Authorized Participant. Purchase orders will be processed through a manual clearing process run by the DTC. A purchase order must be received by the Fund's Distributor prior to the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the day the order is placed, and all other procedures set forth in the Participant Agreement must be followed, in order for you to receive the NAV determined on that day. - -Transaction Fee on Purchase of Creation Units. The Fund imposes a transaction fee in the amount of $22,000 on each purchase of Creation Units, regardless of the number of units purchased. Investors permitted to tender a nonconforming creation basket may be subject to an additional charge commensurate with the cost to the Fund. The transaction fee is paid to the Fund, not to Vanguard or a third party. The fee protects existing shareholders of the Fund from the costs associated with issuing Creation Units. The Fund also charges an additional variable fee (a maximum of 2%) for cash purchases. This fee is assessed as a percentage of the cash in lieu of the amount invested. 11 Redeeming Vanguard ETF Shares With an Issuing Fund The redemption process is essentially the reverse of the purchase process. - -Eligible Investors. To redeem ETF Shares with a Fund, you must be an Authorized Participant or you must redeem through a broker that is an Authorized Participant. - -Creation Units. To redeem ETF Shares with a Fund, you must tender the shares in Creation Unit-size blocks. - -In-Kind Redemption Proceeds. Redemption proceeds will be paid in kind with a basket of securities. In most cases, the basket of securities you receive will be the same as that required of investors purchasing Creation Units on the same day. There will be times, however, when the creation and redemption baskets differ. The composition of the redemption basket will be available on the NSCC bulletin board. The Fund reserves the right to honor a redemption request with a nonconforming redemption basket if the redeeming investor consents. - -Balancing Amount. Depending on whether the NAV of a Creation Unit is higher or lower than the value of the securities in the redemption basket, you will either receive from or pay to the Fund a Balancing Amount in cash. If you are due to receive a Balancing Amount, the amount you actually receive will be reduced by the amount of the applicable transaction fee. - -Cash Redemptions. The Fund may redeem in cash rather than in kind in certain markets. As of the date of this prospectus, cash redemptions will be made for certain securities traded in Brazil, Chile, India, Malaysia, South Korea, and Taiwan. - -Placement of Redemption Orders. As with purchases, redemptions will be processed through the DTC process. A redemption order is deemed received on the date of transmittal if it is received by Vanguard prior to the close of regular trading on the New York Stock Exchange on that date, and if all other procedures set forth in the Participation Agreement are followed. - -Transaction Fee on Redemption of Creation Units. The Fund imposes a $22,000 transaction fee on each redemption of Creation Units. As with the transaction fee on purchases, the transaction fee on redemptions is paid to the Fund, not to Vanguard or a third party. The fee protects existing shareholders of the Fund from the costs associated with redeeming Creation Units. The Fund also charges an additional variable fee (a maximum of 2%) for cash redemptions. This fee is assessed as a percentage of the cash in lieu of the amount redeemed. Purchasing and Selling Vanguard ETF Shares on the Secondary Market You can buy and sell ETF Shares on the secondary market in the same way you buy and sell any other exchange-traded security--through a broker. In most cases, the broker will charge you a commission to execute the transaction. The price at which you buy or sell ETF Shares (i.e., the market price) may be more or less than the NAV of 12 the shares. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of ETF Shares you must buy. Conversion Privilege Owners of conventional shares (Investor Shares or Institutional Shares) issued by Vanguard FTSE All-World ex-US Index Fund may convert those shares into ETF Shares of equivalent value. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard imposes a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. Your broker may charge an additional fee to process a conversion. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Unless you are an Authorized Participant, you must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, you must have an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF Shares, please contact your broker. Converting conventional shares into ETF Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). After the transfer, Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. Your Fund's transfer agent will reflect ownership of all ETF Shares in the name of the DTC. The DTC will keep track of which ETF Shares belong to your broker, and your broker, in turn, will keep track of which ETF Shares belong to you. Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (1) credit your account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on 13 the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion. If you convert your conventional shares to ETF Shares through Vanguard Brokerage Services/(R)/ (Vanguard Brokerage), all conventional shares for which you request conversion will be converted into ETF Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Vanguard Brokerage does not impose a conversion fee over and above the fee imposed by Vanguard. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into ETF Shares: - -The conversion transaction is nontaxable except, as applicable, to the limited extent as previously described. - -The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - -Until the conversion process is complete, you will remain fully invested in 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 ETF Shares. Frequent Trading and Market-Timing Unlike frequent trading of a Vanguard fund's conventional (i.e., not exchange-traded) classes of shares, frequent trading of ETF Shares does not disrupt portfolio management, increase the fund's trading costs, lead to realization of capital gains, or otherwise harm fund shareholders. The vast majority of trading in ETF Shares occurs on the secondary market. Because these trades do not involve the issuing fund directly, they do not harm the fund or its shareholders. A few institutional investors are authorized to purchase and redeem ETF Shares directly with the issuing fund. Because these trades are effected in-kind (i.e., for securities and not for cash), they do not cause any of the harmful effects (as previously noted) that may result from 14 frequent cash trades. Moreover, the issuing fund imposes transaction fees on in-kind purchases and redemptions of ETF Shares to cover the custodial and other costs incurred by the fund in effecting in-kind trades. These fees increase if an investor substitutes cash in part or in whole for securities, reflecting the fact that the fund's trading costs increase in those circumstances. For these reasons, the board of trustees of each fund that issues ETF Shares has determined that it is not necessary to adopt policies and procedures to detect and deter frequent trading and market-timing of ETF Shares. Portfolio Holdings We generally post on our website at www.vanguard.com, in the Holdings section of the Fund's Profile page, a detailed list of the securities held by the Fund (under Portfolio Holdings), as of the most recent calendar-quarter-end. This list is generally updated within 30 days after the end of each calendar quarter. Vanguard may exclude any portion of these portfolio holdings from publication when deemed in the best interest of the Fund. We also generally post the ten largest stock portfolio holdings of the Fund and the percentage of the Fund's total assets that each of these holdings represents, as of the most recent calendar-quarter-end. This list is generally updated within 15 calendar days after the end of each calendar quarter. 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. Precautionary Notes A precautionary note to retail investors: The DTC or its nominee will be the registered owner of all outstanding ETF Shares. Your ownership of ETF Shares will be shown on the records of the DTC and the DTC Participant broker through which you hold the shares. Vanguard will not have any record of your ownership. Your account information will be maintained by your broker, which will provide you with account statements, confirmations of your purchases and sales of ETF Shares, and tax information. Your broker also will be responsible for distributing income and capital gains distributions and for ensuring that you receive shareholder reports and other communications from the Fund whose ETF Shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services. A precautionary note to purchasers of Creation Units: You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund. 15 Because new ETF Shares may be issued on an ongoing basis, a "distribution" of ETF Shares could be occurring at any time. Certain activities that you perform as a dealer could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933. For example, you could be deemed a statutory underwriter if you purchase Creation Units from the issuing Fund, break them down into the constituent ETF Shares, and sell those shares directly to customers, or if you choose to couple the creation of a supply of new ETF Shares with an active selling effort involving solicitation of secondary-market demand for ETF Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person's activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not "underwriters" but are participating in a distribution (as opposed to engaging in ordinary secondary-market transactions), and thus dealing with ETF Shares as part of an "unsold allotment" within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. A precautionary note to investment companies: For purposes of the Investment Company Act of 1940, ETF Shares are issued by registered investment companies, and the acquisition of Vanguard ETF Shares by other investment companies is subject to the restrictions of Section 12(d)(1) of that Act, except as provided by an exemption granted by the SEC that permits registered investment companies to invest in a Vanguard fund that issues ETF Shares beyond the limits of Section 12(d)(1), subject to certain terms and conditions. A note on unusual circumstances: Vanguard reserves the right to reject any purchase request at any time, for any reason, and without notice. Vanguard funds can stop selling shares or postpone payment of redemption proceeds at times when the New York Stock Exchange is closed or under any emergency circumstances as determined by the U.S. Securities and Exchange Commission. 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. 16 - -------------------------------------------------------------------------------- Plain Talk About Turnover Rate Turnover rates give an indication of how transaction costs, which are not included in a fund's expense ratio, could affect the fund's future returns. In general, the greater the volume of buying and selling by a 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 140 funds holding assets in excess of $1 trillion. All of the funds that are members of The Vanguard Group share in the expenses associated with administrative services and business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund (or in the case of a fund with multiple share classes, each share class of the fund) pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- Plain Talk About Vanguard's Unique Corporate Structure The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. The management fees charged by these companies include a profit component over and above the companies' cost of providing services. By contrast, Vanguard provides services to its member funds on an at-cost basis, with no profit component, which helps to keep the funds' expenses low. - -------------------------------------------------------------------------------- Investment Advisor The Vanguard Group, Inc. (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, which began operations in 1975, serves as advisor to the Fund through its Quantitative Equity Group. As of October 31, 2006, Vanguard served as advisor for approximately $808 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. 17 For a discussion of why the board of trustees approved the Fund's investment advisory arrangement, see the Fund's semiannual report to shareholders covering the fiscal period ended April 30, 2007, which will be available 60 days after that date. 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: Duane F. Kelly, Principal of Vanguard. He has been with Vanguard since 1989; has managed stock portfolios since 1992; and has managed the Fund since its inception. Education: B.S., LaSalle University. - -------------------------------------------------------------------------------- The Statement of Additional Information provides information about the portfolio manager's compensation, other accounts under management, and ownership of securities in the Fund. Dividends, Capital Gains, and Taxes Fund Distributions The Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any net capital gains realized from the sale of its holdings. Distributions generally occur annually in December. 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. 18 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- Reinvestment of Distributions Brokers may make available to their customers who own ETF Shares the DTC book-entry dividend reinvestment service. If this service is available and used, dividend distributions of both income and capital gains will automatically be reinvested in additional whole and fractional ETF Shares of the same Fund. Without this service, investors would receive their distributions in cash. To determine whether the dividend reinvestment service is available and whether there is a commission or other charge for using this service, consult your broker. As with all exchange-traded funds, reinvestment of dividend and capital gains distributions in additional ETF Shares will occur four business days or more after the ex-dividend date (the date when a distribution of dividends or capital gains is deducted from the price of the fund's shares). The exact number of days depends on your broker. During that time, the amount of your distribution will not be invested in the Fund and therefore will not share in the Fund's income, gains, and losses. Basic Tax Points 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 ETF 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. 19 - -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 ETF Shares. - -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 of ETF 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 ETF 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 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. Note: 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 any tax consequences for you. Daily Pricing The net asset value, or NAV, of the Fund's ETF Shares 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 shares outstanding for that class. Remember: If you buy or sell ETF Shares on the secondary market, you will pay or receive the market price, which may be higher or lower than NAV. Your transaction will be priced at NAV only if you purchase or redeem your ETF Shares in Creation Unit blocks, or if you convert your conventional fund shares into ETF Shares. 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 mutual fund shares held by a fund are based on the NAVs of the underlying mutual funds (in the case of conventional share classes) or the market value of the shares (in the case of exchange traded fund shares, such as ETF Shares). 20 When reliable market quotations are not readily available, securities are priced at their fair value (the amount that the owner might reasonably expect to receive upon the current sale of a security). A fund also will use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, which may trade on foreign exchanges that close many hours before the fund's pricing time. Intervening events might be company-specific (e.g., earnings report, merger announcement); country-specific (e.g., natural disaster, economic or political news, act of terrorism, interest rate change); or global. Intervening events include price movements in U.S. markets that are deemed to affect the value of foreign securities. Fair-value prices are determined by Vanguard according to procedures adopted by the board of trustees. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard's website will show the previous day's closing NAV and closing market price for the Fund's ETF Shares. The previous day's closing market price also will be published in the business section of most major newspapers in the listing of securities traded on the AMEX. Vanguard, Vanguard.com, Connect with Vanguard, Plain Talk, Vanguard Tele-Account, Tele-Account, Vanguard ETF, Vanguard Small Business Online, and the ship logo are trademarks of The Vanguard Group, Inc. The Vanguard FTSE All-World ex-US Index Fund is not in any way sponsored, endorsed, sold or promoted by FTSE International Limited (FTSE) or by the London Stock Exchange Plc (the Exchange) or by The Financial Times Limited (FT), and neither FTSE nor the Exchange nor FT makes any warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE All-World ex US Index (the Index) and/or the figure at which the said Index stands at any particular time on any particular day or otherwise. The Index is compiled and calculated by FTSE. However, neither FTSE nor the Exchange nor FT shall be liable (whether in negligence or otherwise) to any person for any error in the Index and neither FTSE nor the Exchange nor FT shall be under any obligation to advise any person of any error therein. "FTSE/(R)/" is a trademark of the London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under license. "All-World" is a trademark of FTSE International Limited. 21 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. Authorized Participant. Institutional investors that are permitted to purchase Creation Units directly from, and redeem Creation Units directly with, the fund. To be an Authorized Participant, an entity must be a participant in the Depository Trust Company and must enter into an agreement with the fund's Distributor. 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. Creation Unit. A large block of a specified number of ETF Shares. Authorized Participants may purchase and redeem ETF Shares from the fund only in Creation Unit-size aggregations. 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. ETF Shares. A class of exchange-traded shares issued by certain Vanguard mutual funds. ETF Shares can be bought and sold continuously throughout the day at market prices. Expense Ratio. The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management expenses--such as advisory fees, account maintenance, reporting, accounting, legal, and other administrative expenses--and any 12b-1 distribution fees. It does not include the transaction costs of buying and selling portfolio securities. Index. An unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. International Stock Fund. A mutual fund that invests in the stocks of companies located outside the United States. 22 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 specified market benchmark or "index"; also known as indexing. Price/Earnings (P/E) Ratio. The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. Principal. The face value of a debt instrument or the amount of money put into an investment. Securities. Stocks, bonds, money market instruments, and other investment vehicles. Total Return. A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. Volatility. The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. 23 This page intentionally left blank. This page intentionally left blank. SHIP LOGO VANGUARD(R) Institutional Division P.O. Box 2900 Valley Forge, PA 19482-2900 CONNECT WITH VANGUARD/(R)/ > www.vanguard.com For More Information If you would like more information about Vanguard FTSE All-World ex-US ETF, 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 for the issuing Fund provides more detailed information about the Fund's ETF Shares. 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 Vanguard ETF Shares, please visit www.vanguard.com or contact us as follows: The Vanguard Group Institutional Investor Information P.O. Box 2900 Valley Forge, PA 19482-2900 Telephone: 866-499-8473 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, D.C. 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: 811-5972 (C) 2007 The Vanguard Group, Inc. All rights reserved. U.S. Pat. No. 6,879,964 B2 Vanguard Marketing Corporation, Distributor. P991 022007 PART B VANGUARD/(R)/ INTERNATIONAL EQUITY INDEX FUNDS STATEMENT OF ADDITIONAL INFORMATION FEBRUARY 28, 2007 This Statement of Additional Information is not a prospectus but should be read in conjunction with the Funds' current prospectuses dated February 28, 2007. 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-16 SHARE PRICE...........................................................B-17 PURCHASE AND REDEMPTION OF SHARES.....................................B-18 MANAGEMENT OF THE FUNDS...............................................B-20 INVESTMENT ADVISORY SERVICES..........................................B-31 PORTFOLIO TRANSACTIONS................................................B-33 PROXY VOTING GUIDELINES...............................................B-34 INFORMATION ABOUT THE ETF SHARE CLASS.................................B-38 FINANCIAL STATEMENTS..................................................B-63 LEGAL DISCLAIMER......................................................B-63 DESCRIPTION OF THE TRUST ORGANIZATION Vanguard International Equity Index Funds (the Trust) was organized as a Maryland corporation in 1989, and was reorganized as a Delaware statutory trust in July 1998. Prior to its reorganization as a Delaware statutory trust, the Trust was known as Vanguard International Equity Index Fund, 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) as an open-end, diversified management investment company. It currently offers the following funds and classes of shares:
SHARE CLASSES/1/ ------------- FUND/2/ Investor Admiral Institutional Signal ETF ---- -------- ------- ------------- ------ --- Vanguard European Stock Index Fund Yes Yes Yes Yes Yes Vanguard Pacific Stock Index Fund Yes Yes Yes Yes Yes Vanguard Emerging Markets Stock Index Fund Yes Yes Yes Yes Yes Vanguard FTSE All-World ex-US Index Fund Yes No Yes No Yes 1 Individually, a class, collectively, the classes. 2 Individually, a Fund; collectively, the Funds.
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. 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. B-1 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 CUSTODIAN. Brown Brothers Harriman & Co., 40 Water Street, Boston, MA 02109, serves as the Funds' custodian. The custodian is 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, P.O. Box 2600, Valley Forge, PA 19482. 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 a Fund's shares, other than those described in the Fund's current prospectus and elsewhere in this Statement of Additional Information or the possible future termination of the Fund or a 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 each class of a Fund are entitled to receive any dividends or other distributions declared by the Fund for each such class. 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 a particular class according to the number of shares of the 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 net asset values of the different classes and 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 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. B-2 PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Funds' shares. CONVERSION RIGHTS. Fund shareholders may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements. For additional information about the conversion rights applicable to ETF Shares, please see "Information About the ETF Share Class." 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. 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. Under normal circumstances, the European Stock Index, Pacific Stock Index, Emerging Markets Stock Index, and FTSE All-World ex-US Index Funds will invest at least 80% of their assets in the types of stocks connoted by their respective names. In applying these 80% policies, assets will include net assets and borrowings for investment purposes. 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 issued from time to time by the SEC and its staff, or any other regulatory authority with jurisdiction. 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 B-3 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 that 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 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. B-4 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. 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 depository 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 that 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, forward-commitment transactions, options on securities, caps, floors, collars, swap agreements, 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 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 B-5 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. There is no assurance that any derivatives strategy used by a fund's advisor will succeed. The counterparties to the funds' derivatives will not be considered the issuers thereof for certain purposes of the 1940 Act and the IRC, although such derivatives may qualify as securities or investments under such laws. The funds' advisors, however, will monitor and adjust, as appropriate, the funds' credit risk exposure to derivative counterparties. 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. Although 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. A fund may purchase shares of exchange-traded funds (ETFs), including ETF shares issued by other Vanguard funds. Typically, a fund 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. 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 objective, strategies, and policies. The price of an ETF can 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 B-6 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. Most ETFs are investment companies. Therefore, a 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." Vanguard ETF(TM) * Shares are exchange-traded shares that represent an interest in an investment portfolio held by Vanguard index funds. A fund's investments in Vanguard ETF Shares are also generally subject to the descriptions, limitations, and risks described under the heading "Other Investment Companies, " except as provided by an exemption granted by the SEC that permits registered investment companies to invest in a Vanguard fund that issues ETF Shares beyond the limits of Section 12(d)(1) of the 1940 Act, subject to certain terms and conditions. - --------- * U.S. Pat. No. 6,879,964 B2. FOREIGN SECURITIES. Typically, foreign securities are considered to be equity or debt securities issued by entities organized, domiciled, or with a principal executive office outside the United States, such as foreign corporations and governments. Securities issued by certain companies organized outside the United States may not be deemed to be foreign securities if the company's principal operations are conducted from the United States or when the company's equity securities trade principally on a U.S. stock exchange. 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. 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 terrorism); more substantial government involvement in the economy; less government supervision and regulation of B-7 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. In an index fund, the intent is to maintain exposure to foreign currencies to the same extent that the fund's assets are held in securities denominated in those currencies. A fund may enter into foreign currency contracts when it trades foreign stocks in order to avoid any gain or loss on the currency during the settlement period. A fund also may enter into foreign currency transactions to provide the appropriate currency exposure to offset an amount related to an open futures contract. A fund will not speculate in foreign currency exchange. 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-8 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. Futures contracts and options on futures contracts are derivatives. 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 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 B-9 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. 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. B-10 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, among other things, the requirement that: (1) 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; (2) no equity, taxable bond, or money market fund may loan funds if the loan would cause its aggregate outstanding loans through the program to exceed 5%, 7.5%, or 10%, respectively, of its net assets at the time of the loan; and (3) a fund's interfund loans to any one fund shall not exceed 5% of the lending fund's net assets. 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. Any delay in repayment to a lending fund could result in a lost investment opportunity or additional borrowing costs. OPTIONS. An option is a derivative. 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 (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 option 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 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 B-11 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 Section 12(d)(1) of 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 no investment represents more than 3% of the voting stock of an acquired investment company. The 1940 Act and related rules provide certain exemptions from these restrictions. 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 on 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 aggregate amount of any such agreements is not limited except to the extent required by law. 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); (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 B-12 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 fund has knowledge that a material event will occur affecting securities on loan, and in respect of which the holder of the securities will be entitled to vote or consent, the lender must be entitled to call the loaned securities in time to vote or consent. B-13 SWAP AGREEMENTS. A swap agreement is a derivative. 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 transactions 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-14 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 that 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-15 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 SALE OF INVESTOR SHARES OF THE FUND IN JAPAN. Each Fund may borrow (as defined under Japanese law and the rules of the Japanese Securities Dealers Association) money for temporary or emergency purposes only in an amount not to exceed 10% of the Fund's net assets. INVESTMENT LIMITATIONS VANGUARD EUROPEAN STOCK INDEX FUND, VANGUARD PACIFIC STOCK INDEX FUND, AND VANGUARD EMERGING MARKETS STOCK INDEX FUND 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. ASSESSABLE SECURITIES. Each Fund may not invest in assessable securities or securities involving unlimited liability on the part of the holders thereof. BORROWING. Each Fund may not borrow money, except for temporary or emergency purposes in an amount not exceeding 15% of the Fund's net assets. Each Fund may borrow money through banks or Vanguard's interfund lending program only, and must comply with all applicable regulatory conditions. Each Fund may not make any additional investments whenever its outstanding borrowings exceed 5% of net assets. COMMODITIES. Each Fund may not invest in commodities, except that it may invest in stock futures contracts, stock options, and options on stock futures contracts. No more than 5% of the Fund's total assets may be used as initial margin deposit for futures contracts, and no more than 20% of the Fund's total assets may be invested in futures contracts or options at any time. DIVERSIFICATION. With respect to 75% of its total assets, each Fund 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 or its agencies or instrumentalities. 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. B-16 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 will not invest more than 25% of its total assets in any one industry except as necessary to approximate the composition of its target index. INVESTING FOR CONTROL. Each Fund may not invest in a company for purposes of controlling its management. LOANS. Each Fund may not lend money to any person except by purchasing fixed income securities, by entering into repurchase agreements, 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, except as permitted by the Fund's investment policies relating to commodities. OIL, GAS, MINERALS. Each Fund may not invest in interests in oil, gas, or other mineral exploration or development programs. PLEDGING ASSETS. Each Fund may not pledge, mortgage, or hypothecate more than 15% of its net assets. REAL ESTATE. Each Fund may not invest directly in real estate, although it may invest in securities of companies that deal in real estate and bonds secured by real estate. SENIOR SECURITIES. Each Fund may not issue senior securities, except in compliance with the 1940 Act. UNDERWRITING. Each Fund may not act as an underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the1933 Act, in connection with the purchase and sale of portfolio securities. VANGUARD FTSE ALL-WORLD EX-US INDEX FUND The Fund is subject to the following fundamental investment limitations, which cannot be changed in any material way without the approval of the holders of a majority of the Fund's shares. For these purposes, a "majority" of 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. The Fund may borrow money or issue senior securities only as permitted under the 1940 Act. COMMODITIES. The Fund may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments. This limitation shall not prevent the Fund from purchasing, selling, or entering into securities or other instruments backed by physical commodities, foreign currencies, foreign currency forward contracts, foreign currency options, futures contracts, options on futures contracts, swap agreements, or other derivative instruments, subject to compliance with applicable provisions of the federal securities and commodities laws. DIVERSIFICATION. The Fund may not change its classification as a "management company" or its subclassifications as an "open-end company" and as a "diversified company" as each such term is defined in the 1940 Act. INDUSTRY CONCENTRATION. The Fund may not concentrate its investments in a particular industry or group of industries, within the meaning of the 1940 Act. LOANS. The Fund may make loans only as permitted under the 1940 Act. REAL ESTATE. The Fund may not purchase or sell real estate unless acquired as a result of ownership of securities or other instruments. This limitation shall not prevent the Fund from investing in securities or other instruments backed by real estate or securities issued by any company engaged in the real estate business. SENIOR SECURITIES. The Fund may borrow money or issue senior securities only as permitted under the 1940 Act. UNDERWRITING. The Fund may not act as an underwriter of another issuer's securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the1933 Act, in connection with the purchase and sale of portfolio securities. ALL FUNDS 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. B-17 Compliance with the investment limitations set forth above is generally measured at the time the securities are purchased. All investment limitations must comply with applicable regulatory requirements. 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. SHARE PRICE Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange (the 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. The Exchange typically observes the following holidays: New Year's Day, Martin Luther King Jr. Day, Presidents' Day (Washington's Birthday), 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 Fund's prospectus. 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. The European Stock Index and Pacific Stock Index Funds do not charge purchase fees. The Emerging Markets Stock Index Fund charges a 0.5% purchase fee. The FTSE All-World ex-US Index Fund charges a 0.25% purchase fee. The purchase fee is paid to the Fund to reimburse it for the transaction costs incurred from purchasing securities. The fee is deducted from all purchases, including exchanges from other Vanguard funds, but not from reinvested dividends and capital gains. REDEMPTION OF SHARES (OTHER THAN ETF SHARES) The redemption price of shares of each Fund is the NAV next determined after the redemption request is received in good order, as defined in the Fund's prospectus. A redemption order received before the close of regular trading on the Exchange will be executed at the NAV computed on the date of receipt; a redemption order received after the close of regular trading on the Exchange will be executed at the NAV computed on the next day that the Exchange is open. 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 each 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. There is a 0.5% redemption fee charged for redemptions from the Emerging Markets Stock Index Fund. For the European Stock Index, Pacific Stock Index Fund, and FTSE All-World ex-US Index Fund, each Fund charges a redemption fee of 2% for shares held for less than two months. The redemption fee is paid to the Fund to reimburse the Fund for B-18 transaction costs it incurs while liquidating securities in order to meet fund redemptions. Shares redeemed may be worth more or less than what was paid for them, depending on the market value of the securities held by the Funds. 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 (not applicable to Vanguard Emerging Markets Stock Index Fund). - - 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 (not applicable to Vanguard Emerging Markets Stock Index Fund): - 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 (including eligibility requirements), redemption, exchange, conversion, service, or privilege at any time without prior notice; (2) accept initial purchases by telephone; (3) freeze any account and/or suspend account services when Vanguard has received reasonable notice of a dispute regarding the assets in an account, including notice of a dispute between the registered or beneficial account owners or when we reasonably believe a fraudulent transaction may occur or has occurred; (4) 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 any or all investors. These actions will be taken when, at the sole discretion of Vanguard management, we reasonably believe they are deemed to be in the best interest of a fund. 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 B-19 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. 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 and redemption fees on shareholder and participant accounts and remit these fees to the funds. The application of purchase and redemption fees and frequent-trading policies may vary among intermediaries. There are no assurances that Vanguard will successfully identify all intermediaries or that intermediaries will properly assess purchase and redemption fees or administer frequent-trading policies. If you invest with Vanguard through an intermediary, please read that firm's materials carefully to learn of any other rules or fees that may apply. MANAGEMENT OF THE FUNDS VANGUARD Each Fund is part of the Vanguard group of investment companies, which consists of more than 140 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. 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 October 31, 2006, the Funds (except the FTSE All-World ex-US Index Fund which commenced operations on March 2, 2007) had contributed $4,436,000 to Vanguard, which represented 0.01% of each Fund's net assets and was 4.44% 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 B-20 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. 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 October 31, 2006, none of the Vanguard funds' allocated share of VMC's marketing and distribution expenses was greater than 0.03% 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 advisor), 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 B-21 sales target; and (4) reasonable travel and lodging accommodations to facilitate participation in marketing and distribution activities. 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 and distribution 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 captioned "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 captioned "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 October 31, 2004, 2005, and 2006, 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 10/31/2004 10/31/2005 10/31/2006 FUND - ---- ---------- ---------- ---------- EUROPEAN STOCK INDEX FUND Management and Administrative Expenses: 0.18% 0.20% 0.19% Marketing and Distribution Expenses: .01 .02 .02 PACIFIC STOCK INDEX FUND Management and Administrative Expenses: 0.25% 0.23% 0.19% Marketing and Distribution Expenses: .02 .02 .02 EMERGING MARKETS STOCK INDEX FUND Management and Administrative Expenses: 0.22% 0.25% 0.25% Marketing and Distribution Expenses: .01 .02 .02
Vanguard FTSE All-World ex-US Index Fund did not commence operations until March 2, 2007. OFFICERS AND TRUSTEES Each Fund is governed by the board of trustees to the Trust and a single set of officers. The officers 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, 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. B-22
VANGUARD PRINCIPAL OCCUPATION(S) AND POSITION(S) FUNDS' TRUSTEE/ OUTSIDE DIRECTORSHIPS NUMBER OF VANGUARD FUNDS NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS OVERSEEN BY TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------------------- INTERESTED TRUSTEE John J. Brennan* Chairman of the May 1987 Chairman of the Board, Chief 147 (1954) Board, Chief Executive Officer, and Director Executive Officer, (Trustee) of Vanguard, and of each of and Trustee the investment companies served by Vanguard. - ----------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES Charles D. Ellis Trustee January 2001 Applecore Partners (pro bono ventures in 147 (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 147 (1945) of Rohm and Haas Co. (chemicals); Board Member of American Chemistry Council; Director of Tyco International, Ltd. (diversified manufacturing and services) since 2005; Trustee of Drexel University and the Chemical Heritage Foundation. Amy Gutmann Trustee June 2006 President of the University of Pennsylvania since 147 (1949) 2004; Professor in the School of Arts and Sciences, Annenberg School for Communication, and Graduate School of Education of the University of Pennsylvania since 2004; Provost (2001-2004) and Laurance S. Rockefeller Professor of Politics and the University Center for Human Values (1990-2004), Princeton University; Director of Carnegie Corporation of New York since 2005, and of Schuylkill River Development Corporation and Greater Philadelphia Chamber of Commerce since 2004. JoAnn Heffernan Heisen Trustee July 1998 Corporate Vice President and Chief Global Diversity 147 (1950) Officer since 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. *Officers of the Fund are "interested persons" as defined in the 1940 Act.
B-23
VANGUARD PRINCIPAL OCCUPATION(S) AND POSITION(S) FUNDS' TRUSTEE/ OUTSIDE DIRECTORSHIPS NUMBER OF VANGUARD FUNDS NAME, YEAR OF BIRTH HELD WITH FUNDS OFFICER SINCE DURING THE PAST FIVE YEARS OVERSEEN BY TRUSTEE/OFFICER - ------------------- --------------- -------------- -------------------------- --------------------------- Andre F. Perold Trustee December 2004 George Gund Professor of Finance and 147 (1952) Banking, Harvard Business School; 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; Chair of the Investment Committee of HighVista Strategies LLC (private investment firm) since 2005; Director of registered investment companies advised by Merrill Lynch Investment Managers and affiliates (1985-2004); Genbel Securities Limited (South African financial services firm) (1999-2003), Gensec Bank (1999-2003), 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, 147 (1941) and Director of NACCO Industries, Inc.(forklift trucks/housewares/lignite); Director of Goodrich Corporation (industrial products/ aircraft systems and services). J. Lawrence Wilson Trustee April 1985 Retired Chairman and Chief Executive Officer 147 (1936) of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines), and Amerisource Bergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University and of Culver Educational Foundation. EXECUTIVE OFFICERS Heidi Stam* Secretary July 2005 Managing Director of Vanguard since 2006; 147 (1956) General Counsel of Vanguard since 2005; Secretary of Vanguard, and of each of the investment companies served by Vanguard, since 2005; Principal of Vanguard (1997-2006). Thomas J. Higgins* Treasurer July 1998 Principal of Vanguard; Treasurer of each of the 147 (1957) investment companies served by Vanguard. *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 2005 and 2006, Vanguard paid Greenwich subscription fees amounting to less than $400,000. Vanguard's subscription rates are similar to those of other subscribers. Board Committees: The Trust'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 two meetings during the Funds' 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 the Funds' 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 five meetings during the Funds' last fiscal year. B-24 The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Rankin, 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 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 an 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 (except the FTSE All-World ex-US Index Fund) for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement, and the total amount of compensation paid to each trustee by all Vanguard funds. VANGUARD INTERNATIONAL EQUITY INDEX FUNDS TRUSTEES' COMPENSATION TABLE
PENSION OR RETIREMENT ACCRUED ANNUAL TOTAL COMPENSATION AGGREGATE BENEFITS ACCRUED RETIREMENT BENEFITS FROM ALL VANGUARD FUNDS COMPENSATION FROM AS PART OF THESE AT JANUARY 1, 2006/2/ PAID TO TRUSTEES/3/ TRUSTEE THESE FUNDS/1/ FUNDS' EXPENSES/1/ - ----------------------------------------------------------------------------------------------------------------------------------- John J. Brennan -- -- -- -- Charles D. Ellis $5,101 -- -- $140,000 Rajiv L. Gupta 5,206 -- -- 136,000 Amy Gutmann/4/ 2,169 -- -- 72,000 JoAnn Heffernan Heisen 5,206 $144 $2,365 140,000 Andre F. Perold 5,101 -- -- 140,000 Alfred M. Rankin, Jr. 5,206 174 4,634 152,250 J. Lawrence Wilson. 5,986 184 6,735 144,750 /1/ The amounts shown in this column are based on the Funds' fiscal year ended October 31, 2006. 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 145 Vanguard funds for the 2006 calendar year. /4/ Dr. Gutmann became a member of the Funds' board effective June 2006.
B-25 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, 2006.
DOLLAR RANGE OF FUND AGGREGATE DOLLAR RANGE OF FUND TRUSTEE SHARES OWNED BY VANGUARD FUND SHARES TRUSTEE OWNED BY TRUSTEE - --------------------------------------------------------------------------------------------------- EUROPEAN STOCK INDEX FUND John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis -- Over $100,000 Rajiv L. Gupta -- Over $100,000 Amy Gutmann -- Over $100,000 JoAnn Heffernan Heisen -- Over $100,000 Andre F. Perold -- Over $100,000 Alfred M. Rankin, Jr. -- Over $100,000 J. Lawrence Wilson Over $100,000 Over $100,000 PACIFIC STOCK INDEX FUND John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis Over $100,000 Over $100,000 Rajiv L. Gupta -- Over $100,000 Amy Gutmann -- Over $100,000 JoAnn Heffernan Heisen -- Over $100,000 Andre F. Perold -- Over $100,000 Alfred M. Rankin, Jr. -- Over $100,000 J. Lawrence Wilson -- Over $100,000 EMERGING MARKETS STOCK INDEX FUND John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis $50,001-$100,000 Over $100,000 Rajiv L. Gupta -- Over $100,000 Amy Gutmann -- Over $100,000 JoAnn Heffernan Heisen -- Over $100,000 Andre F. Perold Over $100,000 Over $100,000 Alfred M. Rankin, Jr. -- Over $100,000 J. Lawrence Wilson Over $100,000 Over $100,000
As of January 31, 2007, the trustees and executive officers of the funds owned, in the aggregate, less than 1% of each class of each fund's outstanding shares. As of January 31, 2007, those listed below owned of record 5% or more of each class' outstanding shares: Vanguard European Stock Index Fund--Investor Shares: Vanguard Total International Stock Index Fund, Malvern, PA (63.08%), Vanguard Developed Markets Index Fund, Malvern, PA (10.71%); Vanguard European Stock Index Fund--Admiral Shares: Charles Schwab & Co., Inc., San Francisco, CA (5.28%); Vanguard European Stock Index Fund--Institutional Shares: Vanguard Institutional Developed Markets Index Fund, Malvern, PA (76.99%); Vanguard Pacific Stock Index Fund--Investor Shares: Vanguard Total International Stock Index Fund, Malvern, PA (62.50%), Vanguard Developed Markets Index Fund, Malvern, PA (10.61%); Vanguard Pacific Stock Index Fund--Institutional Shares: Vanguard Institutional Developed Markets Index Fund, Malvern, PA (63.44%), Qualcomm Incorporated, San Diego, CA (8.01%); Vanguard Emerging Markets Stock Index Fund--Investor Shares: Vanguard Total International Stock Index Fund, Malvern, PA (38.91%); Vanguard Emerging Markets Stock Index Fund--Institutional Shares: Northern Trust Co., Chicago, IL (11.63%), Amica Mutual Insurance Company, Lincoln, RI (7.93%), Blue Cross and Blue Shield of Florida Inc., Jacksonville, FL (12.97%), Sema & Co., New York, NY (10.78%), C. Fred Taylor & Erica S. Taylor, Irvine, CA (9.57%). B-26 Although the Funds do not have information concerning the beneficial ownership of shares held in the names of Depository Trust Company (DTC) participants, as of January 31, 2007, the name and percentage ownership of each DTC participant that owned a record 5% or more of the outstanding ETF Shares of a Fund were as follows: Vanguard European Stock Index Fund--ETF Shares: Charles Schwab & Co., Inc. (13.65%), Citigroup Global Markets Inc. (7.75%), Morgan Stanley DW Inc. (6.93%), National Financial Services LLC (8.68%), Pershing LLC (15.13%); Vanguard Pacific Stock Index Fund--ETF Shares: Charles Schwab & Co., Inc. (12.94%), Citigroup Global Markets Inc. (5.65%), Merrill Lynch, Pierce, Fenner & Smith (6.13%), National Financial Services LLC (9.16%), Pershing LLC (15.18%), Wells Fargo Bank, N.A. (5.47%); Vanguard Emerging Markets Stock Index Fund--ETF Shares: Charles Schwab & Co., Inc. (13.46%), First Clearing, LLC (7.58%), National Financial Services LLC (11.31%), Pershing LLC (15.96%). PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES INTRODUCTION Vanguard and the Boards of Trustees of the Vanguard funds (Boards) have adopted Portfolio Holdings Disclosure Policies and Procedures (Policies and Procedures) to govern the disclosure of the portfolio holdings of each 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 1940 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 as of the most recent calendar-quarter-end (quarter-end ten largest stock holdings) 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. In addition, those funds generally will seek to disclose the fund's ten largest stock portfolio holdings as of the most recent month-end (month-end ten largest stock holdings, and together with quarter-end ten largest stock holdings, ten largest stock holdings) online at www.vanguard.com in the "Holdings" section of the fund's Profile page, 10 business days after the end of the month. 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 B-27 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 that make up the fund, such as cash investments and derivatives. As of October 31, 2006, Vanguard fund complete portfolio holdings are disclosed to the following Service Providers as part of ongoing arrangements that serve legitimate business purposes: Advisor Software, Inc., 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., State Street Investment Manager Solutions, Triune Color Corporation, and Tursack Printing Inc. 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 B-28 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 that make up 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 October 31, 2006, Vanguard fund complete portfolio holdings are disclosed to the following Affiliates and Fiduciaries as part of ongoing arrangements that serve legitimate business purposes: Vanguard, and each investment advisor, custodian, and independent registered public accounting firm 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 that make up 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 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. As of October 31, 2006, Vanguard non-material portfolio holdings information is disclosed to KPMG, LLP, and R.V. Kuhns & Associates. B-29 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 (ETF Funds) that offer a class of shares known as Vanguard ETF Shares in accordance with the terms and conditions of related exemptive orders (Vanguard ETF Exemptive Orders) issued by the Securities and Exchange Commission (SEC), as described further below. Unlike the conventional classes of shares issued by ETF Funds, the ETF Shares are listed for trading on the American Stock Exchange (AMEX). Each ETF Fund issues ETF 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 ETF 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 ETF 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 Vanguard ETF 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 ETF 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 an ETF Share, and (2) every 15 seconds throughout the trading day, separately from the consolidated tape, a calculation of the estimated NAV of an ETF 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, ETF Shares are selling at a premium or at a discount to NAV. ETF Shares are listed on the AMEX and traded in the secondary market in the same manner as other equity securities. The price of ETF Shares trading on the secondary market is based on a current bid/offer market. As contemplated by the Vanguard ETF Exemptive Orders, Vanguard and the ETF Funds expect that only institutional arbitrageurs and institutional investors with large indexed portfolios will buy and sell ETF 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 ETF Shares, also may purchase Creation Units for use in its market-making activities on the AMEX. Vanguard and the ETF Funds expect secondary market purchasers of ETF Shares will include both institutional and retail investors. Vanguard and the ETF Funds believe that arbitrageurs will purchase or redeem Creation Units to take advantage of discrepancies between the ETF Shares' market price and the ETF Shares' underlying NAV. Vanguard and the ETF Funds expect that this arbitrage activity will provide a market "discipline" that will result in a close correspondence between the price at which the ETF Shares trade and their NAV. In other words, Vanguard and the ETF Funds do not expect the ETF 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 ETF 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 ETF 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 ETF Fund would be immaterial and would not convey any advantage to the recipient in making an investment decision concerning the ETF 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 ETF 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, in 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, B-30 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 that make up 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-1 under the 1940 Act). Furthermore, Vanguard's management, in its sole discretion, may determine not to disclose portfolio holdings or other investment positions that make up 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. 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 Funds receive all investment advisory services from Vanguard, through its Quantitative Equity Group. These services are provided on an at-cost basis from an experienced advisory staff employed directly by Vanguard. The compensation and other expenses of the advisory staff are allocated among the funds utilizing these services. During the fiscal years ended October 31, 2004, 2005, and 2006, the Funds incurred expenses for investment advisory services of approximately the following amounts:
FISCAL YEAR FISCAL YEAR FISCAL YEAR ENDED ENDED ENDED FUND 10/31/2004 10/31/2005 10/31/2006 ---- ---------- ---------- ---------- Vanguard European Stock Index Fund $121,000 $189,000 $221,000 Vanguard Pacific Stock Index Fund 121,000 171,000 136,000 Vanguard Emerging Markets Stock Index Fund 121,000 168,000 126,000
B-31 OTHER ACCOUNTS MANAGED Duane F. Kelly manages the European Stock Index Fund and the Emerging Markets Stock Index Fund, which, as of October 31, 2006, collectively held assets of $34.2 billion. Mr. Kelly also manages the FTSE All-World ex-US Index Fund which commenced operations on March 2, 2007. In addition, Mr. Kelly managed 14 other registered investment companies with total assets of $16.8 billion and two other pooled investment vehicles with total assets of $871 million, as of October 31, 2006. Michael Buek manages the Pacific Stock Index Fund, which, as of October 31, 2006, held assets of $11.4 billion. Mr. Buek managed six other registered investment companies with total assets of $139.6 billion and six other pooled investment vehicles with total assets of $3.7 billion, as of October 31, 2006. 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. Managing multiple accounts may give rise to potential conflicts of interest including, for example, conflicts among investment strategies and conflicts in the allocation of investment opportunities. Vanguard manages potential conflicts between funds or with other types of accounts through allocation policies and procedures, internal 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 Each Fund's portfolio manager is a Vanguard employee. This section describes the compensation of the Vanguard employees who manage Vanguard mutual funds. As of October 31, 2006, 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 objective, policies, strategies, and limitations, and the market environment during the measurement period. This performance factor is not based on the value of assets held in the fund's portfolio. For each Fund, the performance factor depends on how closely the portfolio manager tracks the fund's benchmark index over a one-year period. For the European Stock Index Fund, Pacific Stock Index Fund, Emerging Markets Stock Index Fund, and the FTSE All-World ex-US Index Fund, the benchmark index is the Morgan Stanley Capital International/(R)/ (MSCI/(R)/) Europe Index, MSCI Pacific Index, MSCI Emerging Markets Stock Index, and FTSE All-World ex US Index, respectively. 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 B-32 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. 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 October 31, 2006, Vanguard employees collectively invested $1.8 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 October 31, 2006, Mr. Kelly owned no shares of the European Stock Index Fund and owned shares of the Emerging Markets Stock Index Fund within the $50,001-$100,000 range. As of October 31, 2006, Mr. Buek owned shares of the Pacific Stock Index Fund within the $1-$10,000 range. DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENT The Fourth Amended and Restated Funds' Service Agreement, which governs the at-cost investment advisory services provided to the Funds, will continue in full force and effect until terminated or amended by mutual agreement of the Funds and Vanguard. 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 advisor 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. As of October 31, 2006, each Fund held no securities of its "regular brokers or dealers," as that term is defined in Rule 10b-1 of the 1940 Act. 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 advisor. If such securities are compatible with the investment policies of a Fund and one or more of the advisor's other clients, and are considered for purchase or sale at or about the same time, then transactions 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. During the fiscal years ended October 31, 2004, 2005, and 2006, the Funds paid brokerage commissions in the following amounts:
FISCAL FISCAL YEAR FISCAL YEAR YEAR ENDED ENDED ENDED FUND 10/31/2004 10/31/2005 10/31/2006 ---- ---------- ---------- ---------- European Stock Index $5,057,000 $8,840,000 $11,056,000 Pacific Stock Index 376,000 718,000 1,141,000 Emerging Markets Stock Index 2,034,000 3,649,000 11,797,000
Vanguard FTSE All-World ex-US Index Fund did not commence operations until March 2, 2007. B-33 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), composed 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. 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 those purposes 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 fund, 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. 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 Nominated slate results in board comprised of a majority of non- comprised of a majority of independent directors. independent directors. All members of Audit, Audit, Nominating, and/or Compensation committees include Nominating, and Compensation committees non-independent members. are independent of management. 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-34 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. 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) delivering market-competitive total pay. feature.
B. BONUS PLANS Bonus plans, which must be periodically submitted for shareholder approval to qualify for deductibility under Section 162(m) of the IRC, 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. B-35 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. 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. B-36 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 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 B-37 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. INFORMATION ABOUT THE ETF SHARE CLASS Each Fund offers and issues an exchange-traded class of shares called ETF Shares. Each Fund issues ETF 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 Funds' Distributor. Each ETF Fund issues Creation Units in kind, in exchange for a basket of portfolio securities (Deposit Securities). Each ETF Fund also redeems Creation Units in kind; an investor who tenders a Creation Unit will receive an in-kind redemption of portfolio securities (Redemption Securities). The Deposit Securities and the Redemption Securities will usually, but may not always, be the same. The Deposit Securities and Redemption Securities may include American Depository Receipts (ADRs). 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. Each ETF Fund reserves the right to issue Creation Units for cash, rather than in kind. As of the date of this Statement of Additional Information, cash purchases and redemptions will be required for securities traded in Brazil, Chile, India, Malaysia, South Korea, and Taiwan. EXCHANGE LISTING AND TRADING The ETF Shares have been approved for listing on the American Stock Exchange (AMEX) and will trade on the AMEX at market prices that may differ from net asset value. There can be no assurance that, in the future, ETF Shares will continue to meet all of the AMEX's listing requirements. The AMEX may, but is not required to, delist a Fund's ETF 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 ETF Shares for 30 or B-38 more consecutive trading days; (2) the value of the target index tracked by the 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 ETF Shares upon termination of the ETF Share class. As with any stock traded on an exchange, purchases and sales of ETF Shares will be subject to usual and customary brokerage commissions. The AMEX disseminates through the facilities of the Consolidated Tape Association an updated "indicative optimized portfolio value" (IOPV) for each Fund as calculated by an information provider. The Funds are not involved with or responsible for the calculation or dissemination of the IOPVs, and they make no warranty as to the accuracy of the IOPVs. An IOPV for each Fund's ETF Shares is disseminated every 15 seconds during regular AMEX trading hours. An IOPV has an equity securities value component and a cash component. The equity securities values included in an IOPV are based on the real time market prices of the Deposit Securities for a Fund's ETF Shares. The IOPV is designed as an estimate of a Fund's net asset value at a particular point in time, but it is only an estimate and it should not be viewed as the actual net asset value, which is calculated once each day. CONVERSIONS AND EXCHANGES Owners of conventional shares issued by an ETF Fund (Investor, Admiral, Signal, or Institutional Shares) may convert those shares into ETF Shares of equivalent value of the same Fund. Please note that investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into ETF Shares. Vanguard will impose a charge on conversion transactions and reserves the right, in the future, to limit or terminate the conversion privilege. ETF Shares, whether acquired through a conversion or purchased on the secondary market, cannot be converted into shares of another class of the same Fund. Similarly, ETF Shares of one Fund cannot be exchanged for ETF Shares of another Fund. Investors that are not Authorized Participants must hold ETF Shares in a brokerage account. Thus, before converting conventional shares into ETF Shares, an investor must have an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into ETF 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 ETF 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 ETF Shares will be known only to his or her broker. Next, the broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into ETF Shares of equivalent value, based on the respective net asset values of the two share classes. The Fund's transfer agent will reflect ownership of all ETF Shares in the name of the DTC. The DTC will keep track of which ETF Shares belong to the broker and the broker, in turn, will keep track of which ETF Shares belong to its customers. Because the 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 ETF Shares, the DTC account would receive 90 ETF Shares. Conventional shares worth 0.750 ETF Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. The broker then could either (1) take certain internal actions necessary to credit the investor's account with 0.750 ETF Shares rather than 2.481 conventional shares, or (2) redeem the 2.481 conventional shares at net asset value, in which case 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 ETF Shares through an account at Vanguard Brokerage Services (VBS/(R)/). If the investor converts his or her conventional shares to ETF Shares through VBS, all conventional shares for which he or she requests conversion will be converted into the equivalent amount of ETF 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 Fund into ETF Shares: - - The conversion transaction is nontaxable except, as applicable, to the limited extent described above. B-39 - - The conversion process can take anywhere from several days to several weeks, depending on the broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day. Vanguard imposes conversion blackout windows around the dates when a fund with ETF Shares declares dividends. This is necessary to prevent a shareholder from collecting a dividend from both the conventional share class currently held and also from the ETF share class into which the shares will be converted. - - 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 ETF Shares. BOOK ENTRY ONLY SYSTEM Vanguard ETF/ /Shares are registered in the name of the DTC or its nominee, Cede & Co., and deposited with, or on behalf of, the DTC. The 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 the DTC. More specifically, the DTC is owned by a number of its DTC Participants and by the New York Stock Exchange (NYSE), the 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 ETF Shares is limited to DTC Participants, Indirect Participants, and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in ETF 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 ETF Shares. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in ETF Shares. Each Fund recognizes the DTC or its nominee as the record owner of all ETF Shares for all purposes. Beneficial Owners of ETF Shares are not entitled to have ETF 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 the 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 ETF 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 ETF Shares of each Fund held by each DTC Participant. The Trust shall obtain from each such DTC Participant the number of Beneficial Owners holding ETF 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, 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 the DTC or its nominee as the registered holder of all ETF Shares. The 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 ETF Shares of the appropriate Fund as shown on the records of the DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of ETF Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now B-40 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 ETF Shares, or for maintaining, supervising, or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between the DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. The DTC may determine to discontinue providing its service with respect to ETF 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 the DTC to perform its functions at a comparable cost or, if such replacement is unavailable, to issue and deliver printed certificates representing ownership of ETF Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the AMEX (or such other exchange on which ETF Shares may be listed). PURCHASE AND ISSUANCE OF ETF SHARES IN CREATION UNITS The ETF Funds issue and sell ETF 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 ETF Funds 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 (Washington's Birthday), 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 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 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 Fund to the purchaser in cash (except as offset by the Transaction Fee, described below). Vanguard, through the National Securities Clearing Corporation (NSCC), 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 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 Fund until such time as the next-announced Fund Deposit composition is made available. Each Fund reserves the right to accept a nonconforming Fund Deposit. The identity and number of shares of the Deposit Securities required for a Fund Deposit may change from one day to another to reflect rebalancing adjustments and corporate actions by the 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. 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 Fund, and the Fund's determination shall be final and binding. B-41 PROCEDURES FOR PURCHASING CREATION UNITS To be eligible to place orders with the Distributor and to purchase Creation Units from a 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. To initiate a purchase order for a Creation Unit, 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 Distributor shall inform the Fund's Custodian of the order. The Custodian will then inform the appropriate foreign subcustodians. Each subcustodian shall maintain an account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, the relevant Deposit Securities (or the cash value of all or part of such securities, in the case of a permitted or required cash purchase or "cash in lieu" amount), with any appropriate adjustments as advised by Vanguard. Deposit Securities must be delivered to an account maintained at the applicable local subcustodians. Those placing orders to purchase Creation Units through an Authorized Participant should allow sufficient time to permit proper submission of the purchase order to the Distributor by the cut-off time on the Business Day. The Authorized Participant must also make available on or before the contractual settlement date, by means satisfactory to the Fund, immediately available or same day funds estimated by the Fund to be sufficient to pay the Cash Component next determined after acceptance of the purchase order, together with the applicable Transaction Fee. Any excess funds will be returned following settlement of the issue of the Creation Unit. 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. 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. An order to purchase Creation Units 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 the appropriate parties do 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. Except as provided herein, a Creation Unit will not be issued until the transfer of good title to the Fund of the Deposit Securities and the payment of the Cash Component have been completed. When each subcustodian has confirmed to the Custodian that the required securities included in the Fund Deposit have been delivered to the account of the relevant subcustodian, and the Cash Component has been delivered to the Custodian, the Distributor shall be notified of such delivery, and the Fund will issue and cause the delivery of the Creation Unit. A 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, cash totaling at least 103% of the market value of the undelivered Deposit Securities (the Additional Cash Deposit) in accordance with the Fund's procedures. The order shall be deemed to be received on the Business Day on which the order is placed provided that the order is placed in proper form prior to Closing Time on such date. If the order is not placed in proper form by 4 p.m, then the Fund may reject the order and the investor shall be liable to the Fund for losses, if any, resulting therefrom. B-42 Information concerning the Funds' current procedures for use of collateral under these circumstances is available from the Distributor. The Funds will be permitted to purchase missing Deposit Securities at any time and the Authorized Participant will be subject to liability for any shortfall between the cost to the Fund of purchasing the missing Deposit Securities and the cash collateral. ACCEPTANCE OF PURCHASE ORDERS Subject to the conditions that (1) an irrevocable purchase order has been submitted by the Authorized Participant (either on its own or another investor's behalf) not later than the Closing Time, and (2) arrangements satisfactory to the Fund are in place for payment of the Cash Component and any other cash amounts which may be due, the Fund will accept the order, subject to its right to reject any order until acceptance. REJECTION OF PURCHASE ORDERS Each of the Funds reserves the absolute right to reject a purchase order. By way of example, and not limitation, a Fund will reject a purchase order if: - - the order is not in proper form; - - the investor(s), upon obtaining the ETF 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, as described above; - - acceptance of the Deposit Securities would have certain adverse tax consequences to the 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 Fund or Vanguard, have an adverse effect on the Fund or any of its shareholders; or - - circumstances outside the control of the Fund, the Transfer Agent, the Custodian, the subcustodian(s), 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 Custodian, the subcustodian(s), 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 Funds, Vanguard, the Transfer Agent, the Custodian, the subcustodian(s), 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. TRANSACTION FEE ON PURCHASES OF CREATION UNITS Each of the Funds 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. When a Fund permits or requires 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. The transaction fees for in-kind and cash purchases (when available or specified) are listed in the table below. This table is subject to revision from time to time. Investors are also responsible for payment of the costs of transferring the Deposit Securities to the Fund. B-43
TRANSACTION FEE MAXIMUM ADDITIONAL ON PURCHASES VARIABLE CHARGE FOR ETF SHARES CASH PURCHASES/1/ ---------- ------------ ----------------- European ETF $9,600 2.00% Pacific ETF 7,200 2.00 Emerging Markets ETF 9,300 2.00 FTSE All-World ex-US ETF 22,000 2.00 1 As a percentage of the cash in lieu amount invested.
REDEMPTION OF ETF SHARES IN CREATION UNITS ETF Shares may be redeemed only in Creation Units; a Fund will not redeem ETF 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 ETF 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 received on a Business Day in good order will receive the NAV next determined after the request is made. Unless cash redemptions are available or specified for a Fund, 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 a Fund and a redeeming investor mutually agree, the Fund may provide the investor with a basket of Redemption Securities that differs from the composition of the redemption basket published through NSCC. TRANSACTION FEE ON REDEMPTIONS OF CREATION UNITS Each of the Funds imposes a transaction fee (payable to the Fund) to compensate the Fund for the transfer and other transaction costs associated with the redemption of Creation Units. When an ETF 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 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. The transaction fees for redemptions in kind and for cash and the additional variable charge for cash redemptions (when cash redemptions are available or specified) are listed in the table below. This table is subject to revision from time to time. Investors are also responsible for payment of the costs of transferring the Redemption Securities from the Fund to their account.
MAXIMUM ADDITIONAL VARIABLE TRANSACTION FEE CHARGE FOR ETF SHARES ON REDEMPTIONS CASH REDEMPTIONS/1/ ---------- -------------- ------------------- European ETF $9,600 2.00% Pacific ETF 7,200 2.00 Emerging Markets ETF 9,300 2.00 FTSE All-World ex-US ETF 22,000 2.00 1 As a percentage of the cash in lieu amount redeemed.
B-44 PLACEMENT OF REDEMPTION ORDERS Redemption requests for Creation Units must be submitted to the Distributor by or through an Authorized Participant on a Business Day between the hours of 9 a.m. and 4 p.m., Eastern time. Investors are responsible for making arrangements for redemption requests to be made through Authorized Participants. The Distributor will provide a list of current Authorized Participants upon request. Investors making a redemption request should be aware that such request must be in the form specified by the Authorized Participant. Investors making a redemption request should allow sufficient time to permit proper submission of the request by an Authorized Participant and transfer of the ETF Shares to the Fund's Transfer Agent. Investors should also allow for the additional time that may be requested to effect redemptions through their financial intermediaries if such intermediaries are not Authorized Participants. An order to redeem a Creation Unit of a Fund 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 ETF 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. The calculation of the value of the Redemption Securities and the Cash Redemption Amount to be delivered upon redemption will be made by the Fund 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 Fund on such Transmittal Date. Each 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 ETF 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. A redemption request is considered to be in "proper form" if (1) an Authorized Participant has transferred or caused to be transferred to the Fund's Transfer Agent the Creation Unit being redeemed through the book-entry system of the DTC so as to be effective by the AMEX closing time on a day on which the AMEX is open for business and (2) a request satisfactory to the Fund is received by the Distributor from the Authorized Participant on behalf of itself or another redeeming investor within the time periods specified above. Upon receiving a redemption request, the Distributor shall notify the Fund and the Fund's Transfer Agent of such redemption request. The tender of an investor's ETF Shares for redemption and the distribution of the cash redemption payment in respect of Creation Units redeemed will be effected through the DTC and the relevant Authorized Participant to the beneficial owner thereof as recorded on the book-entry system of the DTC or the DTC Participant through which such investor holds ETF Shares, as the case may be, or by such other means specified by the Authorized Participant submitting the redemption request. In connection with taking delivery of shares of Redemption Securities upon redemption of a Creation Unit, a redeeming Beneficial Owner or Authorized Participant acting on behalf of such Beneficial Owner must maintain appropriate security arrangements with a qualified broker-dealer, bank, or other custody provider in each jurisdiction in which any of the Redemption Securities are customarily traded, to which account such Deposit Securities will be delivered. Deliveries of redemption proceeds by the Funds relating to those countries generally will be made within three business days. Due to the schedule of holidays in certain countries, however, the delivery of in-kind redemption proceeds may take longer than three business days after the day on which the redemption request is received in proper form. For each country relating to a Fund, Appendix A identifies the instances where more than seven days would be needed to deliver redemption proceeds. If neither the redeeming Beneficial Owner nor the Authorized Participant acting on behalf of the redeeming Beneficial Owner has appropriate arrangements to take delivery of the Redemption Securities in the applicable foreign jurisdiction B-45 and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the Redemption Securities in such jurisdiction, the Fund may in its discretion exercise its option to redeem such shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In such case, the investor will receive a cash payment equal to the net asset value of the Creation Unit redeemed after the redemption request is received in proper form (minus a redemption transaction fee and additional variable charge for cash redemptions specified above, to offset the Fund's brokerage and other transaction costs associated with the disposition of Redemption Securities of the Fund). Redemptions of Creation Units will be subject to compliance with applicable United States federal and state securities laws and each Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund could not lawfully deliver specific Redemption Securities upon redemptions or could not do so without first registering the Redemption Securities. Although the ETF Funds do not ordinarily permit cash redemptions of Creation Units, in the event that cash redemptions are permitted or required by a Fund, proceeds will be paid to the Authorized Participant redeeming shares on behalf of the redeeming investor as soon as practicable after the date of redemption (within seven calendar days thereafter, except for the instances listed in Appendix A hereto where more than seven calendar days would be needed). To the extent contemplated by an Authorized Participant's agreement with the Distributor, in the event the Authorized Participant that has submitted a redemption request in proper form is unable to transfer all or part of the Creation Unit to be redeemed to the Fund at or prior to 4 p.m. on the business day of submission of such redemption request, the Distributor will nonetheless accept the redemption in reliance on the undertaking by the Authorized Participant to deliver the missing ETF Shares as soon as possible, which undertaking shall be secured by the Authorized Participant's delivery and maintenance of collateral consisting of cash having a value at least equal to 103% of the value of the missing ETF Shares in accordance with the Fund's then-effective procedures. Information concerning the Funds' current procedures for use of collateral under these circumstances is available from the Distributor. The only collateral that is acceptable to the Fund is cash in U.S. dollars. The Fund's current procedures for collateralization of missing ETF Shares require, among other things, that any cash collateral shall be in the form of U.S. dollars in immediately available funds, and that the fees of the custodian and any subcustodians in respect of the delivery, maintenance and redelivery of the cash collateral shall be payable by the Authorized Participant. The Authorized Participant Agreement permits the Fund to purchase the missing ETF Shares or acquire the Redemption Securities and the Cash Component underlying such ETF Shares at any time and subjects the Authorized Participant to liability for any shortfall between the cost to the Fund of purchasing such ETF Shares, Redemption Securities, or Cash Component and the cash collateral or the amount that may be drawn under any letter of credit. Because the Redemption Securities of a Fund may trade on the relevant exchange(s) on days that the AMEX is closed, stockholders may not be able to redeem their shares of such Fund, or to purchase or sell ETF Shares on the AMEX, on days when the net asset value of such Fund could be significantly affected by events in the relevant foreign markets. The right of redemption may be suspended or the date of payment postponed with respect to any Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the NYSE is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Fund's portfolio securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstances as is permitted by the SEC. APPENDIX A--ETF SHARES: FOREIGN MARKET INFORMATION The ETF Funds generally intend to deliver Redemption Securities on a basis of "T" plus three Business Days. The Funds may effect deliveries of Redemption Securities on a basis other than T plus three to accommodate local holiday schedules or under certain other circumstances. The ability of the Funds to effect in-kind redemptions within three Business Days of receipt of a redemption request is subject, among other things, to the condition that, within the time period from the date of the request to the date of delivery of the securities, there are no days that are local market holidays that are Business Days. For every occurrence of one or more intervening holidays in the local market that are local holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Funds from delivering securities within three Business Days. The securities delivery cycles currently practicable for transferring Redemption Securities to redeeming investors, coupled with local market holiday schedules, will require a delivery process longer than seven calendar days in certain circumstances, during the calendar year 2007. The holidays applicable to each Fund during such periods are listed as B-46 follows, as are instances where more than seven days will be needed to deliver redemption proceeds. Although certain holidays may occur on different dates in subsequent years, the number of days required to deliver redemption proceeds in any given year is not expected to exceed the maximum number of days listed below for each Fund. The proclamation of new holidays, the treatment by market participants of certain days as "informal holidays" (e.g., days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays, or changes in local securities delivery practices, could affect the information set forth herein at some time in the future. VANGUARD EUROPEAN ETF SHARES REGULAR HOLIDAYS. The dates in the calendar year 2007 on which the regular holidays affect the relevant securities markets are as follows AUSTRIA ------- January 1 December 25 April 6 December 26 April 9 May 1 BELGIUM ------- January 1 May 18 December 26 April 6 May 28 April 9 August 15 May 1 November 1 May 17 December 25 DENMARK ------- January 1 May 17 December 26 April 5 May 28 December 31 April 6 June 5 April 9 December 24 May 4 December 25 FINLAND ------- January 1 June 22 December 31 April 6 December 6 April 9 December 24 May 1 December 25 May 17 December 26 FRANCE ------ January 1 December 26 April 6 April 9 May 1 December 25 GERMANY ------- January 1 December 24 April 6 December 25 April 9 December 26 May 1 December 31 May 28 B-47 GREECE ------ January 1 May 28 February 19 August 15 April 6 December 25 April 9 December 26 May 1 IRELAND ------- January 1 June 4 April 6 December 24 April 9 December 25 May 1 December 26 May 7 ITALY ----- January 1 December 24 April 6 December 25 April 9 December 26 May 1 December 31 August 15 NETHERLANDS ----------- January 1 December 26 April 6 April 9 May 1 December 25 NORWAY ------ January 1 May 1 December 26 April 4 May 17 December 31 April 5 May 28 April 6 December 24 April 9 December 25 PORTUGAL -------- January 1 December 26 April 6 April 9 May 1 December 25 SPAIN ----- January 1 December 25 April 6 December 26 April 9 December 31 May 1 December 24 SWEDEN ------ January 1 April 30 June 22 December 31 January 5 May 1 November 2 April 5 May 16 December 24 April 6 May 17 December 25 April 9 June 6 December 26 B-48 SWITZERLAND ----------- January 1 May 17 December 26 January 2 May 28 December 31 April 6 August 1 April 9 December 24 May 1 December 25 UNITED KINGDOM -------------- January 1 May 1 September 3 December 26 January 15 May 7 October 8 February 19 May 28 November 12 April 6 July 4 November 22 April 9 August 27 December 25 REDEMPTION. A redemption request over the following holidays would result in a settlement period that will exceed seven calendar days (examples are based on the days particular holidays fall during the calendar year 2007). The longest redemption cycle for European ETF Shares is a function of the longest redemption cycles among the markets whose stocks make up this Fund. DENMARK ------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 4/2/2007 4/10/2007 T+8 12/19/2007 12/27/2007 T+8 FINLAND ------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 NORWAY ------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 4/2/2007 4/10/2007 T+8 12/19/2007 12/27/2007 T+8 SWEDEN ------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 SWITZERLAND ----------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 In 2007, 8 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request for European ETF Shares. B-49 VANGUARD PACIFIC ETF SHARES REGULAR HOLIDAYS. The dates in the calendar year 2007 on which the regular holidays affect the relevant securities markets are as follows: AUSTRALIA --------- January 1 April 9 November 6 January 26 April 25 December 24 March 12 June 11 December 25 April 5 August 6 December 26 April 6 October 1 December 31 HONG KONG --------- January 1 April 9 September 26 December 26 February 19 May 1 October 1 December 31 February 20 May 24 October 19 April 4 June 19 December 24 April 6 July 2 December 25 JAPAN ----- January 1 March 21 September 24 January 2 April 30 October 8 January 3 May 3 November 23 January 4 May 4 December 24 January 8 July 16 December 28 February 12 September 17 December 31 NEW ZEALAND ----------- January 1 April 25 December 26 January 2 June 4 December 31 February 6 October 22 April 6 December 24 April 9 December 25 SINGAPORE --------- January 1 May 1 December 25 January 2 May 31 February 19 August 9 February 20 November 8 April 6 December 20 In 2007, 7 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request for Pacific ETF Shares. VANGUARD EMERGING MARKETS ETF SHARES REGULAR HOLIDAYS. The dates in the calendar year 2007 on which the regular holidays affect the relevant securities markets are as follows: ARGENTINA --------- January 1 May 25 November 6 April 2 June 18 December 25 April 5 July 9 April 6 August 20 May 1 October 15 B-50 BRAZIL ------ January 1 May 1 November 15 January 25 June 7 November 20 February 19 July 9 December 24 February 20 September 7 December 25 February 21 October 12 December 31 April 6 November 2 CHILE ----- January 1 July 16 November 1 April 6 August 15 December 25 May 1 September 18 December 31 May 21 September 19 July 2 October 15 CHINA ----- January 1 February 23 May 24 October 2 December 25 January 2 April 5 May 28 October 3 December 26 January 3 April 6 June 19 October 4 January 15 April 9 July 2 October 5 February 19 May 1 July 4 October 8 February 20 May 2 September 3 October 19 February 21 May 3 September 26 November 12 February 22 May 4 October 1 November 22 COLOMBIA -------- January 1 May 1 July 20 November 12 January 8 May 21 August 7 December 25 March 19 June 11 August 20 April 5 June 18 October 15 April 6 July 2 November 5 CZECH REPUBLIC -------------- January 1 September 28 April 9 December 24 May 1 December 25 May 8 December 26 July 5 July 6 EGYPT ----- January 1 April 25 December 20 January 2 May 1 December 21 January 7 July 1 January 21 July 23 April 8 October 14 April 9 December 19 HUNGARY ------- January 1 April 30 October 23 December 25 March 10 May 1 October 27 December 26 March 15 May 28 November 1 December 29 March 16 August 20 November 2 December 31 April 9 October 20 December 22 April 21 October 22 December 24 B-51 INDIA ----- January 1 March 27 August 20 January 26 April 6 October 2 January 30 May 1 November 9 February 16 May 2 December 21 March 19 August 15 December 25 INDONESIA --------- January 1 June 1 December 20 March 19 August 17 December 21 April 6 October 12 December 24 May 17 October 15 December 25 May 18 October 16 ISRAEL ------ March 4 April 8 May 23 September 27 October 4 April 2 April 9 July 24 September 30 April 3 April 23 September 12 October 1 April 4 April 24 September 13 October 2 April 5 May 22 September 26 October 3 JORDAN ------ January 1 January 30 October 16 January 2 April 1 November 14 January 3 May 1 December 25 January 4 October 14 January 21 October 15 MALAYSIA -------- January 1 May 1 December 20 January 2 May 2 December 25 February 1 August 31 February 19 October 15 February 20 November 8 MEXICO ------ January 1 May 1 February 5 November 2 March 19 November 19 April 5 December 12 April 6 December 25 MOROCCO ------- January 1 August 14 December 21 January 11 August 20 January 20 August 21 May 1 November 6 July 30 December 20 PAKISTAN -------- January 1 February 5 October 11 December 25 January 2 March 23 October 12 January 3 May 1 November 9 January 29 August 14 December 18 January 30 September 12 December 19 B-52 PERU ---- January 1 May 1 October 8 April 5 June 29 November 1 April 6 August 30 December 25 PHILIPPINES ----------- January 1 June 12 December 31 April 5 August 21 April 6 November 1 April 9 November 30 May 1 December 25 POLAND ------ January 1 June 7 December 26 April 6 August 15 April 9 November 1 May 1 December 24 May 3 December 25 RUSSIA ------ January 1 January 8 May 1 November 5 January 2 February 23 May 9 December 29 January 3 March 8 June 9 December 31 January 4 April 28 June 11 January 5 April 30 June 12 SOUTH AFRICA ------------ January 1 May 1 December 26 March 21 August 9 April 6 September 24 April 9 December 17 April 27 December 25 SOUTH KOREA ----------- January 1 June 6 September 26 February 19 July 17 October 3 March 1 August 15 December 19 May 1 September 24 December 25 May 24 September 25 December 31 TAIWAN ------ January 1 February 21 April 5 June 19 October 10 February 15 February 22 April 6 June 23 February 16 February 23 April 14 September 24 February 19 February 28 May 1 September 25 February 20 March 3 June 18 September 29 THAILAND -------- January 1 April 16 August 13 January 2 May 1 October 23 March 5 May 7 December 5 March 6 May 31 December 10 April 13 July 30 December 31 B-53 TURKEY ------ January 1 October 11 December 21 January 2 October 12 January 3 October 29 April 23 December 19 August 30 December 20 REDEMPTION. A redemption request over the following holidays would result in a settlement period that will exceed seven calendar days (examples are based on the days particular holidays fall during the calendar year 2007). The longest redemption cycle for Emerging Market ETF Shares is a function of the longest redemption cycles among the markets whose stocks make up this Fund: CHINA ----- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 2/14/2007 2/26/2007 T+12 4/2/2007 4/10/2007 T+8 4/26/2007 5/7/2007 T+11 9/26/2007 10/9/2007 T+13 CZECH REPUBLIC -------------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 HUNGARY ------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 INDONESIA --------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 10/9/2007 10/17/2007 T+8 12/18/2007 12/26/2007 T+8 PHILIPPINES ----------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 4/2/2007 4/10/2007 T+8 SOUTH AFRICA ------------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 3/30/2007 4/10/2007 T+11 12/18/2007 12/27/2007 T+9 TAIWAN ------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 2/16/2007 2/26/2007 T+10 B-54 In 2007, 13 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request for Emerging Markets ETF Shares. VANGUARD FTSE ALL-WORLD EX-US ETF SHARES REGULAR HOLIDAYS. The dates in the calendar year 2007 on which the regular holidays affect the relevant securities markets are as follows: ARGENTINA --------- January 1 May 25 November 6 April 2 June 18 December 25 April 5 July 9 April 6 August 20 May 1 October 15 AUSTRALIA --------- January 1 April 9 November 6 January 26 April 25 December 24 March 12 June 11 December 25 April 5 August 6 December 26 April 6 October 1 December 31 AUSTRIA ------- January 1 December 25 April 6 December 26 April 9 May 1 BELGIUM ------- January 1 May 18 December 26 April 6 May 28 April 9 August 15 May 1 November 1 May 17 December 25 BERMUDA ------- January 1 August 3 April 6 September 3 May 24 December 25 June 11 December 26 August 2 BRAZIL ------ January 1 May 1 November 15 January 25 June 7 November 20 February 19 July 9 December 24 February 20 September 7 December 25 February 21 October 12 December 31 April 6 November 2 CANADA ------ January 1 May 21 August 6 December 25 January 15 May 28 September 3 December 26 February 19 July 2 October 8 April 6 July 4 November22 B-55 CHILE ----- January 1 July 16 November 1 April 6 August 15 December 25 May 1 September 18 December 31 May 21 September 19 July 2 October 15 CHINA ----- January 1 February 23 May 24 October 2 December 25 January 2 April 5 May 28 October 3 December 26 January 3 April 6 June 19 October 4 January 15 April 9 July 2 October 5 February 19 May 1 July 4 October 8 February 20 May 2 September 3 October 19 February 21 May 3 September 26 November 12 February 22 May 4 October 1 November 22 COLOMBIA -------- January 1 May 1 July 20 November 12 January 8 May 21 August 7 December 25 March 19 June 11 August 20 April 5 June 18 October 15 April 6 July 2 November 5 DENMARK ------- January 1 May 17 December 26 April 5 May 28 December 31 April 6 June 5 April 9 December 24 May 4 December 25 EGYPT ----- January 1 April 25 December 20 January 2 May 1 December 21 January 7 July 1 January 21 July 23 April 8 October 14 April 9 December 19 FINLAND ------- January 1 June 22 December 31 April 6 December 6 April 9 December 24 May 1 December 25 May 17 December 26 FRANCE ------ January 1 December 26 April 6 April 9 May 1 December 25 B-56 GERMANY ------- January 1 December 24 April 6 December 25 April 9 December 26 May 1 December 31 May 28 GREECE ------ January 1 May 28 February 19 August 15 April 6 December 25 April 9 December 26 May 1 HONG KONG --------- January 1 April 6 June 19 October 19 December 31 February 19 April 9 July 2 December 24 February 20 May 1 September 26 December 25 April 4 May 24 October 1 December 26 HUNGARY ------- January 1 April 30 October 23 December 25 March 10 May 1 October 27 December 26 March 15 May 28 November 1 December 29 March 16 August 20 November 2 December 31 April 9 October 20 December 22 April 21 October 22 December 24 INDIA ----- January 1 March 27 August 20 January 26 April 6 October 2 January 30 May 1 November 9 February 16 May 2 December 21 March 19 August 15 December 25 INDONESIA --------- January 1 June 1 December 20 March 19 August 17 December 21 April 6 October 12 December 24 May 17 October 15 December 25 May 18 October 16 IRELAND ------- January 1 June 4 April 6 December 24 April 9 December 25 May 1 December 26 May 7 ISRAEL ------ March 4 April 8 May 23 September 27 October 4 April 2 April 9 July 24 September 30 April 3 April 23 September 12 October 1 April 4 April 24 September 13 October 2 April 5 May 22 September 26 October 3 B-57 ITALY ----- January 1 August 15 December 31 April 6 December 24 April 9 December 25 May 1 December 26 JAPAN ----- January 1 March 21 September 24 January 2 April 30 October 8 January 3 May 3 November 23 January 4 May 4 December 24 January 8 July 16 December 28 February 12 September 17 December 31 LUXEMBOURG ---------- January 1 May 17 December 24 April 6 May 28 December 25 April 9 August 15 December 26 May 1 November 1 MALAYSIA -------- January 1 May 1 December 20 January 2 May 2 December 25 February 1 August 31 February 19 October 15 February 20 November 8 MEXICO ------ January 1 May 1 February 5 November 2 March 19 November 19 April 5 December 12 April 6 December 25 MOROCCO ------- January 1 August 14 December 21 January 11 August 20 January 20 August 21 May 1 November 6 July 30 December 20 NETHERLANDS ----------- January 1 December 26 April 6 April 9 May 1 December 25 NEW ZEALAND ----------- January 1 April 25 December 26 January 2 June 4 December 31 February 6 October 22 April 6 December 24 April 9 December 25 B-58 NORWAY ------ January 1 April 9 December 24 April 4 May 1 December 25 April 5 May 17 December 26 April 6 May 28 December 31 PAKISTAN -------- January 1 February 5 October 11 December 25 January 2 March 23 October 12 January 3 May 1 November 9 January 29 August 14 December 18 January 30 September 12 December 19 PERU ---- January 1 May 1 October 8 April 5 June 29 November 1 April 6 August 30 December 25 PHILIPPINES ----------- January 1 June 12 December 31 April 5 August 21 April 6 November 1 April 9 November 30 May 1 December 25 POLAND ------ January 1 June 7 December 26 April 6 August 15 April 9 November 1 May 1 December 24 May 3 December 25 PORTUGAL -------- January 1 December 26 April 6 April 9 May 1 December 25 RUSSIA ------ January 1 January 8 May 1 November 5 January 2 February 23 May 9 December 29 January 3 March 8 June 9 December 31 January 4 April 28 June 11 January 5 April 30 June 12 SINGAPORE --------- January 1 May 1 December 25 January 2 May 31 February 19 August 9 February 20 November 8 April 6 December 20 B-59 SOUTH AFRICA ------------ January 1 May 1 December 26 March 21 August 9 April 6 September 24 April 9 December 17 April 27 December 25 SOUTH KOREA ----------- January 1 June 6 September 26 February 19 July 17 October 3 March 1 August 15 December 19 May 1 September 24 December 25 May 24 September 25 December 31 SPAIN ----- January 1 December 25 April 6 December 26 April 9 December 31 May 1 December 24 SWEDEN ------ January 1 April 30 June 22 December 31 January 5 May 1 November 2 April 5 May 16 December 24 April 6 May 17 December 25 April 9 June 6 December 26 SWITZERLAND ----------- January 1 May 17 December 26 January 2 May 28 December 31 April 6 August 1 April 9 December 24 May 1 December 25 TAIWAN ------ January 1 February 21 April 5 June 19 October 10 February 15 February 22 April 6 June 23 February 16 February 23 April 14 September 24 February 19 February 28 May 1 September 25 February 20 March 3 June 18 September 29 THAILAND -------- January 1 April 16 August 13 January 2 May 1 October 23 March 5 May 7 December 5 March 6 May 31 December 10 April 13 July 30 December 31 TURKEY ------ January 1 October 11 December 21 January 2 October 12 January 3 October 29 April 23 December 19 August 30 December 20 B-60 UNITED KINGDOM -------------- January 1 May 1 September 3 December 26 January 15 May 7 October 8 February 19 May 28 November 12 April 6 July 4 November 22 April 9 August 27 December 25 REDEMPTION. A redemption request over the following holidays would result in a settlement period that will exceed seven calendar days (examples are based on the days particular holidays fall during the calendar year 2007). The longest redemption cycle for FTSE All-World ex-US ETF Shares is a function of the longest redemption cycles among the markets whose stocks make up this Fund: CHINA ----- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 2/14/2007 2/26/2007 T+12 4/2/2007 4/10/2007 T+8 4/26/2007 5/7/2007 T+11 9/26/2007 10/9/2007 T+13 DENMARK ------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 4/2/2007 4/10/2007 T+8 12/19/2007 12/27/2007 T+8 FINLAND ------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 HUNGARY ------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 INDONESIA --------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 10/9/2007 10/17/2007 T+8 12/18/2007 12/26/2007 T+8 NORWAY ------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 4/2/2007 4/10/2007 T+8 12/19/2007 12/27/2007 T+8 PHILIPPINES ----------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 4/2/2007 4/10/2007 T+8 B-61 SOUTH AFRICA ------------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 3/30/2007 4/10/2007 T+11 12/18/2007 12/27/2007 T+9 SWEDEN ------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 SWITZERLAND ----------- REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 12/19/2007 12/27/2007 T+8 TAIWAN ------ REDEMPTION DATE REDEMPTION SETTLEMENT DATE SETTLEMENT PERIOD --------------- -------------------------- ----------------- 2/16/2007 2/26/2007 T+10 In 2007, 13 calendar days would be the maximum number of calendar days necessary to satisfy a redemption request for FTSE All-World ex-US ETF Shares. B-62 FINANCIAL STATEMENTS With the exception of Vanguard FTSE All-World ex-US Index Fund, which commenced operation on March 2, 2007, each Fund's Financial Statements for the fiscal year ended October 31, 2006, appearing in the Funds' 2006 Annual Reports to Shareholders, and the report thereon of PricewaterhouseCoopers LLP, an independent registered public accounting firm, also appearing therein, are incorporated by reference in this Statement of Additional Information. 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. LEGAL DISCLAIMER EACH FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MORGAN STANLEY CAPITAL INTERNATIONAL INC. ("MSCI"), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE "MSCI PARTIES"). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY VANGUARD. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF EACH FUND OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN FUNDS GENERALLY OR IN THESE FUNDS PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THESE FUNDS OR THE ISSUER OR OWNER OF THESE FUNDS. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUERS OR OWNERS OF THESE FUNDS INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THESE FUNDS TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THESE FUNDS ARE REDEEMABLE FOR CASH. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE OWNERS OF THESE FUNDS IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THESE FUNDS. ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS OR COUNTERPARTIES, ISSUERS OF THESE FUNDS, OWNERS OF THESE FUNDS, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARITES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING WITHOUT LIMITATION LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. NO PURCHASER, SELLER OR HOLDER OF A SECURITY, PRODUCT OR FUND, OR ANY OTHER PERSON OR ENTITY, SHOULD USE OR REFER TO ANY MSCI TRADE NAME, TRADEMARK OR SERVICE MARK TO SPONSOR, ENDORSE, MARKET OR PROMOTE THE SECURITY WITHOUT FIRST CONTACTING MSCI TO DETERMINE WHETHER MSCI'S PERMISSION IS REQUIRED. UNDER NO CIRCUMSTANCES MAY ANY PERSON OR ENTITY CLAIM ANY AFFILIATION WITH MSCI WITHOUT THE PRIOR WRITTEN PERMISSION OF MSCI. B-63 FTSE/(R)/ IS A TRADEMARK OWNED BY THE LONDON STOCK EXCHANGE PLC AND THE FINANCIAL TIMES LIMITED AND IS USED BY FTSE INTERNATIONAL LIMITED UNDER LICENSE. ALL WORLD IS A TRADEMARK OF FTSE INTERNATIONAL LIMITED. THE FTSE ALL-WORLD EX US INDEX IS CALCULATED BY FTSE INTERNATIONAL LIMITED. FTSE INTERNATIONAL LIMITED DOES NOT SPONSOR, ENDORSE, OR PROMOTE THE FUND; IS NOT IN ANY WAY CONNECTED TO IT; AND DOES NOT ACCEPT ANY LIABILITY IN RELATION TO ITS ISSUE, OPERATION, AND TRADING. SAI072 022007 B-64 PART C VANGUARD INTERNATIONAL EQUITY INDEX FUNDS OTHER INFORMATION ITEM 23. EXHIBITS (a) Declaration of Trust, filed on September 25, 2002, Post-Effective Amendment No. 24, is hereby incorporated by reference. (b) By-Laws, are filed herewith. (c) Instruments Defining Rights of Security Holders--Reference is made to Articles III and V of the Registrant's Amended and Restated Agreement and Declaration of Trust, incorporated by reference in Item 23(a) of this post-effective amendment. (d) Investment Advisory Contract, The Vanguard Group, Inc., provides investment advisory services to the Funds at cost pursuant to the Amended and Restated Funds' Service Agreement, filed on February 19, 2003 Post-Effective Amendment No. 26, hereby incorporated by reference. (e) Underwriting Contracts, Not applicable (f) Reference is made to the section entitled "Management of the Funds" in the Registrant's Statement of Additional Information (g) Custodian Agreement for Brown Brothers Harriman & Co., is filed herewith. (h) Amended and Restated Funds' Service Agreement, filed February 19, 2003, Post-Effective Amendment No. 26, is hereby incorporated by reference. (i) Legal Opinion, Not Applicable (j) Consent of Independent Registered Public Accounting Firm, is filed herewith. (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 on December 15, 2006, Post-Effective Amendment No. 53, is hereby incorporated by reference. (o) Reserved (p) Code of Ethics, for The Vanguard Group, filed on November 9, 2006, Post-Effective Amendment No. 52, is herby 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 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. C-1 ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER 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)Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard Group, Inc., is the principal underwriter of each fund within the Vanguard group of investment companies, a family of 36 investment companies with more than 140 funds. (b)The principal business address of each named director and officer of Vanguard Marketing Corporation is 100 Vanguard Boulevard, Malvern, PA 19355.
Name Positions and Office with Underwriter Positions and Office with Funds - ---- ------------------------------------- ------------------------------- R. Gregory Barton Director and Senior Vice President None John J. Brennan Director Trustee, Chairman, President, and Chief Executive Officer Mortimer J. Buckley Director and Senior Vice President None F. William McNabb III Director and Senior Vice President None Michael S. Miller Director and Managing Director None Ralph K Packard Director None George U. Sauter Director, Vice President, and General Counsel None Heidi Stam Director, Vice President, and General Counsel Secretary Richard D. Carpenter Treasurer None David L. Cermak Principal None Joseph Colaizzo Financial and Operations Principal and Assistant None Treasurer Patti Colby Principal None Amy B. Cooper Secretary None Sean P. Hagerty Principal None A. Kimberly Lynch Assistant Treasurer None Brian P. McCarthy Senior Registered Options Principal None Deborah McCracken Assistant Secretary None Miranda O'Keefe Compliance Registered Options Principal None Joseph F. Miele Registered Municipal Securities Principal None Jane K. Myer Principal None Pauline C. Scalvino Chief Compliance Officer Chief Compliance officer
(c) Not applicable C-2 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 the Registrant; 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; the Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and the Registrant's Custodian, Brown Brothers Harriman & Co., 40 Water Street, Boston, Massachusetts 02109. 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-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 meets all requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Post-Effective Amendment to this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on the 27th day of February, 2007. VANGUARD INTERNATIONAL EQUITY INDEX 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: ---------------------------- President, Chairman, Chief February 27, 2007 /S/ JOHN J. BRENNAN Executive Officer, and Trustee (Heidi Stam) John J. Brennan* By: ---------------------------- Trustee February 27, 2007 /S/ CHARLES D. ELLIS (Heidi Stam) Charles D. Ellis* By: ---------------------------- Trustee February 27, 2007 /S/ RAJIV L, GUPTA (Heidi Stam) Rajiv L. Gupta* By: ---------------------------- Trustee February 27, 2007 /S/ AMY GUTMANN (Heidi Stam) Amy Gutmann* By: ---------------------------- Trustee February 27, 2007 /S/ JOANN HEFFERNAN HEISEN (Heidi Stam) JoAnn Heffernan Heisen* By: ---------------------------- Trustee February 27, 2007 /S/ ANDRE F. PEROLD (Heidi Stam) Andre F. Perold* By: ---------------------------- Trustee February 27, 2007 /S/ ALFRED M. RANKIN, JR. (Heidi Stam) Alfred M. Rankin, Jr.* By: ---------------------------- Trustee February 27, 2007 /S/ J. LAWRENCE WILSON (Heidi Stam) J. Lawrence Wilson* By: ---------------------------- Treasurer and Principal February 27, 2007 /S/ THOMAS J. HIGGINS Financial and Principal (Heidi Stam) Accounting Officer Thomas J. Higgins*
*By Power of Attorney. Filed on July 27, 2006, see File Number 002-65955-99. Incorporated by Reference. INDEX TO EXHIBITS By Laws for The Vanguard Group, Inc. . . . . . . . . . . . . . . . . Ex-99. B Custodian Agreement for Brown Brothers Harriman & Co. . . . . . . . .Ex-99. G Consent of Independent Registered Public Accounting Firm. . . . . . .Ex-99. J EX-99.B 3 vanguardbylaws.txt VANGUARD BY-LAWS AMENDED AND RESTATED BY-LAWS OF VANGUARD TREASURY FUND ARTICLE I FISCAL YEAR AND OFFICES SECTION 1. FISCAL YEAR. Unless otherwise provided by resolution of the Board of Trustees, the fiscal year of the Trust shall begin on the 1st day of September and end on the last day of August. SECTION 2. DELAWARE OFFICE. The Board of Trustees shall establish a registered office in the State of Delaware and shall appoint as the Trust's registered agent for service of process in the State of Delaware an individual resident of the State of Delaware or a Delaware corporation or a foreign corporation authorized to transact business in the State of Delaware; in each case the business office of such registered agent for service of process shall be identical with the registered Delaware office of the Trust. SECTION 3. OTHER OFFICES. The Board of Trustees may at any time establish branch or subordinate offices at any place or places where the Trust intends to do business. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETING. Meetings of the shareholders for the election of trustees shall be held in such place as shall be fixed by resolution of the Board of Trustees and stated in the notice of the meeting. SECTION 2. ANNUAL MEETINGS. An Annual Meeting of shareholders will not be held unless the Investment Company Act of 1940 requires the election of trustees to be acted upon. SECTION 3. SPECIAL MEETINGS. Special Meetings of the shareholders may be called at any time by the Chairman, or President, or by a majority of the Board of Trustees, and shall be called by the Secretary upon written request of the holders of shares entitled to cast not less than twenty percent of all the votes entitled to be cast at such meeting provided that (a) such request shall state the purposes of such meeting and the matters proposed to be acted on and (b) the shareholders requesting such meeting shall have paid to the Trust the reasonable estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such shareholders. No special meeting need be called upon the request of shareholders entitled to cast less than a majority of all votes entitled to be cast at such meeting to consider any matter which is substantially the same as a matter voted on at any meeting of the shareholders held during the preceding twelve months. The foregoing provisions of this section 3 notwithstanding a special meeting of shareholders shall be called upon the request of the holders of at least ten percent of the votes entitled to be cast for the purpose of consideration removal of a trustee from office as provided in section 16(c) of the Investment Company Act of 1940. SECTION 4. NOTICE. Not less than ten, nor more than ninety days before the date of every Annual or Special Shareholders Meeting, the Secretary shall cause to be mailed (including via electronic delivery) to the shareholders entitled to vote at such meeting at their addresses (as such addresses appear on the records of the Trust at the time of mailing) written notice stating the time and place of the meeting and, in the case of a Special Meeting of Shareholders, shall be limited to the purposes stated in the notice. Notice of adjournment of a shareholders meeting to another time or place need not be given, if such time and place are announced at the meeting. SECTION 5. RECORD DATE FOR MEETINGS. Subject to the provisions of the Declaration of Trust, the Board of Trustees may fix in advance a date not more than ninety, nor less than ten days, prior to the date of any annual or special meeting of the shareholders as a record date for the determination of the shareholders entitled to receive notice of, and to vote at any meeting and any adjournment thereof; and in such case such shareholders and only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to receive notice of and to vote at such meeting and any adjournment thereof as the case may be, notwithstanding any transfer of any stock on the books of the Trust after any such record date fixed as aforesaid. SECTION 6. QUORUM. Except as otherwise provided by the Investment Company Act of 1940 or in the Trust's Declaration of Trust, at any meeting of shareholders, the presence in person or by proxy of the holders of record of Shares issued and outstanding and entitled to vote representing more than fifty percent of the total combined net asset value of all Shares issued and outstanding and entitled to vote shall constitute a quorum for the transaction of any business at the meeting. If, however, a quorum shall not be present or represented at any meeting of the shareholders, the holders of a majority of the votes present or in person or by proxy shall have the power to adjourn the meeting from time to time, without notice other than -2- announcement at the meeting, until a quorum shall be present or represented to a date not more than 120 days after the original record date. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 7. VOTING. Each shareholder shall have one vote for each dollar (and a fractional vote for each fractional dollar) of the net asset value of each share (including fractional shares) held by such shareholder on the record date set pursuant to Section 5 on each matter submitted to a vote at a meeting of shareholders. For purposes of this section and Section 6 of this Article II, net asset value shall be determined pursuant to Section 3 Article VIII of these Bylaws as of the record date for such meeting set pursuant to Section 5. There shall be no cumulative voting in the election of trustees. Votes may be made in person or by proxy. At all meetings of the shareholders, a quorum being present, all matters shall be decided by majority of the votes entitled to be cast held by shareholders present in person or by proxy, unless the question is one for which by express provision of the laws of the State of Delaware, the Investment Company Act of 1940, as from time to time amended, or the Declaration of Trust, a different vote is required, in which case such express provision shall control the decision of such question. At all meetings of shareholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the Chairman of the meeting. SECTION 8. INSPECTORS. At any election of trustees, the Board of Trustees prior thereto may, or, if they have not so acted, the Chairman of the meeting may appoint one or more inspectors of election who shall first subscribe an oath of affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability, and shall after the election make a certificate of the result of the vote taken. SECTION 9. STOCK LEDGER AND LIST OF SHAREHOLDERS. It shall be the duty of the Secretary or Assistant Secretary of the Trust to cause an original or duplicate share ledger to be maintained at the office of the Trust's transfer agent. Such share ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection. SECTION 10. ACTION WITHOUT MEETING. Any action to be taken by shareholders may be taken without a meeting if (a) all shareholders entitled to vote on the matter consent to the action in writing, and (b) all shareholders entitled to notice of the -3- meeting but not entitled to vote at it sign a written waiver of any right to dissent, and (c) the written consents are filed with the records of the meeting of shareholders. Such consent shall be treated for all purposes as a vote at a meeting. ARTICLE III TRUSTEES SECTION 1. GENERAL POWERS. The business of the Trust shall be managed under the direction of its Board of Trustees, which may exercise all powers of the Trust, except such as are by statute, or the Declaration of Trust, or by these Bylaws conferred upon or reserved to the shareholders. SECTION 2. NUMBER AND TERM OF OFFICE. The number of trustees which shall constitute the whole Board shall be determined from time to time by the Board of Trustees, but shall not be fewer than the minimum number permitted by applicable laws, nor more than fifteen. Each trustee elected shall hold office until his successor is elected and qualified. Trustees need not be shareholders. SECTION 3. ELECTIONS. Provided a quorum is present, the trustees shall be elected by the vote of a plurality of the votes present in person or by proxy, except that any vacancy on the Board of Trustees may be filled by a majority vote of the Board of Trustees, although less than a quorum, subject to the requirements of Section 16(a) of the Investment Company Act of 1940. SECTION 4. PLACE OF MEETING. Meetings of the Board of Trustees, regular or special, may be held at any place as the Board may from time to time determine. SECTION 5. QUORUM. At all meetings of the Board of Trustees, one-third of the entire Board of Trustees shall constitute a quorum for the transaction of business provided that in no case may a quorum be less than two persons. The action of a majority of the trustees present at any meeting at which a quorum is present shall be the action of the Board of Trustees unless the concurrence of a greater proportion is required for such action by the Investment Company Act of 1940, these Bylaws or the Declaration of Trust. If a quorum shall not be present at any meeting of trustees, the trustees present thereat may by a majority vote adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. -4- SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Trustees may be held without additional notice at such time and place as shall from time to time be determined by the Board of Trustees provided that notice of any change in the time or place of such meetings shall be sent promptly to each trustee not present at the meeting at which such change was made in the manner provided for notice of special meetings. SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of Trustees may be called by the Chairman or President on one day's notice to each trustee; Special meetings shall be called by the Chairman or President or Secretary in like manner and on like notice on the written request of two trustees. SECTION 8. TELEPHONE MEETING. Members of the Board of Trustees or a committee of the Board of Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. SECTION 9. INFORMAL ACTIONS. Any action required or permitted to be taken at any meeting of the Board of Trustees or of any committee thereof may be taken without a meeting, if a written consent to such action is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. SECTION 10. COMMITTEES. The Board of Trustees may by resolution passed by a majority of the entire Board appoint from among its members an Executive Committee and other committees composed of two or more trustees, and may delegate to such committees, in the intervals between meetings of the Board of Trustees, any or all of the powers of the Board of Trustees in the management of the business and affairs of the Trust. SECTION 11. ACTION OF COMMITTEES. In the absence of an appropriate resolution of the Board of Trustees, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable, provided that the quorum shall not be less than two trustees. The committees shall keep minutes of their proceedings and shall report the same to the Board of Trustees at the meeting next succeeding, and any action by the committee shall be subject to revision and alteration by the Board of Trustees, provided that no rights of third persons shall be affected by any such revision or alteration. In the absence of any member of such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Trustees to act in the place of such -5- absent member. SECTION 12. COMPENSATION. Any trustee, whether or not he is a salaried officer or employee of the Trust, may be compensated for his services as trustee or as a member of a committee of trustees, or as chairman of a committee by fixed periodic payments or by fees for attendance at meetings or by both, and in addition may be reimbursed for transportation and other expenses, all in such manner and amounts as the Board of Trustees may from time to time determine. ARTICLE IV NOTICES SECTION 1. FORM. Notices to shareholders shall be in writing and delivered personally or mailed (including via electronic delivery) to the shareholders at their addresses appearing on the books of the Trust. Notices to trustees shall be oral or by telephone or telegram or in writing delivered personally or mailed (including via electronic delivery) to the trustees at their addresses appearing on the books of the Trust. Notice by mail shall be deemed to be given at the time when the same shall be mailed (including via electronic delivery). Subject to the provisions of the Investment Company Act of 1940, notice to trustees need not state the purpose of a regular or special meeting. SECTION 2. WAIVER. Whenever any notice of the time, place or purpose of any meeting of shareholders, trustees or a committee is required to be given under the provisions of the Declaration of Trust or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting of shareholders in person or by proxy, or at the meeting of trustees or a committee in person, shall be deemed equivalent to the giving of such notice to such persons. ARTICLE V OFFICERS SECTION 1. EXECUTIVE OFFICERS. The officers of the Trust shall be chosen by the Board of Trustees and shall include a Chairman, President, a Secretary and a Treasurer. The Board of Trustees may, from time to time, elect or appoint a Controller, one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. The Board of Trustees, at its discretion, may also appoint a trustee as Senior Chairman of the Board who shall -6- perform and execute such executive and administrative duties and powers as the Board of Trustees shall from time to time prescribe. The same person may hold two or more offices, except that no person shall be both President and Vice-President and no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law, the Declaration of Trust or these Bylaws to be executed, acknowledged or verified by two or more officers. SECTION 2. ELECTION. The Board of Trustees shall choose a Chairman, President, a Secretary and a Treasurer. SECTION 3. OTHER OFFICERS. The Board of Trustees from time to time may appoint such other officers and agents as it shall deem advisable, who shall hold their offices for such terms and shall exercise powers and perform such duties as shall be determined from time to time by the Board. The Board of Trustees from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. SECTION 4. COMPENSATION. The salaries or other compensation of all officers and agents of the Trust shall be fixed by the Board of Trustees, except that the Board of Trustees may delegate to any person or group of persons the power to fix the salary or other compensation of any subordinate officers or agents appointed pursuant to Section 3 of this Article V. SECTION 5. TENURE. The officers of the Trust shall serve at the pleasure of the Board of Trustees. Any officer or agent may be removed by the affirmative vote of a majority of the Board of Trustees whenever, in its judgment, the best interests of the Trust will be served thereby. In addition, any officer or agent appointed pursuant to Section 3 may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Board of Trustees. Any vacancy occurring in any office of the Trust by death, resignation, removal or otherwise shall be filled by the Board of Trustees, unless pursuant to Section 3 the power of appointment has been conferred by the Board of Trustees on any other officer. SECTION 6. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President shall be the Chief Executive Officer of the Trust, unless the Board of Trustees designates the Chairman as Chief Executive Officer. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect. The Chief Executive Officer shall also be the Chief Administrative Officer of the Trust and shall perform such other duties and have such other powers as the Board of Trustees may from time to time prescribe. -7- SECTION 7.CHAIRMAN. The Chairman of the Board shall perform and execute such duties and administrative powers as the Board of Trustees shall from time to time prescribe. SECTION 8. SENIOR CHAIRMAN OF THE BOARD. The Senior Chairman of the Board, if one shall be chosen, shall perform and execute such executive duties and administrative powers as the Board of Trustees shall from time to time prescribe. SECTION 9. VICE-PRESIDENT. The Vice-Presidents, in order of their seniority, shall, in the absence or disability of the Chief Executive Officer, perform the duties and exercise the powers of the Chief Executive Officer and shall perform such other duties as the Board of Trustees or the Chief Executive Officer may from time to time prescribe. SECTION 10. SECRETARY. The Secretary shall attend all meetings of the Board of Trustees and all meetings of the shareholders and record all the proceedings thereof and shall perform like duties for any committee when required. He shall give, or cause to be given, notice of meetings of the shareholders and of the Board of Trustees, shall have charge of the records of the Trust, including the stock books, and shall perform such other duties as may be prescribed by the Board of Trustees or Chief Executive Officer, under whose supervision he shall be. He shall keep in safe custody the seal of the Trust and, when authorized by the Board of Trustees, shall affix and attest the same to any instrument requiring it. The Board of Trustees may give general authority to any other officer to affix the seal of the Trust and to attest the affixing by his signature. SECTION 11. ASSISTANT SECRETARIES. The Assistant Secretaries in order of their seniority, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Trustees shall prescribe. SECTION 12. TREASURER. The Treasurer, unless another officer has been so designated, shall be the Chief Financial Officer of the Trust. He shall have general charge of the finances and books of account of the Trust. Except as otherwise provided by the Board of Trustees, he shall have general supervision of the funds and property of the Trust and of the performance by the custodian of its duties with respect thereto. He shall render to the Board of Trustees, whenever directed by the Board, an account of the financial condition of the Trust and of all his transactions as Treasurer. He shall cause to be prepared annually a full and correct statement of the affairs of the Trust, including a balance sheet and a statement of operations for the preceding fiscal year. He shall perform all the acts incidental to the office of Treasurer, subject to the control of the Board of Trustees. -8- SECTION 13. ASSISTANT TREASURER. The Assistant Treasurer shall in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the Board of Trustees may from time to time prescribe. ARTICLE VI INDEMNIFICATION AND INSURANCE SECTION 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this Article, "agent" means any person who is or was a trustee or officer of this Trust and any person who, while a trustee or officer of this Trust, is or was serving at the request of this Trust as a trustee, director, officer, partner, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; "Trust" includes any domestic or foreign predecessor entity of this Trust in a merger, consolidation, or other transaction in which the predecessor's existence ceased upon consummation of the transaction; "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes without limitation attorney's fees and any expenses of establishing a right to indemnification under this Article. SECTION 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of this Trust) by reason of the fact that such person is or was an agent of this Trust, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if it is determined that person acted in good faith and reasonably believed: (a) in the case of conduct in his official capacity as an agent of the Trust, that his conduct was in the Trust's best interests and (b) in all other cases, that his conduct was at least not opposed to the Trust's best interests and (c) in the case of a criminal proceeding, that he had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order or settlement shall not of itself create a presumption that the person did not meet the requisite standard of conduct set forth in this Section. The termination of any proceeding by conviction, or a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the person did not meet the requisite standard of conduct set forth in this Section. SECTION 3. ACTIONS BY THE TRUST. This Trust shall -9- indemnify any person who was or is a party or is threatened to be made a party to any proceeding by or in the right of this Trust to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Trust, against expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this Trust and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. SECTION 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for 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 agent's office with this Trust. No indemnification shall be made under Sections 2 or 3 of this Article: (a) In respect of any proceeding as to which that person shall have been adjudged to be liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity; or (b) In respect of any proceeding as to which that person shall have been adjudged to be liable in the performance of that person's duty to this Trust, unless and only to the extent that the court in which that action was brought shall determine upon application that in view of all the relevant circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; however, in such case, indemnification with respect to any proceeding by or in the right of the Trust or in which liability shall have been adjudged by reason of the disabling conduct set forth in the preceding paragraph shall be limited to expenses; or (c) Of amounts paid in settling or otherwise disposing of a proceeding, with or without court approval, or of expenses incurred in defending a proceeding which is settled or otherwise disposed of without court approval, unless the required approval set forth in Section 6 of this Article is obtained. -10- SECTION 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this Trust has been successful, on the merits or otherwise, in the defense of any proceeding referred to in Sections 2 or 3 of this Article before the court or other body before whom the proceeding was brought, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, provided that the Board of Trustees, including a majority who are disinterested, non-party trustees, also determines that based upon a review of the facts, the agent was not liable by reason of the disabling conduct referred to in Section 4 of this Article. SECTION 6. REQUIRED APPROVAL. Except as provided in Section 5 of this Article, any indemnification under this Article shall be made by this Trust only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article and is not prohibited from indemnification because of the disabling conduct set forth in Section 4 of this Article, by: (a) A majority vote of a quorum consisting of trustees who are not parties to the proceeding and are not interested persons of the Trust (as defined in the Investment Company Act of 1940); (b) A written opinion by an independent legal counsel; or (c) The shareholders; however, shares held by agents who are parties to the proceeding may not be voted on the subject matter under this Sub-Section. SECTION 7. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this Trust before the final disposition of the proceeding if (a) receipt of a written affirmation by the agent of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article and a written undertaking by or on behalf of the agent, such undertaking being an unlimited general obligation to repay the amount of the advance if it is ultimately determined that he has not met those requirements, and (b) a determination that the facts then known to those making the determination would not preclude indemnification under this Article. Determinations and authorizations of payments under this Section must be made in the manner specified in Section 6 of this Article for determining that the indemnification is permissible. SECTION 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which persons other than Trustees and officers -11- of this Trust or any subsidiary hereof may be entitled by contract or otherwise. SECTION 9. LIMITATIONS. No indemnification or advance shall be made under this Article, except as provided in Sections 5 or 6 in any circumstances where it appears: (a) That it would be inconsistent with a provision of the Agreement and Declaration of Trust of the Trust, a resolution of the shareholders, or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. SECTION 10. INSURANCE. Upon and in the event of a determination by the Board of Trustees of this Trust to purchase such insurance, this Trust shall purchase and maintain insurance on behalf of any agent or employee of this Trust against any liability asserted against or incurred by the agent or employee in such capacity or arising out of the agent's or employee's status as such to the fullest extent permitted by law. SECTION 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of this Trust as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article. ARTICLE VII SHARES OF BENEFICIAL INTEREST SECTION 1. CERTIFICATES. A certificate or certificates representing and certifying the class and the full, but not fractional, number of shares of beneficial interest owned by each shareholder in the Trust shall not be issued except as the Board of Trustees may otherwise determine from time to time. Any such certificate issued shall be signed by facsimile signature or otherwise by the Chairman or President or a Vice-President and counter-signed by the Secretary or an Assistant -12- Secretary or the Treasurer or an Assistant Treasurer. SECTION 2. SIGNATURE. In case any officer who has signed any certificate ceases to be an officer of the Trust before the certificate is issued, the certificate may nevertheless be issued by the Trust with the same effect as if the officer had not ceased to be such officer as of the date of its issue. SECTION 3. RECORDING AND TRANSFER WITHOUT CERTIFICATES. The Trust shall have the full power to participate in any program approved by the Board of Trustees providing for the recording and transfer of ownership of the Trust's shares by electronic or other means without the issuance of certificates. SECTION 4. LOST CERTIFICATES. The Board of Trustees may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Trust alleged to have been stolen, lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to have been stolen, lost or destroyed, or upon other satisfactory evidence of such theft, loss or destruction and may in its discretion and as a condition precedent to the issuance thereof, require the owner of such stolen, lost or destroyed certificate or certificates, or his legal representative, to give the Trust a bond with sufficient surety, to the Trust to indemnify it against any loss or claim that may be made by reason of the issuance of a new certificate. SECTION 5. TRANSFER OF SHARES. Transfers of shares of beneficial interest of the Trust shall be made on the books of the Trust by the holder of record thereof (in person or by his attorney thereunto duly authorized by a power of attorney duly executed in writing and filed with the Secretary of the Trust) (i) if a certificate or certificates have been issued, upon the surrender of the certificate or certificates, properly endorsed or accompanied by proper instruments of transfer, representing such shares, or (ii) as otherwise prescribed by the Board of Trustees. Every certificate exchanged, surrendered for redemption or otherwise returned to the Trust shall be marked "Canceled" with the date of cancellation. SECTION 6. REGISTERED SHAREHOLDERS. The Trust shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law or the Declaration of Trust. -13- SECTION 7. TRANSFER AGENTS AND REGISTRARS. The Board of Trustees may, from time to time, appoint or remove transfer agents and or registrars of the Trust, and they may appoint the same person as both transfer agent and registrar. Upon any such appointment being made, all certificates representing shares of beneficial interest thereafter issued shall be countersigned by such transfer agent and shall not be valid unless so countersigned. SECTION 8. STOCK LEDGER. The Trust shall maintain an original stock ledger containing the names and addresses of all shareholders and the number and class of shares held by each shareholder. Such stock ledger may be in written form or any other form capable of being converted into written form within reasonable time for visual inspection. ARTICLE VIII GENERAL PROVISIONS SECTION 1. CUSTODIANSHIP. Except as otherwise provided by resolution of the Board of Trustees, the Trust shall place and at all times maintain in the custody of a custodian (including any sub-custodian for the custodian) all funds, securities and similar investments owned by the Trust. Subject to the approval of the Board of Trustees, the custodian may enter into arrangements with securities depositories, provided such arrangements comply with the provisions of the Investment Company Act of 1940 and the rules and regulations promulgated thereunder. SECTION 2. EXECUTION OF INSTRUMENTS. All deeds, documents, transfers, contracts, agreements and other instruments requiring execution by the Trust shall be signed by the Chairman or President or a Vice President. SECTION 3. NET ASSET VALUE. The net asset value per share shall be determined separately as to each class of the Trust's shares, by dividing the sum of the total market value of the class's investments and other assets, less any liabilities, by the total outstanding shares of such class, subject to the Investment Company Act of 1940 and any other applicable Federal securities law or rule or regulation currently in effect. ARTICLE IX AMENDMENTS The Board of Trustees shall have the power to make, alter and repeal the Bylaws of the Trust. -14- EX-99.G 4 browncustagree.txt BROWN BROTHERS HARRIMAN CUSTODIAN AGREEMENT AMENDED AND RESTATED CUSTODIAN AGREEMENT THIS AMENDED AND RESTATED AGREEMENT, dated as of June 25, 2001, between certain open-end management investment companies (each investment company a "Fund") organized under the laws of the State of Delaware and registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (the "1940 Act"), on behalf of certain of their series (each series a "Series"), and BROWN BROTHERS HARRIMAN & CO., a limited partnership formed under the laws of the State of New York (BBH&Co. or the Custodian), W I T N E S S E T H: WHEREAS, each Fund has employed BBH&Co. to act as the Fund's custodian and to provide related services, all as provided herein; WHEREAS, the Securities and Exchange Commission has promulgated amendments to Rule 17f-5 and adopted Rule 17f-7 under the 1940 Act that establish rules regarding the custody of investment company assets held outside the United States; and WHEREAS, BBH&Co. is willing to provide services in connection with such Rules in accordance with the terms of this Amended Custodian Agreement; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, each Fund and BBH&Co. hereby agree, as follows: 1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints BBH&Co. as the Fund's custodian, and BBH&Co. hereby accepts such appointment. All Investments of the Fund delivered to the Custodian or its agents or Subcustodians shall be dealt with as provided in this Agreement. The duties of the Custodian with respect to the Fund's Investments shall be set forth expressly in this Agreement and any addenda thereto which duties are generally comprised of safekeeping and various administrative duties that will be performed in accordance with Instructions and as reasonably required to effect Instructions. 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FUND. The Fund hereby represents, warrants and covenants each of the following: 2.1 This Agreement has been, and at the time of delivery of each Instruction such Instruction will have been, duly authorized, executed and delivered by the Fund. This Agreement does not violate any Applicable Law or conflict with or constitute a default under the Fund's prospectus or other organic document, agreement, judgment, order or decree to which the Fund is a party or by which it or its Investments is bound. The Fund is and will be in compliance with all laws and regulations applicable to its operations, investments or activities. 2.2 By providing an Instruction with respect to the first acquisition of an Investment in a jurisdiction other than the United States of America, the Fund shall be deemed to have confirmed to the Custodian that the Fund has (a) assessed and accepted all material Country or Sovereign Risks and accepted responsibility for their occurrence, (b) made all determinations required to be made by the Fund under the 1940 Act, and (iii) appropriately and adequately disclosed to its shareholders, other investors and all persons who have rights in or to such Investments, all material investment risks, including those relating to the custody and settlement infrastructure or the servicing of securities in such jurisdiction. 2.3 The Fund shall safeguard and shall solely be responsible for the safekeeping of any testkeys, identification codes, passwords, other security devices or statements of account with which the Custodian provides it. In furtherance and not limitation of the foregoing, in the event the Fund utilizes any on-line service offered by the Custodian, the Fund and the Custodian shall be fully responsible for the security of each party's connecting terminal, access thereto and the proper and authorized use thereof and the initiation and application of continuing effective safeguards in respect thereof. Additionally, if the Fund uses any on-line or similar communications service made available by the Custodian, the Fund shall be solely responsible for ensuring the security of its access to the service and for the use of the service, and shall only attempt to access the service and the Custodian's computer systems as directed by the Custodian. If the Custodian provides any computer software to the Fund relating to the services described in this Agreement, the Fund will only use the software for the purposes for which the Custodian provided the software to the Fund, and will abide by the license agreement accompanying the software and any other security policies which the Custodian provides to the Fund. 3. REPRESENTATION AND WARRANTY OF BBH&CO. BBH&Co. hereby represents and warrants that this Agreement has been duly authorized, executed and delivered by BBH&Co. and does not and will not violate any Applicable Law or conflict with or constitute a default under BBH&Co.'s limited partnership agreement or any agreement, instrument, judgment, order or decree to which BBH&Co. is a party or by which it is bound. BBH&Co. also warrants that it will comply with all applicable laws and regulations in performance of its duties under this Agreement. 2 4. INSTRUCTIONS. Unless otherwise explicitly indicated herein, the Custodian shall perform its duties pursuant to Instructions. As used herein, the term Instruction shall mean a directive initiated by the Fund, acting directly or through its board of directors or trustees, officers or other Authorized Persons, which directive shall conform to the requirements of this Section 4. 4.1 AUTHORIZED PERSONS. For purposes hereof, an Authorized Person shall be a person or entity authorized to give Instructions for or on behalf of the Fund by written notices to the Custodian or otherwise in accordance with procedures delivered to the Custodian. The Custodian may treat any Authorized Person as having full authority of the Fund to issue Instructions hereunder unless the notice of authorization contains explicit limitations as to said authority. The Custodian shall be entitled to rely upon the authority of Authorized Persons until it receives appropriate written notice from the Fund to the contrary. 4.2 FORM OF INSTRUCTION. Each Instruction shall be transmitted by such secured or authenticated electro-mechanical means as the Custodian shall make available to the Fund from time to time unless the Fund shall elect to transmit such Instruction in accordance with Subsections 4.2.1 through 4.2.3 of this Section. 4.2.1 Fund Designated Secured-Transmission Method. Instructions may be transmitted through a secured or tested electro-mechanical means identified by the Fund or by an Authorized Person entitled to give Instruction and acknowledged and accepted by the Custodian; it being understood that such acknowledgment shall authorize the Custodian to receive and process such means of delivery but shall not represent a judgment by the Custodian as to the reasonableness or security of the method determined by the Authorized Person. 4.2.2 Written Instructions. Instructions may be transmitted in a writing that bears the manual signature of Authorized Persons. 4.2.3 Other Forms of Instruction. Instructions may also be transmitted by another means determined by the Fund or Authorized Persons and acknowledged and accepted by the Custodian (subject to the same limits as to acknowledgements as is contained in Subsection 4.2.1, above) including Instructions given orally or by SWIFT, telex or telefax (whether tested or untested). 3 When an Instruction is given by means established under Subsections 4.2.1 through 4.2.3, it shall be the responsibility of the Custodian to use reasonable care to adhere to any security or other procedures established in writing between the Custodian and the Authorized Person with respect to such means of Instruction, but such Authorized Person shall be solely responsible for determining that the particular means chosen is reasonable under the circumstances. If the Custodian believes that the means chosen are unreasonable, it shall promptly notify an Authorized Person. Oral Instructions shall be binding upon the Custodian only if and when an Authorized Person provides Instructions that conform to the requirements of this Section 4. Any Oral Instructions shall promptly thereafter be confirmed in writing by an Authorized Person (which confirmation may bear the facsimile signature of such Person). With respect to telefax Instructions, the parties agree and acknowledge that receipt of legible Instructions cannot be assured and that the Custodian cannot verify that authorized signatures on telefax Instructions are original or properly affixed. If the Custodian determines that a telefax Instruction is illegible, the Custodian shall promptly contact an Authorized Person and request a legible telefax Instruction. Provided the Custodian has exercised the standard of care required herein with respect to receipt of Proper Instructions including but not limited to any applicable security or authorization procedures, the Custodian shall not be liable for losses or expenses incurred through actions taken in reliance on inaccurately stated or unauthorized telefax Instructions. The provisions of Section 4A of the Uniform Commercial Code shall apply to Funds Transfers performed in accordance with Instructions. In the event that a Funds Transfer Services Agreement is executed between the Fund or an Authorized Person and the Custodian, such an agreement shall comprise a designation of form of a means of delivering Instructions for purposes of this Section 4.2. 4.3 COMPLETENESS AND CONTENTS OF INSTRUCTIONS. The Authorized Person shall be responsible for assuring the adequacy and accuracy of Instructions. Particularly, upon any acquisition or disposition or other dealing in the Fund's Investments and upon any delivery and transfer of any Investment or moneys, the person initiating such Instruction shall give the Custodian an Instruction with appropriate detail, including, without limitation: 4 4.3.1 The transaction date and the date and location of settlement; 4.3.2 The specification of the type of transaction; 4.3.4 A description of the Investments or moneys in question, including, as appropriate, quantity, price per unit, amount of money to be received or delivered and currency information. Where an Instruction is communicated by electronic means, or otherwise where an Instruction contains an identifying number such as a CUSIP, SEDOL or ISIN number, the Custodian shall be entitled to rely on such number as controlling notwithstanding any inconsistency contained in such Instruction, particularly with respect to Investment description. If the Custodian is aware of such an inconsistency in an Instruction, it shall give prompt notice of such inconsistency to an Authorized Person. 4.3.5 The name of the broker or similar entity concerned with execution of the transaction. If the Custodian shall reasonably determine that an Instruction, including a telefax Instruction, is either unclear or incomplete, the Custodian shall give prompt notice of such determination to the Fund, and the Fund shall thereupon amend or otherwise reform such Instruction. In such event, the Custodian shall have no obligation to take any action in response to the Instruction initially delivered until the redelivery of an amended or reformed Instruction 4.4 TIMELINESS OF INSTRUCTIONS. In giving an Instruction, the Fund shall take into consideration delays which may occur due to the involvement of a Subcustodian or agent, differences in time zones, and other factors particular to a given market, exchange or issuer. When the Custodian has established specific timing requirements or deadlines with respect to particular classes of Instruction and the Custodian has notified the Fund of such timing requirements and deadlines, or when an Instruction is received by the Custodian at such a time that it could not reasonably be expected to have acted on such Instruction due to time zone differences or other factors beyond its reasonable control, the execution of any Instruction received by the Custodian after such deadline or at such time (including any modification or revocation of a previous Instruction) shall be at the risk of the Fund. 5 5. SAFEKEEPING OF FUND ASSETS. The Custodian shall hold Investments delivered to it or Subcustodians for the Fund in accordance with the provisions of this Section. The Custodian will identify the Investments on its books as belonging to each individual Series. The Custodian shall not be responsible for (a) the safekeeping of Investments not delivered or that are not caused to be issued to it or its Subcustodians; or, (b) pre-existing faults or defects in Investments that are delivered to the Custodian, or its Subcustodians. The Custodian or Subcustodian shall give prompt notice to the Fund of any pre-existing faults or defects that it is aware of. The Custodian is hereby authorized to hold with itself or a Subcustodian, and to record in one or more accounts, all Investments delivered to and accepted by the Custodian, any Subcustodian or their respective agents pursuant to an Instruction or in consequence of any corporate action. Each such account is a "Securities Account" (as such term is defined in the Uniform Commercial Code as in effect from time to time in the State of New York (the "UCC"). The Custodian shall hold Investments for the account of the Fund and shall segregate Investments from assets belonging to the Custodian and shall cause its Subcustodians to segregate Investments from assets belonging to the Subcustodian in an account held for the Fund or in an account maintained by the Subcustodian generally for non-proprietary assets of the Custodian. The parties acknowledge that the Custodian and Subcustodians each are acting under this Agreement as a "Securities Intermediary" (as such term is used and defined in the UCC). For the purposes of this Agreement, the parties hereto acknowledge and agree that (i) any Investment held by the Custodian or any Subcustodian shall constitute a "Financial Asset" (as such term is used and defined in the UCC), (ii) the Fund may at any time issue one or more "Entitlement Orders" (as such term is used and defined in the UCC) with respect to the Fund's Investments, (iii) upon the Custodian's or Subcustodian's receipt of an Investment for the benefit of the Fund, the Custodian or Subcustodian, as the case may be, shall credit to the Fund a "Security Entitlement" (as such term is used and defined in the UCC), and (iv) the Fund shall have a Security Entitlement with respect to all Investments held by the Custodian or Subcustodian. 6 5.1 USE OF SECURITIES DEPOSITORIES. The Custodian may deposit and maintain Investments in any Securities Depository, either directly or through one or more Subcustodians appointed by the Custodian. Investments held in a Securities Depository shall be held (a) subject to the agreement, rules, statement of terms and conditions or other document or conditions effective between the Securities Depository and the Custodian or the Subcustodian, as the case may be, and (b) in an account for the Fund or in bulk segregation in an account maintained for the non-proprietary assets of the entity holding such Investments in the Depository. If market practice or the rules and regulations of the Securities Depository prevent the Custodian, the Subcustodian or (any agent of either) from holding its client assets in such a separate account, the Custodian, the Subcustodian or other agent shall as appropriate segregate such Investments for the benefit of the Fund or for benefit of clients of the Custodian generally on its own books. 5.2 CERTIFICATED ASSETS. Investments which are certificated may be held in registered or bearer form: (a) in the Custodian's vault; (b) in the vault of a Subcustodian or agent of the Custodian or a Subcustodian; or (c) in an account maintained by the Custodian, Subcustodian or agent at a Securities Depository; all in accordance with customary market practice in the jurisdiction in which any Investments are held. 7 5.3 REGISTERED ASSETS. Investments which are registered may be registered in the name of the Custodian, a Subcustodian, or in the name of the Fund or a nominee for any of the foregoing, and may be held in any manner set forth in paragraph 5.2 above with or without any identification of fiduciary capacity in such registration. 5.4 BOOK ENTRY ASSETS. Investments which are represented by book-entry may be so held in an account maintained by the Book-Entry Agent on behalf of the Custodian, a Subcustodian or another agent of the Custodian, or a Securities Depository. 5.5 REPLACEMENT OF LOST INVESTMENTS. In the event of a loss of Investments for which the Custodian is responsible under the terms of this Agreement, the Custodian shall promptly replace such Investment, or in the event that such replacement cannot be effected, the Custodian shall pay to the Fund the fair market value of such Investment based on the last available price as of the close of business in the relevant market on the date that a claim was first made to the Custodian with respect to such loss. 6. ADMINISTRATIVE DUTIES OF THE CUSTODIAN. The Custodian shall perform the following administrative duties with respect to Investments of the Fund. 6.1 PURCHASE OF INVESTMENTS. Pursuant to Instruction, Investments purchased for the account of the Fund shall be paid for (a) against delivery thereof to the Custodian or a Subcustodian, as the case may be, either directly or through a Clearing Corporation or a Securities Depository (in accordance with the rules of such Securities Depository or such Clearing Corporation), or (b) otherwise in accordance with an Instruction, Applicable Law, generally accepted trade practices, or the terms of the instrument representing such Investment. 6.2 SALE OF INVESTMENTS. Pursuant to Instruction, Investments sold for the account of the Fund shall be delivered (a) against payment therefor in cash, by check or by bank wire transfer, (b) by credit to the account of the Custodian or the applicable Subcustodian, as the case may be, with a Clearing Corporation or a Securities Depository (in accordance with the rules of such Securities Depository or such Clearing Corporation), or (c) otherwise in accordance with an Instruction, Applicable Law, generally accepted trade practices, or the terms of the instrument representing such Investment. 8 6.3 DELIVERY IN CONNECTION WITH BORROWINGS OF THE FUND OR OTHER COLLATERAL AND MARGIN REQUIREMENTS. Pursuant to Instruction, the Custodian may deliver Investments or cash of the Fund in connection with borrowings and other collateral and margin requirements. 6.4 FUTURES AND OPTIONS. If, pursuant to an Instruction, the Custodian shall become a party to an agreement with the Fund and a futures commission merchant regarding margin (Tri-Party Agreement), the Custodian shall (a) receive and retain, to the extent the same are provided to the Custodian, confirmations or other documents evidencing the purchase or sale by the Fund of exchange-traded futures contracts and commodity options, (b) when required by such Tri-Party Agreement, deposit and maintain in an account opened pursuant to such Agreement (Margin Account), segregated either physically or by book-entry in a Securities Depository for the benefit of any futures commission merchant, such Investments as the Fund shall have designated as initial, maintenance or variation "margin" deposits or other collateral intended to secure the Fund's performance of its obligations under the terms of any exchange-traded futures contracts and commodity options; and (c) thereafter pay, release or transfer Investments into or out of the Margin Account in accordance with the provisions of the such Agreement. Alternatively, the Custodian may deliver Investments, in accordance with an Instruction, to a futures commission merchant for purposes of margin requirements in accordance with Rule 17f-6. The Custodian shall in no event be responsible for but shall give prompt notice to the Fund in the event it becomes aware of the acts and omissions of any futures commission merchant to whom Investments are delivered pursuant to this Section; for the sufficiency of Investments held in any Margin Account; or, for the performance of any terms of any exchange-traded futures contracts and commodity options. 6.5 CONTRACTUAL OBLIGATIONS AND SIMILAR INVESTMENTS. From time to time, the Fund's Investments may include Investments that are not ownership interests as may be represented by certificate (whether registered or bearer), by entry in a Securities Depository or by book entry agent, registrar or similar agent for recording ownership interests in the relevant Investment. If the Fund shall at any time acquire such Investments, including without limitation deposit obligations, loan participations, repurchase agreements and derivative arrangements, the Custodian shall (a) receive and retain, to the extent the same are provided to the Custodian, confirmations or other documents evidencing the arrangement; and (b) perform on the Fund's account in accordance with the terms of the applicable arrangement, but only to the extent directed to do so by Instruction. The Custodian shall have no responsibility for agreements running to the Fund as to which it is not a party other than to retain, to the extent the same are provided to the Custodian, documents or copies of documents evidencing the arrangement and, in accordance with Instruction, to include such arrangements in reports made to the Fund. 9 6.6 EXCHANGE OF SECURITIES. Unless otherwise directed by Instruction, the Custodian shall: (a) exchange securities held for the account of the Fund for other securities in connection with any reorganization, recapitalization, conversion, split-up, change of par value of shares or similar event, and (b) deposit any such securities in accordance with the terms of any reorganization or protective plan. 6.7 SURRENDER OF SECURITIES. Unless otherwise directed by Instruction, the Custodian may surrender securities: (a) in temporary form for definitive securities; (b) for transfer into the name of an entity allowable under Section 5.3; and (c) for a different number of certificates or instruments representing the same number of shares or the same principal amount of indebtedness. 6.8 RIGHTS, WARRANTS, ETC. Pursuant to Instruction, the Custodian shall (a) deliver warrants, puts, calls, rights or similar securities to the issuer or trustee thereof, or to any agent of such issuer or trustee, for purposes of exercising such rights or selling such securities, and (b) deposit securities in response to any invitation for the tender thereof. 6.9 MANDATORY CORPORATE ACTIONS. Unless otherwise directed by Instruction, the Custodian shall: (a) comply with the terms of all mandatory or compulsory exchanges, calls, tenders, redemptions or similar rights of securities ownership affecting securities held on the Fund's account and promptly notify the Fund of such action, and (b) collect all stock dividends, rights and other items of like nature with respect to such securities. 6.10 INCOME COLLECTION. Unless otherwise directed by Instruction, the Custodian shall collect any amount due and payable to the Fund with respect to Investments and promptly credit the amount collected to a Principal or Agency Account; provided, however, that the Custodian shall not be responsible for: (a) the collection of amounts due and payable with respect to Investments that are in default, or (b) the collection of cash or share entitlements with respect to Investments that are not registered in the name of the Custodian or its Subcustodians. The Custodian is hereby authorized to endorse and deliver any instrument required to be so endorsed and delivered to effect collection of any amount due and payable to the Fund with respect to Investments. 10 6.11 OWNERSHIP CERTIFICATES AND DISCLOSURE OF THE FUND'S INTEREST. The Custodian is hereby authorized to execute on behalf of the Fund ownership certificates, affidavits or other disclosure required under Applicable Law or established market practice in connection with the receipt of income, capital gains or other payments by the Fund with respect to Investments, or in connection with the sale, purchase or ownership of Investments. 6.12 PROXY MATERIALS. The Custodian shall deliver, or cause to be delivered promptly, to the Fund proxy forms, notices of meeting, and any other notices or announcements materially affecting or relating to Investments received by the Custodian or any nominee. 6.13 TAX RECLAIM SERVICE. The Custodian will apply for a reduction of withholding tax and any refund of any tax paid or tax credits which apply in each applicable market in respect of income payments on Investments for the benefit of the Fund which the Custodian believes may be available to such Fund. Where such reports are available, the Custodian shall periodically report to the Fund concerning the making of applications for a reduction of withholding tax and refund of any tax paid or tax credits which apply in each applicable market in respect of income payments on Investments for the benefit of the Fund. The provision of tax reclaim services by the Custodian is conditional upon the Custodian receiving from the Fund or, where required, the beneficial owner of Investments (a) a declaration of its identity and place of residence and (b) certain other documentation (pro forma copies of which are available from the Custodian). The Custodian shall use reasonable means to advise the Fund of the declarations, documentation and information which the Fund is to provide to the Custodian in order for the Custodian to provide the tax reclaim services described herein. The Fund shall provide to the Custodian such documentation and information as it may require in connection with taxation, and warrants that, when given, this information shall be true and correct in every respect, not misleading in any way, and contain all material information. The Fund undertakes to notify the Custodian immediately if any such information requires updating or amendment. The Custodian shall perform tax reclaim services only with respect to taxation by the revenue authorities of the countries notified to the Fund. 11 The Fund confirms that the Custodian is authorized to deduct from any cash received or credited to an account any taxes or levies required by any revenue or governmental authority for whatever reasons in respect of the accounts. The Custodian and the Fund shall promptly notify the other regarding any change in the Fund's tax status with respect to withholding taxes of which it becomes aware. It is acknowledged that the Custodian does not offer tax advice and that the Fund should consult with its tax adviser as to tax matters. 6.14 OTHER DEALINGS. The Custodian shall otherwise act as directed by Instruction, including without limitation effecting the free payments of moneys or the free delivery of securities, provided that such Instruction shall indicate the purpose of such payment or delivery and that the Custodian shall record the party to whom such payment or delivery is made. The Custodian shall attend to all nondiscretionary details in connection with the sale or purchase or other administration of Investments, except as otherwise directed by an Instruction. In fulfilling the duties set forth in Sections 6.6 through 6.10 above, the Custodian shall provide promptly to the Fund all material information pertaining to a corporate action which the Custodian actually receives. The Custodian shall not be responsible for the completeness or accuracy of such information as long as the Custodian has shown due diligence in attempting to receive complete and accurate information. Any advance credit of cash or shares expected to be received as a result of any corporate action shall be subject to actual collection and may, when the Custodian deems collection unlikely, be reversed by the Custodian. The Custodian shall notify the Fund at least 48 hours prior to any such reversal. The Custodian may at any time or times in its discretion appoint (and may at any time remove) agents (other than Subcustodians) to carry out some or all of the administrative provisions of this Agreement (Agents), provided, however, that the appointment of such agent shall not relieve the Custodian of its administrative obligations under this Agreement. 12 7. CASH ACCOUNTS, DEPOSITS AND MONEY MOVEMENTS. Subject to the terms and conditions set forth in this Section 7, the Fund hereby authorizes the Custodian to open and maintain, with itself or with Subcustodians, cash accounts in United States Dollars, in such other currencies as are the currencies of the countries in which the Fund maintains Investments or in such other currencies as the Fund shall from time to time request by Instruction. 7.1 TYPES OF CASH ACCOUNTS. Cash accounts opened on the books of the Custodian (Principal Accounts) shall be opened in the name of the Fund. Such accounts collectively shall be a deposit obligation of the Custodian and shall be subject to the terms of this Section 7 and the general liability provisions contained in Section 9. Cash accounts opened on the books of a Subcustodian may be opened in the name of the Fund or the Custodian or in the name of the Custodian for its customers generally (Agency Accounts). Such deposits shall be obligations of the Subcustodian and shall be treated as an Investment of the Fund. Accordingly, the Custodian shall be responsible for exercising reasonable care in the administration of such accounts but shall not be liable for their repayment in the event such Subcustodian, by reason of its bankruptcy, insolvency or sovereign risk/force majeure, fails to make repayment unless (a) such Subcustodian is a parent, subsidiary or otherwise affiliated with the Custodian or (b) the Custodian's negligence, bad faith or willful misconduct was the direct cause of the Subcustodian failing to make the repayment or (c) a transaction or other matter between the Custodian and Subcustodian unrelated to the Funds was the cause of the Subcustodian failing to make repayment. Under (a), (b) or (c) the Custodian shall be liable for the repayment. 13 7.2 PAYMENTS AND CREDITS WITH RESPECT TO THE CASH ACCOUNTS. The Custodian shall make payments from or deposits to any of said accounts in the course of carrying out its administrative duties, including but not limited to income collection with respect to the Fund's Investments, and otherwise in accordance with Instructions. The Custodian and its Subcustodians shall be required to credit amounts to the cash accounts only when moneys are actually received in cleared funds in accordance with banking practice in the country and currency of deposit. Any credit made to any Principal or Agency Account before actual receipt of cleared funds shall be provisional and may be reversed by the Custodian in the event such payment is not actually collected. The Custodian shall provide the Fund with at least 48 hours notice prior to any such reversal. Unless otherwise specifically agreed in writing by the Custodian or any Subcustodian, all deposits shall be payable only at the branch of the Custodian or Subcustodian where the deposit is made or carried. 7.3 CURRENCY AND RELATED RISKS. The Fund bears risks of holding or transacting in any currency. The Custodian shall not be liable for any loss or damage arising from the applicability of any law or regulation now or hereafter in effect, or from the occurrence of any event, which may delay or affect the transferability, convertibility or availability of any currency in the country (a) in which such Principal or Agency Accounts are maintained or (b) in which such currency is issued, and in no event shall the Custodian be obligated to make payment of a deposit denominated in a currency during the period during which its transferability, convertibility or availability has been affected by any such law, regulation or event. The Custodian shall notify the Fund in the event it is aware that the Fund is entering into a transaction that is, to its knowledge, illegal under local law. Without limiting the generality of the foregoing, neither the Custodian nor any Subcustodian shall be required to repay any deposit made at a foreign branch of either the Custodian or Subcustodian if such branch cannot repay the deposit due to a cause for which the Custodian would not be responsible in accordance with the terms of Section 9 of this Agreement unless the Custodian or such Subcustodian expressly agrees in writing to repay the deposit under such circumstances. All currency transactions in any account opened pursuant to this Agreement are subject to exchange control regulations of the United States and of the country where such currency is the lawful currency or where the account is maintained. Any taxes, costs, charges or fees imposed on the convertibility of a currency held by the Fund shall be for the account of the Fund unless such taxes, costs, charges or fees were due to an error by the Custodian or Subcustodian. 14 7.4 FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall, subject to the terms of this Section, settle foreign exchange transactions (including contracts, futures, options and options on futures) on behalf and for the account of the Fund with such currency brokers or banking institutions, including Subcustodians, as the Fund may direct pursuant to Instructions. The Custodian may act as principal in any foreign exchange transaction with the Fund in accordance with Section 7.4.2 of this Agreement. The obligations of the Custodian in respect of all foreign exchange transactions (whether or not the Custodian shall act as principal in such transaction) shall be contingent on the free, unencumbered transferability of the currency transacted on the actual settlement date of the transaction. 7.4.1 THIRD PARTY FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall process foreign exchange transactions (including without limitation contracts, futures, options, and options on futures), where any third party acts as principal counterparty to the Fund on the same basis it performs duties as agent for the Fund with respect to any other of the Fund's Investments. Accordingly the Custodian shall only be responsible for delivering or receiving currency on behalf of the Fund in respect of such contracts pursuant to Instructions. The Custodian shall not be responsible for the failure of any counterparty (including any Subcustodian) in such agency transaction to perform its obligations thereunder unless (a) such counterparty is a parent, subsidiary or otherwise affiliated with the Custodian or (b) the Custodian's negligence, bad faith or willful misconduct was the direct cause of the counterparty failing to perform its obligations or (c) a transaction or other matter between the Custodian and the counterparty unrelated to the Funds was the cause of the counterparty's failure to perform. Under (a), (b) or (c) , the Custodian shall be liable. The Custodian (a) shall transmit cash and Instructions to and from the currency broker or banking institution with which a foreign exchange contract or option has been executed pursuant hereto, (b) may make free outgoing payments of cash in the form of Dollars or foreign currency without receiving confirmation of a foreign exchange contract or option or confirmation that the countervalue currency completing the foreign exchange contract has been delivered or received or that the option has been delivered or received, and (c) shall hold all confirmations, certificates and other documents and agreements received by the Custodian and evidencing or relating to such foreign exchange transactions in safekeeping. The Fund accepts full responsibility for its use of third-party foreign exchange dealers and for execution of said foreign exchange contracts and options and understands that the Fund shall be responsible for any and all costs and interest charges which may be incurred by the Fund or the Custodian as a result of the failure or delay of third parties to deliver foreign exchange. The Custodian or Subcustodian shall respectively be responsible for any failure or delay of third parties to deliver foreign exchange when either of those parties respectively is a parent, subsidiary or otherwise affiliated with such third party. 15 7.4.2 FOREIGN EXCHANGE WITH THE CUSTODIAN AS PRINCIPAL. The Custodian may undertake foreign exchange transactions with the Fund as principal as the Custodian and the Fund may agree from time to time. In such event, the foreign exchange transaction will be performed in accordance with the particular agreement of the parties, or in the event a principal foreign exchange transaction is initiated by Instruction in the absence of specific agreement, such transaction will be performed in accordance with the usual commercial terms of the Custodian. 7.5 DELAYS. If no event of Force Majeure shall have occurred and be continuing and in the event that a delay shall have been caused by the negligence, bad faith or willful misconduct of the Custodian in carrying out an Instruction to credit or transfer cash, the Custodian shall be liable to the Fund: (a) with respect to Principal Accounts, for interest to be calculated at the rate customarily paid on such deposit and currency by the Custodian on overnight deposits at the time the delay occurs for the period from the day when the transfer should have been effected until the day it is in fact effected; and, (b) with respect to Agency Accounts, for interest to be calculated at the rate customarily paid on such deposit and currency by the Subcustodian on overnight deposits at the time the delay occurs for the period from the day when the transfer should have been effected until the day it is in fact effected. The Custodian shall not be liable for delays in carrying out such Instructions to transfer cash which are not due to the Custodian's own negligence, bad faith or willful misconduct. The Custodian shall make reasonable attempts where possible to mitigate any such delays. 16 7.6 ADVANCES. If, for any reason in the conduct of its safekeeping duties pursuant to Section 5 hereof or its administration of the Fund's assets pursuant to Section 6 hereof, the Custodian or any Subcustodian advances monies to facilitate settlement or otherwise for benefit of the Fund (whether or not any Principal or Agency Account shall be overdrawn either during, or at the end of, any Business Day), Fund hereby does: 7.6.1 grant to the Custodian a continuing security interest in certain Investments (as mutually agreed from time to time) as security for such Advance, such security interest to be effective only as long as such Advance remain outstanding; and, 7.6.2 agree that the Custodian may secure the resulting Advance by perfecting a security interest in such Investments under Applicable Law. The Custodian shall promptly notify the Fund of any such Advances and the time at which such Advances must be repaid. Such Advances shall be deemed a loan payable on demand, bearing interest at the rate customarily charged by the Custodian on similar loans. Neither the Custodian nor any Subcustodian shall be obligated to advance monies to the Fund, and in the event that such Advance occurs, any transaction giving rise to an Advance shall be for the account and risk of the Fund and shall not be deemed to be a transaction undertaken by the Custodian for its own account and risk. If such Advance shall have been made by a Subcustodian or any other person, the Custodian may assign any rights granted to the Custodian hereunder to such Subcustodian or other person. If the Fund shall fail to repay when due the principal balance of an Advance and accrued and unpaid interest thereon, the Custodian or its assignee, as the case may be, shall be entitled to utilize the available cash balance in the applicable Series Agency or Principal Account and to dispose of any agreed upon Investments to the extent necessary to recover payment of all principal of, and interest on, such Advance in full. The Custodian may assign any rights it has hereunder to a Subcustodian or third party. Any security interest in Investments taken hereunder shall be treated as Financial Assets credited to Securities Accounts under Articles 8 and 9 of the UCC. Accordingly, the Custodian shall have the rights and benefits of a secured creditor that is a Securities Intermediary under such Articles 8 and 9. 17 7.7 INTEGRATED ACCOUNT. For purposes hereof, deposits maintained in all Principal Accounts for each Series of each Fund (whether or not denominated in Dollars) shall collectively constitute a single and indivisible current account with respect to that Series' obligations to the Custodian, or its assignee, and balances in such Principal Accounts shall be available for satisfaction of that Series' obligations under this Section 7. The Custodian shall further have a right of offset against the balances in any Agency Account maintained hereunder to the extent that the aggregate of all Principal Accounts is overdrawn. 8. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Subject to the provisions hereinafter set forth in this Section 8, the Fund hereby authorizes the Custodian to utilize Securities Depositories to act on behalf of the Fund and to appoint from time to time and to utilize Subcustodians. With respect to securities and funds held by a Subcustodian, either directly or indirectly (including by a Securities Depository or Clearing Corporation), notwithstanding any provisions of this Agreement to the contrary, payment for securities purchased and delivery of securities sold may be made prior to receipt of securities or payment, respectively, and securities or payment may be received in a form, in accordance with (a) governmental regulations, (b) rules of Securities Depositories and clearing agencies, (c) generally accepted trade practice in the applicable local market, (d) the terms and characteristics of the particular Investment, or (e) the terms of Instructions. 8.1 DOMESTIC SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian may deposit and/or maintain, either directly or through one or more agents appointed by the Custodian, Investments of the Fund in any Securities Depository in the United States, including The Depository Trust Company, provided such Depository meets applicable requirements of the Federal Reserve Bank or of the Securities and Exchange Commission. The Custodian may, at any time and from time to time, appoint any bank as defined in Section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under Section 17(f) of the 1940 Act and the rules and regulations thereunder, to act on behalf of the Fund as a Subcustodian for purposes of holding Investments of the Fund in the United States. 18 8.2 FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Unless instructed otherwise by the Fund, the Custodian may deposit and/or maintain non-U.S. Investments of the Fund in any non-U.S. Securities Depository provided such Securities Depository meets the requirements of an "eligible securities depository" under Rule 17f-7 promulgated under the 1940 Act, or any successor rule or regulation ("Rule 17f-7") or which by order of the Securities and Exchange Commission is exempted therefrom. Prior to the time that securities are placed with such depository, but subject to the provisions of Section 8.2.5 below, the Custodian shall have prepared an analysis of the custody risks associated with maintaining assets with the Securities Depository and shall have established a system to monitor such risks on a continuing basis in accordance with Subsection 8.2.3 of this Section. Additionally, the Custodian may, at any time and from time to time, appoint (a) any bank, trust company or other entity meeting the requirements of an "eligible foreign custodian" under Rule 17f-5 under the 1940 Act or which by order of the Securities and Exchange Commission is exempted therefrom, or (b) any bank as defined in Section 2(a)(5) of the 1940 Act meeting the requirements of a custodian under Section 17(f) of the 1940 Act and the rules and regulations thereunder, to act on behalf of the Fund as a Subcustodian for purposes of holding Investments of the Fund outside the United States. Such appointment of foreign Subcustodians shall be subject to approval of the Fund in accordance with Subsections 8.2.1 and 8.2.2 hereof, and the use of non-U.S. Securities Depositories shall be subject to the terms of Subsections 8.2.3, 8.2.4 and 8.2.5 hereof. An Instruction to open an account in a given country shall comprise authorization of the Custodian to hold assets in such country in accordance with the terms of this Agreement. The Custodian shall not be required to make independent inquiry as to the authorization of the Fund to invest in such country. 19 8.2.1 BOARD APPROVAL OF FOREIGN SUBCUSTODIANS. Unless and except to the extent that the Board has delegated to, and the Custodian has accepted delegation of, review of certain matters concerning the appointment of Subcustodians pursuant to Subsection 8.2.2, the Custodian shall, prior to the appointment of any Subcustodian for purposes of holding Investments of the Fund outside the United States, obtain written confirmation of the approval of the Board of Trustees or Directors of the Fund with respect to (a) the identity of a Subcustodian, and (b) the Subcustodian agreement which shall govern such appointment, such confirmation to be signed by an Authorized Person. Each such duly approved Subcustodian shall be listed on the Global Custody Network listing attached hereto as the same may from time to time be amended. 8.2.2 DELEGATION OF BOARD REVIEW OF SUBCUSTODIANS. From time to time, the Custodian may agree to perform certain reviews of Subcustodians and of Subcustodian Contracts as delegate of the Fund's Board. In such event, the Custodian's duties and obligations with respect to this delegated review will be performed in accordance with the terms of the attached 17f-5 Delegation Schedule to this Agreement. 8.2.3 MONITORING AND RISK ASSESSMENT OF SECURITIES DEPOSITORIES. Prior to the placement of any assets of the Fund with a Securities Depository, the Custodian: (a) shall provide to the Fund or its authorized representative an assessment of the custody risks associated with maintaining assets with such Securities Depository; and (b) shall have established a system to monitor the custody risks associated with maintaining assets with such Securities Depository on a continuing basis and to promptly notify the Fund or its Investment Adviser of any material changes in such risk. In performing its duties under this subsection, the Custodian shall use reasonable care, prudence and diligence and may rely on such reasonable sources of information as may be available including but not limited to: (i) published ratings; (ii) information supplied by a Subcustodian that is a participant in such Securities Depository; (iii) industry surveys or publications; (iv) information supplied by the depository itself, by its auditors (internal or external) or by the relevant Foreign Financial Regulatory Authority. It is acknowledged that information procured through some or all of these sources may not be independently verifiable by the Custodian and that direct access to Securities Depositories is limited in most circumstances. Accordingly, the Custodian shall not be responsible for errors or omissions in its duties hereunder provided that it has performed its monitoring and assessment duties with reasonable care. The risk assessment shall be provided to the Fund or its Investment Adviser by such means as the Custodian shall reasonably establish. Advice of material change in such assessment may be provided by the Custodian in the manner established as customary between the Fund and the Custodian for transmission of material market information. 8.2.4 WITHDRAWAL OF ASSETS FROM ELIGIBLE SECURITIES DEPOSITORY. If the Fund or its authorized representative determines that a custody arrangement with an Eligible Securities Depository no longer meets the requirements of Rule 17f-7(a), the Fund or its Investment Adviser shall Instruct the Custodian to remove the Fund's Assets from the Depository as soon as reasonably practicable. 20 8.2.5 SPECIAL TRANSITIONAL RULE. It is acknowledged that Rule 17f-7 has an effective date of July 1, 2001 and that the Custodian will require a period of time to fully prepare risk assessment information and to establish a risk monitoring system as provided in Subsection 8.2.3. Accordingly, until July 1, 2001, the Custodian shall use reasonable efforts to implement the measures required by Subsection 8.2.3, and shall in the interim provide to the Fund or its Investment Adviser the depository information customarily provided and shall promptly inform the Fund or its Investment Adviser of any material development affecting the custody risks associated with the maintenance of assets with a particular Securities Depository of which it becomes aware in the course of its general duties under this Agreement or from its duties under Subsection 8.2.3 as such duties have been implemented at any given time. 8.3 RESPONSIBILITY FOR SUBCUSTODIANS. Except as provided in the last sentence of this Section 8.3, the Custodian shall be liable to the Fund for any loss or damage to the Fund caused by or resulting from the acts or omissions of any Subcustodian to the extent that such acts or omissions would be deemed to be negligence, gross negligence, willful misconduct or bad faith in accordance with the terms of the relevant subcustodian agreement under the laws, circumstances and practices prevailing in the place where the act or omission occurred. The liability of the Custodian in respect of the countries and subcustodians listed on the attached Subcustodian Liability Appendix to this Agreement, as such Appendix may be amended from time to time, shall be subject to the additional condition that the Custodian actually recovers such loss or damage from the Subcustodian. 8.4 NEW COUNTRIES. The Fund shall be responsible for informing the Custodian sufficiently in advance of a proposed investment which is to be held in a country in which no Subcustodian is authorized to act in order that the Custodian shall, if it deems appropriate to do so, have sufficient time to establish a subcustodial arrangement in accordance herewith. In the event, however, the Custodian is unable to establish such arrangements prior to the time such Investment is to be acquired, the Custodian is authorized to designate at its discretion a local safekeeping agent, and the use of such local safekeeping agent shall be at the sole risk of the Fund, and accordingly the Custodian shall be responsible to the Fund for the actions of such agent if and only to the extent the Custodian shall have recovered from such agent for any damages caused the Fund by such agent. Notwithstanding the above, the Custodian shall be liable to the extent that (a) such local safekeeping agent is a parent, subsidiary or otherwise affiliated with the Custodian or (b) the Custodian's negligence, bad faith or willful misconduct is the direct cause of the local safekeeping agent failing to make the repayment or (c) a transaction or other matter between the Custodian and the local safekeeping agent unrelated to the Funds was the cause of the loss or damage. Under (a), (b) or (c) the Custodian shall be liable. 21 9. RESPONSIBILITY OF THE CUSTODIAN. In performing its duties and obligations hereunder, the Custodian shall use reasonable care under the facts and circumstances prevailing in the market where performance is effected. Subject to the specific provisions of this Section, the Custodian shall be liable for any direct damage incurred by the Fund in consequence of the Custodian's negligence, bad faith or willful misconduct. The Custodian hereby indemnifies the Fund and agrees to hold the Fund harmless from and against all claims and liabilities, including counsel fees and taxes, incurred or assessed against the Fund to the extent that such claim or liability arises from the negligence, gross negligence, bad faith or willful misconduct on the part of the Custodian itself. If a Fund gives written notice of claim to the Custodian, the Custodian shall promptly give a written response to the Fund. Not more than 30 days following the date of such response, unless the Custodian shall not be liable, the Custodian will pay the amount of such claim or reimburse the Fund for any payment made by the Fund in respect thereof. In no event shall the Custodian be liable hereunder for any special, indirect, punitive or consequential damages arising out of, pursuant to or in connection with this Agreement even if the Custodian has been advised of the possibility of such damages. It is agreed that the Custodian shall have no duty to assess the risks inherent in the Fund's Investments or to provide investment advice with respect to such Investments and that the Fund as principal shall bear any risks attendant to particular Investments such as failure of counterparty or issuer. The Custodian shall provide the Fund with its Market Practice Reports in respect of any foreign market where a Series shall place and maintain Investments. In addition, the Custodian shall provide the Fund with access to its Global Updates which address topical "market" events. 22 9.1 FORCE MAJEURE The Custodian shall not be responsible for any failure to perform its duties and correspondingly, shall not be liable for any loss, cost, damage or expense attributable to its failure to perform in consequence of a force majeure event. Force Majeure shall mean any circumstance or event which is beyond the reasonable control of the Custodian, a Subcustodian or any agent of the Custodian or a Subcustodian and which adversely affects the performance by the above parties, including any event caused by, arising out of or involving (a) an act of God, (b) accident, fire, water damage or explosion, (c) any third party computer, system or other equipment failure or malfunction caused by any computer virus or the malfunction or failure of any communications medium, (d) any third party interruption of the power supply or other utility service, (e) any strike or other work stoppage, whether partial or total, (f) any delay or disruption resulting from or reflecting the occurrence of any Sovereign Risk, (g) any disruption of, or suspension of trading in, the securities, commodities or foreign exchange markets, whether or not resulting from or reflecting the occurrence of any Sovereign Risk, (h) any encumbrance on the transferability of a currency or a currency position on the actual settlement date of a foreign exchange transaction, whether or not resulting from or reflecting the occurrence of any Sovereign Risk, or (i) any other cause similarly beyond the reasonable control of the Custodian, provided always that this shall not affect the Custodian's duty to indemnify the Fund for other losses, claims and liabilities for which the Custodian is bound to indemnify the Fund pursuant to Section 9. The Custodian and the Subcustodian shall take reasonable steps to mitigate additional damages. The Custodian shall notify the Fund when it becomes aware of a situation outlined above. The Fund shall not be responsible for temporary delays in the performance of its duties and obligations and correspondingly shall not be liable for any loss, cost, damage or expense attributable to such delay in consequence of a Force Majeure event as described above affecting the Fund's principal place of business operations or administration; provided always that this shall not affect the Fund's duty to indemnify the Custodian for losses, claims and liabilities for which the Fund is bound to indemnify the Custodian pursuant to Section 10. 9.2 Limitations of Performance. The Custodian shall not be responsible under this Agreement for any failure to perform its duties, and shall not be liable hereunder for any loss or damage in association with such failure to perform, for or in consequence of the following causes: 23 9.2.1 COUNTRY RISK. Country Risk shall mean, with respect to the acquisition, ownership, settlement or custody of Investments in a jurisdiction, all risks relating to, or arising in consequence of, systemic and markets factors affecting the acquisition, payment for or ownership of Investments including (a) the prevalence of crime and corruption, (b) the inaccuracy or unreliability of business and financial information, (c) the instability or volatility of banking and financial systems, or the absence or inadequacy of an infrastructure to support such systems, (d) custody and settlement infrastructure of the market in which such Investments are transacted and held, (e) the acts, omissions and operation of any Securities Depository, (f) the risk of the bankruptcy or insolvency of banking agents, counterparties to cash and securities transactions, registrars or transfer agents, and (g) the existence of market conditions which prevent the orderly execution or settlement of transactions or which affect the value of assets. The Custodian shall provide the Fund with its Market Practice Reports in respect of any foreign market where a Series shall place and maintain Investments. Such Market Practice Report may describe some of the Country Risks outlined above. In addition, the Custodian shall provide the Fund with access to its Global Updates which may describe some timely Country Risks outlined above. 9.2.2 SOVEREIGN RISK. Sovereign Risk shall mean, in respect of any jurisdiction, including the United States of America, where Investments are acquired or held hereunder or under a Subcustody Agreement, (a) any act of war, terrorism, riot, insurrection or civil commotion, (b) the imposition of any investment, repatriation or exchange control restrictions by any Governmental Authority, (c) the confiscation, expropriation or nationalization of any Investments by any Governmental Authority, whether de facto or de jure, (d) any devaluation or revaluation of the currency, (e) the imposition of taxes, levies or other charges affecting Investments, (f) any change in the Applicable Law, or (g) any other economic or political risk incurred or experienced. The Custodian shall provide the Fund with its Market Practice Reports in respect of any foreign market where a Series shall place and maintain Investments. Such Market Practice Report may describe some of the Sovereign Risks outlined above. In addition, the Custodian shall provide the Fund with access to its Global Updates which may describe some timely Sovereign Risks outlined above. 9.3. LIMITATIONS ON LIABILITY. The Custodian shall not be liable for any loss, claim, damage or other liability arising from the following causes: 9.3.1 FAILURE OF THIRD PARTIES. The failure of any third party including: (a) any issuer of Investments or book-entry or other agent of an issuer; (b) any counterparty with respect to any Investment, including any issuer of exchange-traded or other futures, option, derivative or commodities contract; (c) failure of an Investment Advisor, Foreign Custody Manager or other agent of the Fund; or (d) failure of other third parties similarly beyond the control or choice of the Custodian unless: (a) any such third party is a parent, subsidiary or otherwise affiliated with the Custodian or (b) the Custodian's negligence, bad faith or willful misconduct was the direct cause of the failure of the third party or (c) a transaction or other matter between the Custodian and the third party unrelated to the Funds was the cause of the failure of the third party. Under (a), (b) or (c) the Custodian shall be liable for the failure of such third party. 9.3.2 INFORMATION SOURCES. The Custodian may rely upon information received from issuers of Investments or agents of such issuers, information received from Subcustodians and from other commercially reasonable sources such as commercial data bases and the like, but shall not be responsible for specific inaccuracies in such information, provided that the Custodian has relied upon such information in good faith, or for the failure of any commercially reasonable information provider. 9.3.3 RELIANCE ON INSTRUCTION. Action by the Custodian or the Subcustodian in accordance with an Instruction, even when such action conflicts with, or is contrary to any provision of, the Fund's declaration of trust, certificate of incorporation or by-laws, Applicable Law, or actions by the trustees, directors or shareholders of the Fund. If the Custodian or Subcustodian is aware of any of the above, it shall promptly contact an officer of the Fund. 24 9.3.4 RESTRICTED SECURITIES. The limitations inherent in the rights, transferability or similar investment characteristics of a given Investment of the Fund. 10. INDEMNIFICATION. The Fund hereby indemnifies the Custodian and each Subcustodian, and their respective agents, nominees and the partners, employees, officers and directors, and agrees to hold each of them harmless from and against all claims and liabilities, including counsel fees and taxes, incurred or assessed against any of them in connection with the performance of this Agreement and any Instruction except to the extent that such claim or liability is the result of the negligence, bad faith or willful misconduct of the Custodian or Subcustodian. If a Subcustodian or any other person indemnified under the preceding sentence, gives written notice of claim to the Custodian, the Custodian shall promptly give written notice to the Fund. Not more than thirty days following the date of such notice, unless the Custodian shall be liable under Section 8 hereof in respect of such claim, the Fund will pay the amount of such claim or reimburse the Custodian for any payment made by the Custodian in respect thereof. 11. REPORTS AND RECORDS. The Custodian shall: 11.1 create and maintain records relating to the performance of its obligations under this Agreement; 11.2 make available to the Fund, its auditors, agents and employees, upon reasonable request and during normal business hours of the Custodian, all records maintained by the Custodian pursuant to Section 11.1 above, subject, however, to all reasonable security requirements of the Custodian then applicable to the records of its custody customers generally; and 11.3 make available to the Fund all Electronic Reports; it being understood that the Custodian shall not be liable hereunder for the inaccuracy or incompleteness thereof or for errors in any information included therein except to the extent that such inaccuracy, incompleteness or errors are the result of the Custodian's negligence, bad faith or willful misconduct. 25 All such reports and records shall, to the extent applicable, be maintained and preserved in conformity with the 1940 Act and the rules and regulations thereunder. The Fund shall examine all records, howsoever produced or transmitted, promptly upon receipt thereof and notify the Custodian promptly of any discrepancy or error therein. Unless the Fund delivers written notice of any such discrepancy or error within a reasonable time after its receipt thereof, such records shall be deemed to be true and accurate. It is understood that the Custodian now obtains and will in the future obtain information on the value of assets from outside sources which may be utilized in certain reports made available to the Fund. The Custodian deems such sources to be reliable but it is acknowledged and agreed that the Custodian does not verify nor represent nor warrant as to the accuracy or completeness of such information and accordingly shall be without liability in selecting and using such sources and furnishing such information as long as the Custodian has shown due diligence in attempting to receive complete and accurate information. 12. MISCELLANEOUS. 12.1 PROXIES, ETC. The Fund will promptly execute and deliver, upon request, such proxies, powers of attorney or other instruments as may be necessary or desirable for the Custodian to provide, or to cause any Subcustodian to provide, custody services. 12.2 ENTIRE AGREEMENT. Except as specifically provided herein, this Agreement constitutes the entire agreement between the Fund and the Custodian with respect to the subject matter hereof. Accordingly, this Agreement supersedes any custody agreement or other oral or written agreements heretofore in effect between the Fund and the Custodian with respect to the custody of the Fund's Investments. 12.3 WAIVER AND AMENDMENT. No provision of this Agreement may be waived, amended or modified, and no addendum to this Agreement shall be or become effective, or be waived, amended or modified, except by an instrument in writing executed by the party against which enforcement of such waiver, amendment or modification is sought; provided, however, that an Instruction shall, whether or not such Instruction shall constitute a waiver, amendment or modification for purposes hereof, be deemed to have been accepted by the Custodian when it commences actions pursuant thereto or in accordance therewith. 26 12.4 GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH, AND BE GOVERNED BY THE LAWS OF, THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW OF SUCH STATE. 12.5 NOTICES. Notices and other writings contemplated by this Agreement, other than Instructions, shall be delivered (a) by hand, (b) by first class registered or certified mail, postage prepaid, return receipt requested, (c) by a nationally recognized overnight courier or (d) by facsimile transmission, provided that any notice or other writing sent by facsimile transmission shall also be mailed, postage prepaid, to the party to whom such notice is addressed. All such notices shall be addressed, as follows: If to the Fund: Vanguard Group P.O. Box 2600 Valley Forge, PA 19482 Attn: Assistant Treasurer Telephone: (610) 669-6106 Facsimile (610) 669-6112 If to the Custodian: Brown Brothers Harriman & Co. 40 Water Street Boston, Massachusetts 02109 Attn: Manager, Investor Services Department Telephone: (617) 772-1818 Facsimile: (617) 772-2263, or such other address as the Fund or the Custodian may have designated in writing to the other. 27 12.6 HEADINGS. Paragraph headings included herein are for convenience of reference only and shall not modify, define, expand or limit any of the terms or provisions hereof. 12.7 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. This Agreement shall become effective when one or more counterparts have been signed and delivered by the Fund and the Custodian. 12.8 CONFIDENTIALITY. The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party hereto shall be used by any other party hereto solely for the purpose of rendering or obtaining services pursuant to this Agreement and, except as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available other than through a breach of this Agreement, or that is required to be disclosed by or to any bank examiner of the Custodian or any Subcustodian, any Regulatory Authority, any auditor of the parties hereto, or by judicial or administrative process or otherwise by Applicable Law. 12.9 COUNSEL. In fulfilling its duties hereunder, the Custodian shall be entitled to receive and act upon the advice of (i) counsel regularly retained by the Custodian in respect of such matters, (ii) counsel for the Fund or (iii) such counsel as the Fund and the Custodian may agree upon, with respect to all matters, and the Custodian shall be without liability for any action reasonably taken or omitted pursuant to such advice (except to the extent that such action was due to the Custodian's negligence, bad faith or willful misconduct). 28 13. DEFINITIONS. The following defined terms will have the respective meanings set forth below. 13.1 advance shall mean any extension of credit by or through the Custodian or by or through any Subcustodian and shall include amounts paid to third parties for the account of the Fund or in discharge of any expense, tax or other item payable by the Fund. 13.2 AGENCY ACCOUNT shall mean any deposit account opened on the books of a Subcustodian or other banking institution in accordance with Section 7.1. 13.3 AGENT shall have the meaning set forth in the last paragraph of Section 6. 13.4 APPLICABLE LAW shall mean with respect to each jurisdiction, all (a) laws, statutes, treaties, regulations, guidelines (or their equivalents); (b) orders, interpretations, licenses and permits; and (c) judgments, decrees, injunctions, writs, orders and similar actions by a court of competent jurisdiction; compliance with which is required or customarily observed in such jurisdiction. 13.5 AUTHORIZED PERSON shall mean any person or entity authorized to give Instructions on behalf of the Fund in accordance with Section 4.1. 13.6 BOOK-ENTRY AGENT shall mean an entity acting as agent for the issuer of Investments for purposes of recording ownership or similar entitlement to Investments, including without limitation a transfer agent or registrar. 13.7 CLEARING CORPORATION shall mean any entity or system established for purposes of providing securities settlement and movement and associated functions for a given market. 13.8 DELEGATION AGREEMENT shall mean any separate agreement entered into between the Custodian and the Fund or its authorized representative with respect to certain matters concerning the appointment and administration of Subcustodians delegated to the Custodian pursuant to Rule 17f-5 under the 1940 Act. 13.9 FOREIGN CUSTODY MANAGER shall mean the Fund's foreign custody manager appointed pursuant to Rule 17f-5 under the 1940 Act. 13.10 FOREIGN FINANCIAL REGULATORY AUTHORITY shall have the meaning given by Section 2(a)(50) of the 1940 Act. 13.11 FUNDS TRANSFER SERVICES AGREEMENT shall mean any separate agreement entered into between the Custodian and the Fund or its authorized representative with respect to certain matters concerning the processing of payment orders from Principal Accounts of the Fund. 13.12 INSTRUCTION(S) shall have the meaning assigned in Section 4. 13.13 INVESTMENT ADVISOR shall mean any investment advisor as defined in Section 202(a)(11) of the Investment Advisors Act of 1940. 13.14 INVESTMENTS shall mean any investment asset of the Fund, including without limitation securities, bonds, notes, and debentures as well as receivables, derivatives, contractual rights or entitlements and other intangible assets. 29 13.15 MARGIN ACCOUNT shall have the meaning set forth in Section 6.4 hereof. 13.16 PRINCIPAL ACCOUNT shall mean deposit accounts of the Fund carried on the books of BBH&Co. as principal in accordance with Section 7. 13.17 SAFEKEEPING ACCOUNT shall mean an account established on the books of the Custodian or any Subcustodian for purposes of segregating the interests of the Fund (or clients of the Custodian or Subcustodian) from the assets of the Custodian or any Subcustodian. 13.18 SECURITIES DEPOSITORY shall mean a central or book entry system or agency established under Applicable Law for purposes of recording the ownership and/or entitlement to investment securities for a given market that, if a foreign Securities Depository, meets the requirements of an "Eligible Securities Depository" as defined in Rule 17f-7 under the 1940 Act. 13.19 SUBCUSTODIAN shall mean each foreign bank appointed by the Custodian pursuant to Section 8, but shall not include Securities Depositories. 13.20 TRI-PARTY AGREEMENT shall have the meaning set forth in Section 6.4 hereof. 13.21 1940 Act shall mean the Investment Company Act of 1940. 14. COMPENSATION. The Fund agrees to pay to the Custodian for its services under this Agreement such amount as may be agreed upon in writing from time to time ("Fee Schedule"). 15. SEVERAL OBLIGATIONS OF THE FUNDS: With respect to any obligations of the Funds and their related accounts arising hereunder, the Custodian shall look for payment or satisfaction of any such obligation solely to the assets and property of the Fund and such accounts to which such obligation relates as though each investment company had separately contracted with the Custodian by separate written instrument with respect to each Fund and its accounts. The Custodian and each Subcustodian realize that the Fund is comprised of one or more Series. The Custodian and each Subcustodian agree that it will honor and abide by any and all Instructions or notices which the Custodian or Subcustodian may receive from time to time from the Fund with respect to designating, marking, allocating or otherwise attributing securities to or for the benefit of any one Series. 30 16. TERMINATION. This Agreement may be terminated by either party in accordance with the provisions of this Section. The provisions of this Agreement and any other rights or obligations incurred or accrued by any party hereto prior to termination of this Agreement shall survive any termination of this Agreement. This Agreement may be terminated as to one or more Funds (but less than all the Funds) by delivery of an amended List of Funds deleting all such Funds, in which case termination as to the deleted Funds shall take effect sixty days after the date of such delivery. The execution and delivery of an amended List of Funds which deletes one or more Funds, shall constitute a termination hereof only with respect to such deleted Funds, shall be governed by the provisions of Section 16.2 as to the identification of a successor custodian and the delivery of Investments of the Fund so deleted to such successor custodian, and shall not affect the obligations of the Custodian hereunder with respect to the other Funds set forth in the List of Funds, as amended from time to time. 16.1 Notice and Effect. This Agreement may be terminated by either party by written notice effective no sooner than sixty days following the date that notice to such effect shall be delivered to other party at its address set forth in paragraph 12.5 hereof. 16.2 SUCCESSOR CUSTODIAN. In the event of the appointment of a successor custodian, it is agreed that the Investments of the Fund held by the Custodian or any Subcustodian shall be delivered to the successor custodian in accordance with reasonable Instructions. The Custodian agrees to cooperate with the Fund in the execution of documents and performance of other actions necessary or desirable in order to facilitate the succession of the new custodian. If no successor custodian shall be appointed, the Custodian shall in like manner transfer the Fund's Investments in accordance with Instructions. 31 16.3 DELAYED SUCCESSION. If no Instruction has been given as of the effective date of termination, Custodian may at any time on or after such termination date and upon ten days written notice to the Fund either (a) deliver the Investments of the Fund held hereunder to the Fund at the address designated for receipt of notices hereunder; or (b) deliver any investments held hereunder to a bank or trust company having a capitalization of $2M USD equivalent and operating under the Applicable law of the jurisdiction where such Investments are located, such delivery to be at the risk of the Fund. In the event that Investments or moneys of the Fund remain in the custody of the Custodian or its Subcustodians after the date of termination owing to the failure of the Fund to issue Instructions with respect to their disposition or owing to the fact that such disposition could not be accomplished in accordance with such Instructions despite diligent efforts of the Custodian, the Custodian shall be entitled to compensation for its services with respect to such Investments and moneys during such period as the Custodian or its Subcustodians retain possession of such items and the provisions of this Agreement shall remain in full force and effect until disposition in accordance with this Section is accomplished. 32 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be duly executed as of the date first above written. By: /s/ Robert Snowden Assistant Treasurer On behalf of the Funds included on the List of Funds attached hereto BROWN BROTHERS HARRIMAN & CO. By: /s/ Stokley P. Towles Partner 33 LIST OF FUNDS SCHEDULE TO THE CUSTODIAN AGREEMENT BETWEEN CERTAIN OPEN-END MANAGEMENT INVESTMENT COMPANIES ("FUNDS") and BROWN BROTHERS HARRIMAN & CO. The following is a list of Funds and their Series for which the Custodian serves under an Amended Custodian Agreement dated as of June 25, 2001 (the "Agreement"): The following series of Vanguard International Equity Index Funds: Vanguard Emerging Markets Stock Index Fund Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund The following series of Vanguard Horizon Funds: Vanguard Global Asset Allocation Fund Vanguard Global Equity Fund The following series of Vanguard Tax-Managed Funds Vanguard Tax-Managed International Fund The following series of Vanguard Trustees' Equity Fund: Vanguard International Value Fund Vanguard Variable Insurance Funds-International Portfolio IN WITNESS WHEREOF, each of the parties hereto has caused this Schedule to be executed in its name and on behalf of such Funds. FUNDS BROWN BROTHERS HARRIMAN & CO. By: /s/ Robert Snowden By: /s/ Stokley P. Towles Name: Robert Snowden Name: Stokley P. Towles Title: Assistant Treasurer Title: Partner 34 17f-5 DELEGATION SCHEDULE By the terms of this Delegation Schedule between certain open-end management investment companies (each investment company, a "Fund") organized under the laws of the State of Delaware and registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (the "1940 Act"), on behalf of certain of their series (each series a "Series"), each Fund hereby appoints BROWN BROTHERS HARRIMAN & CO., a New York limited partnership with an office in Boston, Massachusetts (the "Delegate") as its delegate to perform certain functions with respect to the custody of Fund Assets outside the United States. 1. Maintenance of Fund Assets Abroad. The Fund, acting through its Board or its duly authorized representative, hereby instructs Delegate pursuant to the terms of the Custodian Agreement to place and maintain the Fund's Assets in countries outside the United States in accordance with Instructions received from the Fund or the Fund's investment advisor. Such instruction shall represent a Proper Instruction under the terms of the Custodian Agreement. The Fund acknowledges that - (a) the Delegate shall perform services hereunder only with respect to the countries where it accepts Delegation as Foreign Custody Manager as indicated on the BBH Global Custody Network listing; (b) depending on conditions in the particular country, advance notice may be required before the Delegate shall be able to perform its duties hereunder in or with respect to such country (such advance notice to be reasonable in light of the specific facts and circumstances attendant to performance of duties in such country); and (c) nothing in this Delegation Schedule shall require the Delegate to provide delegated or custodial services in any country, and there may from time to time be countries as to which the Delegate determines it will not provide delegation services; such countries shall be indicated on the BBH Global Custody Network listing. 2. Delegation. Pursuant to the provisions of Rule 17f-5 under the 1940 Act as amended, the Board hereby delegates to the Delegate, and the Delegate hereby accepts such delegation and agrees to perform, only those duties set forth in this Delegation Schedule concerning the safekeeping of the Fund's Assets in each of the countries as to which it acts as the Board's delegate. The Delegate is hereby authorized to take such actions on behalf of or in the name of the Fund as are reasonably required to discharge its duties under this Delegation Schedule, including, without limitation, to cause the Fund's Assets to be placed with a particular Eligible Foreign Custodian in accordance herewith. The Fund confirms to the Delegate that the Fund or its investment adviser has considered the Sovereign Risk and prevailing Country Risk as part of its continuing investment decision process, including such factors as may be reasonably related to the systemic risk of maintaining the Fund's Assets in a particular country, including, but not limited to, financial infrastructure, prevailing custody and settlement systems and practices (including the use of any Compulsory Securities Depository), and the laws relating to the safekeeping and recovery of the Fund's Assets held in custody pursuant to the terms of the Custodian Agreement. 3. Selection of Eligible Foreign Custodian and Contract Administration. The Delegate shall perform the following duties with respect to the selection of Eligible Foreign Custodians and administration of certain contracts governing the Fund's foreign custodial arrangements: (a) Selection of Eligible Foreign Custodian. The Delegate shall place and maintain the Fund's Assets with an Eligible Foreign Custodian; provided that the Delegate shall have determined that the Fund's Assets will be subject to reasonable care based on the standards applicable to custodians in the relevant market after considering all factors relevant to the safekeeping of such assets including, without limitation: (i) The Eligible Foreign Custodian's practices, procedures, and internal controls, including, but not limited to, the physical protections available for certificated securities (if applicable), the controls and procedures for dealing with any Eligible Securities Depository, the method of keeping custodial records, and the security and data protection practices; (ii) Whether the Eligible Foreign Custodian has the requisite financial strength to provide reasonable care for the Fund's Assets; (iii) The Eligible Foreign Custodian's general reputation and standing; and (iv) Whether the Fund will have jurisdiction over and be able to enforce judgments against the Eligible Foreign Custodian, such as by virtue of the existence of any offices of such Eligible Foreign Custodian in the United States or such Eligible Foreign Custodian's appointment of an agent for service of process in the United States or consent to jurisdiction in the United States. 2 The Delegate shall be required to make the foregoing determination to the best of its knowledge and belief based only on information reasonably available to it. (b) Contract Administration. The Delegate shall cause that the foreign custody arrangements with an Eligible Foreign Custodian shall be governed by a written contract that the Delegate has determined will provide reasonable care for Fund assets based on the standards applicable to custodians in the relevant market. Each such contract shall, except as set forth in the last paragraph of this subsection (b), include provisions that provide: (i) For indemnification or insurance arrangements (or any combination of the foregoing) such that the Fund will be adequately protected against the risk of loss of Assets held in accordance with such contract; (ii) That the Fund's Assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Eligible Foreign Custodian or its creditors, except a claim of payment for their safe custody or administration or, in the case of cash deposits, liens or rights in favor of creditors of such Custodian arising under bankruptcy, insolvency or similar laws; (iii) That beneficial ownership of the Fund's Assets will be freely transferable without the payment of money or value other than for safe custody or administration; (iv) That adequate records will be maintained identifying the Fund's Assets as belonging to the Fund or as being held by a third party for the benefit of the Fund; (v) That the Fund's independent public accountants will be given access to those records described in (iv) above or confirmation of the contents of such records; and (vi) That the Fund will receive sufficient and timely periodic reports with respect to the safekeeping of the Fund's Assets, including, but not limited to, notification of any transfer to or from the Fund's account or a third party account containing the Fund's Assets. Such contract may contain, in lieu of any or all of the provisions specified in this Section 3 (b), such other provisions that the Delegate determines will provide, in their entirety, the same or a greater level of care and protection for the Fund's Assets as the specified provisions, in their entirety. 3 (c) Limitation to Delegated Selection. Notwithstanding anything in this Delegation Schedule to the contrary, the duties under this Section 3 shall apply only to Eligible Foreign Custodians selected by the Delegate and shall not apply to Securities Depositories or to any Eligible Foreign Custodian that the Delegate is directed to use pursuant to Section 7. 4. Monitoring. The Delegate shall establish a system to monitor at reasonable intervals (but at least annually) the appropriateness of maintaining the Fund's Assets with each Eligible Foreign Custodian that has been selected by the Delegate pursuant to Section 3 of this Delegation Schedule. The Delegate shall monitor the continuing appropriateness of placement of the Fund's Assets in accordance with the criteria established under Section 3(a) of this Delegation Schedule. The Delegate shall monitor the continuing appropriateness of the contract governing the Fund's arrangements in accordance with the criteria established under Section 3(b) of this Delegation Schedule. 5. Reporting. At least annually and more frequently as mutually agreed between the parties, the Delegate shall provide to the Fund's Board written reports specifying placement of the Fund's Assets with each Eligible Foreign Custodian selected by the Delegate pursuant to Section 3 of this Delegation Schedule and shall promptly report as to any material changes to such foreign custody arrangements. Delegate will prepare such a report with respect to any Eligible Foreign Custodian that the Delegate has been instructed to use pursuant to Section 7 only to the extent specifically agreed with respect to the particular situation. Upon request by the Fund, the Delegate will identify the name, address and principal place of business of any Eligible Foreign Custodian of the Fund's Investments and the name and address of the governmental agency or other regulatory authority that supervises or regulates such Eligible Foreign Custodian. 6. Withdrawal of Fund's Assets. If the Delegate determines that an arrangement with a specific Eligible Foreign Custodian selected by the Delegate under Section 3 of this Delegation Schedule no longer meets the requirements of said Section, Delegate shall withdraw the Fund's Assets from the non-complying arrangement as soon as reasonably practicable; provided, however, that if in the reasonable judgment of the Delegate, such withdrawal would require liquidation of any of the Fund's Assets or would materially impair the liquidity, value or other investment characteristics of the Fund's Assets, it shall be the duty of the Delegate to provide information regarding the particular circumstances and to act only in accordance with Proper Instructions of an Authorized Person with respect to such liquidation or other withdrawal. 4 7. Direction as to Eligible Foreign Custodian. Notwithstanding this Delegation Schedule, the Fund, acting through its Board or its other authorized representative, may direct the Delegate to place and maintain the Fund's Assets with a particular Eligible Foreign Custodian, including without limitation with respect to investment in countries as to which the Custodian will not provide delegation services. In such event, the Delegate will notify the Fund that the Delegate will not provide delegation services in that country. In addition, the Delegate shall be entitled to rely on any such instruction as a Proper Instruction under the terms of the Custodian Agreement and shall have no duties under this Delegation Schedule with respect to such arrangement save those that it may undertake specifically in writing with respect to each particular instance. 8. Standard of Care. In carrying out its duties under this Delegation Schedule, the Delegate agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for safekeeping the Fund's Assets would exercise. 9. Representations. The Delegate hereby represents and warrants that it is a U.S. Bank and that this Delegation Schedule has been duly authorized, executed and delivered by the Delegate and is a legal, valid and binding agreement of the Delegate. The Fund hereby represents and warrants that its Board of Trustees has determined that it is reasonable to rely on the Delegate to perform the delegated responsibilities provided for herein and that this Delegation Schedule has been duly authorized, executed and delivered by the Fund and is a legal, valid and binding agreement of the Fund. 10. Effectiveness; termination. This Delegation Schedule shall be effective as of the date on which this Delegation Schedule shall have been accepted by the Delegate, as indicated by the date set forth below the Delegate's signature. This Delegation Schedule may be terminated at any time, without penalty, by written notice from the terminating party to the non-terminating party. Such termination shall be effective on the 60th day following the date on which the non-terminating party shall receive the foregoing notice. The foregoing to the contrary notwithstanding, this Delegation Schedule shall be deemed to have been terminated concurrently with the termination of the Custodian Agreement. 5 11. Notices. Notices and other communications under this Delegation Schedule are to be made in accordance with the arrangements designated for such purpose under the Custodian Agreement unless otherwise indicated in a writing referencing this Delegation Schedule and executed by both parties. 12. Definitions. Capitalized terms in this Delegation Schedule have the following meanings: a. Compulsory Securities Depository - shall mean a Securities Depository the use of which is mandatory (i) under applicable law or regulation; (ii) because securities cannot be withdrawn from the depository; or, (iii) because maintaining securities outside the Securities Depository is not consistent with prevailing custodial practices. b. Country Risk - shall have meaning set forth in Section 9.2.1 of the Custodian Agreement. c. Eligible Foreign Custodian - shall have the meaning set forth in Rule 17f-5(a)(1) under the 1940 Act and shall also include a U.S. Bank. d. Eligible Securities Depository - shall have the meaning set forth in Rule 17f-7(b)(1) under the 1940 Act. e. Fund's Assets - shall mean any of the Fund's investments (including foreign currencies) for which the primary market is outside the United States, and such cash and cash equivalents as are reasonably necessary to effect the Fund's transactions in such investments. 6 f. Proper Instructions - shall have the meaning set forth in the Custodian Agreement. g. Sovereign Risk - shall have the meaning set forth in Section 9.2.2 of the Custodian Agreement. h. U.S. Bank - shall have the meaning set forth in Rule 17f-5(a) (7) under the 1940 Act. 13. Governing Law and Jurisdiction. This Delegation Schedule shall be construed in accordance with the laws of the State of New York. 14. Fees. Delegate shall perform its functions under this Delegation Schedule for the compensation determined under the Custodian Agreement. 15. Integration. This Delegation Schedule sets forth all of the Delegate's duties with respect to the selection and monitoring of Eligible Foreign Custodians, the administration of contracts with Eligible Foreign Custodians, the withdrawal of assets from Eligible Foreign Custodians and the issuance of reports in connection with such duties. The terms of the Custodian Agreement shall apply generally as to matters not expressly covered in this Delegation Schedule, including dealings with the Eligible Foreign Custodians in the course of discharge of the Delegate's obligations under the Custodian Agreement. 7 NOW THEREFORE, the parties have caused this Delegation Schedule to be executed by its duly authorized representatives, effective as of the date written below. BROWN BROTHERS HARRIMAN & CO. ON BEHALF OF THE FUNDS INCLUDED IN THE LIST OF FUNDS ATTACHED TO THE AMENDED AND RESTATED CUSTODIAN AGREEMENT By: /s/ Stokley P. Towles By: /s/ Robert D. Snowden Name: Stokley P. Towles Name: Robert D. Snowden Title: Partner Title: Assistant Treasurer Date: June 25, 2001 Date: June 25, 2001 8 BROWN BROTHERS HARRIMAN - GLOBAL CUSTODY NETWORK VANGUARD GLOBAL CUSTODY NETWORK LISTING COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ ARGENTINA CITIBANK NA, BUENOS AIRES CVSA Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 AUSTRALIA NATIONAL AUSTRALIA BANK LTD. (NAB) Austraclear National Australia Bank Agt. 5/1/85 CHESS Agreement Amendment 2/13/92 RBA Omnibus Amendment 11/22/93 AUSTRIA BANK AUSTRIA AG OeKB Creditanstalt Bankverein Agreement 12/18/89 Omnibus Amendment 1/17/94 BAHRAIN HSBC BANK MIDDLE EAST, BAHRAIN FOR None HONGKONG & SHANGHAI BANKING CORP. LTD. (HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 BBME Supplement 5/14/96 Side Letter Agreement dated 7/28/97 BANGLADESH STANDARD CHARTERED BANK (SCB), DHAKA None Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 BELGIUM BANK BRUSSELS LAMBERT (BBL) CIK Banque Bruxelles Lambert Agt. 11/15/90 Omnibus Amendment 3/1/94 BERMUDA BANK OF N.T. BUTTERFIELD & SON LTD. None The Bank of N.T. Butterfield & Son Ltd. Agreement 5/27/97 BOTSWANA STANBIC BANK BOTSWANA LTD FOR STANDARD None BANK OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 9/29/97 BRAZIL BANKBOSTON NA, SAO PAULO CBLC The First National Bank of Boston Agreement 1/5/88 Omnibus Amendment 2/22/94 Amendment 7/29/96 BULGARIA ING BANK NV, SOFIA BNB ING Bank N.V. Agreement 9/15/97 CANADA ROYAL BANK OF CANADA (RBC) Bank of Canada The Royal Bank of Canada Agreement 2/23/96 Page 1 of 7 COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ CHILE CITIBANK NA, SANTIAGO DCV Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 CHINA STANDARD CHARTERED BANK (SCB), SHENZHEN SSCC Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 CHINA STANDARD CHARTERED BANK (SCB), SHANGHAI SSCCRC Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 COLOMBIA CITITRUST COLOMBIA SA, SOCIEDAD DCV FIDUCIARIA FOR CITIBANK NA Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, N.A./Cititrust Colombia Agreement 12/2/91 Citibank, N.A. Subsidiary Amendment 10/19/95 CROATIA BANK AUSTRIA CREDITANSTALT CROATIA DD SDA FOR BANK AUSTRIA AG CNB Creditanstalt Bankverein Agreement Ministry of Finance 12/18/89 Omnibus Amendment 1/17/94 Creditanstalt AG / Bank Austria Creditanstalt Croatia d.d. Agt. 9/1/98 CYPRUS CYPRUS POPULAR BANK LTD. None (aka Laiki Bank) Cyprus Popular Bank Ltd. Agt. 2/18/98 ***BBH'S RESPONSIBILITY FOR THIS SUBCUSTODIAN IS CONDITIONED ON THE ABILITY OF BBH TO RECOVER FROM THE SUBCUSTODIAN. IN ADDITION, BBH DOES NOT ACCEPT DELEGATION IN THIS MARKET.*** CZECH REPUBLIC CITIBANK AS FOR CITIBANK NA CNB-TKD System Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank NA / Citibank AS Agreement 6/24/96 DENMARK DANSKE BANK VP Den Danske Bank Agreement 1/1/89 Omnibus Amendment 12/1/93 ECUADOR CITIBANK NA, QUITO DECEVALE Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, Quito Side Letter 7/3/95 EGYPT CITIBANK NA, CAIRO MCSD Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 FINLAND MERITA BANK PLC FCSD Union Bank of Finland Agreement 2/27/89 Omnibus Amendment 4/6/94 FRANCE CREDIT AGRICOLE INDOSUEZ (CAI) BdF Banque Indosuez Agreement 7/19/90 Omnibus Amendment 3/10/94 Page 2 of 7 COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ GERMANY DRESDNER BANK CBF Dresdner Bank Agreement 10/6/95 GHANA MERCHANT BANK (GHANA) LIMITED FOR None STANDARD BANK OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 ***BBH'S RESPONSIBILITY FOR THIS SUBCUSTODIAN IS CONDITIONED ON THE ABILITY OF BBH TO RECOVER FROM THE SUBCUSTODIAN. IN ADDITION, BBH DOES NOT ACCEPT DELEGATION IN THIS MARKET.*** GREECE CITIBANK NA, ATHENS CSD Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 HONG KONG HONGKONG & SHANGHAI BANKING CMU CORPORATION LTD. Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 HUNGARY CITIBANK BUDAPEST RT. FOR CITIBANK NA KELER Ltd. Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, N.A. Subsidiary Amendment 10/19/95 Citibank, N.A. / Citibank Budapest Agreement 6/23/92 Citibank, N.A. / Citibank Budapest Amendment 9/29/92 INDIA DEUTSCHE BANK AG, MUMBAI NSDL Deutsche Bank Agreement 8/21/96 Deutsche Bank Agreement 2/19/96 INDONESIA CITIBANK NA, JAKARTA PT KSEI Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 IRELAND ALLIED IRISH BANKS PLC (AIB) CREST Allied Irish Banks Agreement 1/10/89 Omnibus Amendment 4/8/94 ISRAEL BANK HAPOALIM BM TASECH Bank Hapoalim Agreement 8/27/92 ITALY INTESA BCI SPA Monte Titoli S.P.A. Banca Commerciale Italiana Agreement 5/8/89 Agreement Amendment 10/8/93 Omnibus Amendment 12/14/93 JAPAN BANK OF TOKYO - MITSUBISHI, LTD. (BTM) BoJ Bank of Tokyo - Mitsubishi Agreement 6/17/96 Page 3 of 7 COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ JORDAN HSBC BANK MIDDLE EAST, JORDAN FOR None HONGKONG & SHANGHAI BANKING CORP. (HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 BBME Supplement 5/14/96 Side letter Agreement dated 7/28/97 KENYA STANBIC BANK KENYA LIMITED FOR STANDARD None BANK OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 9/29/97 KOREA CITIBANK NA, SEOUL KSD Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, Seoul Agreement Supplement 10/28/94 LEBANON HSBC BANK MIDDLE EAST, LEBANON FOR Midclear HONGKONG & SHANGHAI BANKING CORP. (HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 BBME Supplement 5/14/96 Side letter Agreement dated 7/28/97 LUXEMBOURG KREDIETBANK LUXEMBOURG (KBL) CBL Kredietbank Luxembourg Agt. 4/7/98 MALAYSIA HSBC BANK MALAYSIA BERHAD (HBMB) BNM FOR HONGKONG SHANGHAI BANKING CORP. (HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 Malaysia Subsidiary Supplement 5/23/94 Side letter Agreement dated 7/28/97 MAURITIUS HONGKONG & SHANGHAI BANKING CORP. LTD. CDS (HSBC), MAURITIUS Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 MEXICO CITIBANK MEXICO SA FOR CITIBANK NA Banxico Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank Mexico, S.A. Amendment 2/28/95 MOROCCO CITIBANK MAGHREB, CASABLANCA FOR MCLR Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Side Letter Agreement pending NAMIBIA STANDARD BANK NAMIBIA FOR STANDARD BANK None OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 10/3/96 NETHERLANDS FORTIS BANK NECIGEF MeesPierson NV Agreement 6/4/99 Page 4 of 7 COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ NEW ZEALAND NATIONAL AUSTRALIA BANK LTD. (NAB), NZCSD AUCKLAND National Australia Bank Agt. 5/1/85 Agreement Amendment 2/13/92 Omnibus Amendment 11/22/93 New Zealand Addendum 3/7/89 NORWAY DEN NORSKE BANK VPS Den norske Bank Agreement 11/16/94 OMAN HSBC BANK MIDDLE EAST, OMAN FOR MDSRC HONGKONG & SHANGHAI BANKING CORP. LTD. (HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 BBME Supplement 5/14/96 Side letter Agreement dated 7/28/97 PAKISTAN STANDARD CHARTERED BANK (SCB), KARACHI CDC Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 PERU CITIBANK NA, LIMA CAVALI Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 PHILIPPINES CITIBANK NA, MANILA PCD Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 POLAND BANK HANDLOWY W WARSZA WIE SA (BHW) CRBS FOR CITIBANK NA Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank Subsidiary Amendment 10/30/95 Citibank, N.A. / Citibank Poland S.A. Agt. 11/6/92 PORTUGAL BANCO COMERCIAL PORTUGUES SA (BCP) CVM Banco Comercial Portugues 5/18/98 ROMANIA ING BANK NV, BUCHAREST BSE ING Bank N.V. Agreement 9/29/97 NBR SNCDD RUSSIA CREDIT SUISSE FIRST BOSTON AO (CSFB AO) VTB FOR CREDIT SUISSE, ZURICH Credit Suisse First Boston Agreement 8/18/99 Credit Suisse, Zurich Agreement 4/30/96 ***REQUIRES SIGNED AMENDMENT TO THE CUSTODIAN AGREEMENT PRIOR TO INVESTMENT.*** RUSSIA CITIBANK T/O FOR CITIBANK NA VTB Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Citibank, N.A. Subsidiary Amendment 10/19/95 Citibank N.A. / Citibank T/O Agt. 6/16/97 Side Letter Agt. 8/18/97 ***REQUIRES SIGNED AMENDMENT TO THE CUSTODIAN AGREEMENT PRIOR TO INVESTMENT.*** Page 5 of 7 COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ SINGAPORE HONGKONG & SHANGHAI BANKING CORP. LTD. CDP (HSBC), SINGAPORE Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 SLOVAKIA ING BANK NV, BRATISLAVA NBS ING Bank N.V. Agreement 9/1/98 SLOVENIA BANK AUSTRIA CREDITANSTALT DD LJUBLJANA KDD Creditanstalt Bankverein Agreement 12/18/89 Omnibus Amendment 1/17/94 Master Subcustodian Agreement 4/17/98 Amendment dated 4/17/98 Amendment dated 10/14/98 SOUTH AFRICA STANDARD BANK OF SOUTH AFRICA (SBSA) CDL Standard Bank of South Africa Agreement 3/11/94 SPAIN BANCO SANTANDER CENTRAL HISPANO SA Banco de Espana (BSCH) Banco de Santander Agreement 12/14/88 SRI LANKA HONGKONG & SHANGHAI BANKING CORP. LTD. CDS (HSBC), COLOMBO Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 SWAZILAND STANDARD BANK SWAZILAND LTD FOR None STANDARD BANK OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 9/29/97 SWEDEN SKANDINAVISKA ENSKILDA BANKEN (SEB) VPC Skandinaviska Enskilden Banken Agreement 2/20/89 Omnibus Amendment 12/3/93 SWITZERLAND UBS AG SIS Union Bank of Switzerland Agreement 12/20/88 Omnibus Amendment 11/29/94 TAIWAN STANDARD CHARTERED BANK (SCB), TAIPEI TSCD Standard Chartered Bank Agreement 2/18/92 Omnibus Amendment 6/13/94 Appendix 4/8/96 THAILAND HONGKONG & SHANGHAI BANKING CORP. LTD. TSDC (HSBC), BANGKOK Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Omnibus Supplement 12/29/93 Schedule 5/14/96 TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO. (BBH&CO.) CBL TURKEY CITIBANK NA, ISTANBUL CBT Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 Page 6 of 7 COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ UNITED KINGDOM HSBC BANK PLC CMO Midland Bank Agreement 8/8/90 Omnibus Amendment 12/15/93 URUGUAY BANKBOSTON NA, MONTEVIDEO None The First National Bank of Boston Agreement 1/5/88 Omnibus Amendment 2/22/94 Amendment 7/29/96 Uruguay Amendment 10/18/96 VENEZUELA CITIBANK NA, CARACAS CVV Citibank, N.A., New York Agt. 7/16/81 New York Agreement Amendment 8/31/90 New York Agreement Amendment 7/26/96 ZAMBIA STANBIC BANK ZAMBIA LTD FOR STANDARD BoZ BANK OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 10/3/96 ZIMBABWE STANBIC BANK ZIMBABWE LTD FOR STANDARD None BANK OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 Subsidiary Amendment 10/3/96 Page 7 of 7 BROWN BROTHERS HARRIMAN - GLOBAL CUSTODY NETWORK VANGUARD SUBCUSTODIAN LIABILITY APPENDIX COUNTRY SUBCUSTODIAN DEPOSITORIES - ------- ------------ ------------ CYPRUS THE CYPRUS POPULAR BANK LTD. None (aka Laiki Bank) Cyprus Popular Bank Ltd. Agt. 2/18/98 GHANA MERCHANT BANK (GHANA) LIMITED FOR None STANDARD BANK OF SOUTH AFRICA (SBSA) Standard Bank of South Africa Agreement 3/11/94 Page 1 of 1 LIST OF FUNDS AMENDED SCHEDULE TO THE CUSTODIAN AGREEMENT BETWEEN CERTAIN OPEN-END MANAGEMENT INVESTMENT COMPANIES ("FUNDS") and BROWN BROTHERS HARRIMAN & CO. The following is a list of Funds and their Series for which the Custodian serves under an Amended Custodian Agreement dated as of June 25, 2001 (the "Agreement"): The following series of Vanguard International Equity Index Funds: Vanguard Emerging Markets Stock Index Fund Vanguard European Stock Index Fund Vanguard Pacific Stock Index Fund The following series of Vanguard Horizon Funds: Vanguard Global Equity Fund The following series of Vanguard Tax-Managed Funds Vanguard Tax-Managed International Fund The following series of Vanguard Trustees' Equity Fund: Vanguard International Value Fund Vanguard Variable Insurance Funds-International Portfolio The following series of Vanguard World Funds: Vanguard Consumer Discretionary Index Fund Vanguard Consumer Staples Index Fund Vanguard Energy Index Fund Vanguard Financials Index Fund Vanguard Health Care Index Fund Vanguard Industrials Index Fund Vanguard Information Technology Index Fund Vanguard Materials Index Fund Vanguard Telecommunication Services Index Fund Vanguard Utilities Index Fund IN WITNESS WHEREOF, each of the parties hereto has caused this Schedule to be executed in its name and on behalf of such Funds on October 1, 2003. FUNDS BROWN BROTHERS HARRIMAN & CO. By: s/Thomas J. Higgins By: s/ Stokley P. Towles Name: Thomas J. Higgins Name: Stokley P. Towles Title: Treasurer Title: Partner LIST OF FUNDS AMENDED SCHEDULE TO THE CUSTODIAN AGREEMENT BETWEEN CERTAIN OPEN-END MANAGEMENT INVESTMENT COMPANIES ("FUNDS") and BROWN BROTHERS HARRIMAN & CO. The following is a list of Funds and their Series for which the Custodian serves under an Amended Custodian Agreement dated as of June 25, 2001 (the "Agreement"): The following series of Vanguard International Equity Index Funds: Vanguard Emerging Markets Stock Index Fund Vanguard European Stock Index Fund Vanguard FTSE All-World ex-US Index Fund Vanguard Pacific Stock Index Fund The following series of Vanguard Horizon Funds: Vanguard Global Equity Fund The following series of Vanguard Tax-Managed Funds Vanguard Tax-Managed International Fund The following series of Vanguard Trustees' Equity Fund: Vanguard International Value Fund Vanguard Variable Insurance Funds-International Portfolio The following series of Vanguard World Funds: Vanguard Consumer Discretionary Index Fund Vanguard Consumer Staples Index Fund Vanguard Energy Index Fund Vanguard Financials Index Fund Vanguard Health Care Index Fund Vanguard Industrials Index Fund Vanguard Information Technology Index Fund Vanguard Materials Index Fund Vanguard Telecommunication Services Index Fund Vanguard Utilities Index Fund IN WITNESS WHEREOF, each of the parties hereto has caused this Schedule to be executed in its name and on behalf of such Funds on December 27, 2006. FUNDS BROWN BROTHERS HARRIMAN & CO. By: /s/ Thomas J. Higgins By: /s/ James R. Kent Name: Thomas J. Higgins Name: James R. Kent Title: Treasurer Title: Managing Director EX-99.J 5 consent.txt CONSENT OF INDEPENDENT REGISTERED ACCOUNTING FIRM CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Prospectuses and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 54 to the Registration Statement on Form N-1A (the "Registration Statement") of our report dated December 18, 2006, relating to the financial statements and financial highlights appearing in the October 31, 2006 Annual Report to Shareholders of the Vanguard European Stock Index Fund, the Vanguard Pacific Stock Index Fund, and the Vanguard Emerging Markets Stock Index Fund, which report is also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Financial Highlights" in the Prospectuses and under the headings "Financial Statements" and "Service Providers--Independent Registered Public Accounting Firm" in the Statement of Additional Information. PricewaterhouseCoopers LLP Philadelphia, PA February 23, 2007 -----END PRIVACY-ENHANCED MESSAGE-----