U.S. patent application number 14/147092 was filed with the patent office on 2014-07-10 for method and system for implementing an investment company that issues a class of conventional shares and a class of exchange-traded shares in the same fund.
This patent application is currently assigned to The Vanguard Group, Inc.. The applicant listed for this patent is The Vanguard Group, Inc.. Invention is credited to Walter LENHARD, George U. SAUTER.
Application Number | 20140195404 14/147092 |
Document ID | / |
Family ID | 25180267 |
Filed Date | 2014-07-10 |
United States Patent
Application |
20140195404 |
Kind Code |
A1 |
SAUTER; George U. ; et
al. |
July 10, 2014 |
METHOD AND SYSTEM FOR IMPLEMENTING AN INVESTMENT COMPANY THAT
ISSUES A CLASS OF CONVENTIONAL SHARES AND A CLASS OF
EXCHANGE-TRADED SHARES IN THE SAME FUND
Abstract
A method is provided for administering a single investment
company that issues one or more classes of shares that are bought
from and redeemed with the single investment company at a net asset
value and issues one or more classes of shares that are listed for
trading on a securities exchange and that are bought and sold at
negotiated market prices. One or more computers maintain account
data of the outstanding shares. An owner of any share of any share
class has an undivided interest in the single investment
company.
Inventors: |
SAUTER; George U.; (Malvern,
PA) ; LENHARD; Walter; (Wayne, PA) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
The Vanguard Group, Inc. |
Malvern |
PA |
US |
|
|
Assignee: |
The Vanguard Group, Inc.
Malvern
PA
|
Family ID: |
25180267 |
Appl. No.: |
14/147092 |
Filed: |
January 3, 2014 |
Related U.S. Patent Documents
|
|
|
|
|
|
Application
Number |
Filing Date |
Patent Number |
|
|
13857473 |
Apr 5, 2013 |
8626636 |
|
|
14147092 |
|
|
|
|
13342328 |
Jan 3, 2012 |
8417623 |
|
|
13857473 |
|
|
|
|
13084199 |
Apr 11, 2011 |
8090646 |
|
|
13342328 |
|
|
|
|
12781203 |
May 17, 2010 |
7925573 |
|
|
13084199 |
|
|
|
|
12036626 |
Feb 25, 2008 |
7720749 |
|
|
12781203 |
|
|
|
|
11093183 |
Mar 28, 2005 |
7337138 |
|
|
12036626 |
|
|
|
|
09801128 |
Mar 7, 2001 |
6879964 |
|
|
11093183 |
|
|
|
|
Current U.S.
Class: |
705/37 |
Current CPC
Class: |
G06Q 40/123 20131203;
G06Q 40/04 20130101; G06Q 20/108 20130101; G06Q 40/00 20130101;
G06Q 40/128 20131203; G06Q 40/12 20131203; G06Q 20/40 20130101;
G06Q 20/102 20130101; G06Q 20/10 20130101; G06Q 40/025 20130101;
G06Q 40/06 20130101; G06Q 40/02 20130101; G06Q 20/1085 20130101;
G06Q 20/105 20130101; G06Q 20/042 20130101 |
Class at
Publication: |
705/37 |
International
Class: |
G06Q 40/04 20120101
G06Q040/04 |
Claims
1. A method comprising: (a) issuing, by a first processor, a first
class of shares, wherein shares of the first class of shares are
bought from and redeemed with a single investment company by one or
more shareholders at a net asset value; (b) maintaining account
data in one or more computers at the single investment company
representative of the number of shares of the first class of shares
held by each of the one or more shareholders; (c) generating
electronic data identifying the names and number of shares of
securities that comprise a basket of securities; (d) receiving, at
a second processor, data representing the basket of securities from
a first entity that has an equivalent monetary value to a
predetermined number of shares of a second class of shares, wherein
the predetermined number of shares comprises a Creation Unit, the
shares of the second class of shares are listed for trading on a
national securities exchange, and the shares of the second class of
shares are bought and sold by one or more investors at negotiated
market prices through one or more second entities; (d) issuing, by
a third processor, the Creation Unit of shares of the second class
of shares in response to receiving the data representing the basket
of securities; (e) electronically sending data representing the
Creation Unit of shares of the second class of shares to the first
entity; and (f) maintaining data in one or more computers at the
investment company of the total number of outstanding shares of the
first class of shares and the second class of shares, wherein an
owner of any share of the first class of shares and the second
class of shares has an undivided interest in the single investment
company.
2. The method of claim 1, further comprising: (g) receiving, at a
fourth processor, an electronic request from a second entity to
convert a designated number or dollar value of shares of the first
class of shares that are bought from and redeemed with the single
investment company at a net asset value for a monetarily equivalent
number of shares of the second class of shares that are listed for
trading on a national securities exchange; and (h) implementing the
request received from the second entity, wherein implementing the
request comprises: (i) determining, by the fourth processor, the
equivalent number of the second class of shares corresponding to
the designated number or dollar value of shares of the first class
of shares; (ii) maintaining, by a computer, a whole number of
shares of the second class of shares in an account based on the
equivalent number of shares, and (iii) maintaining, by a computer,
a fractional number of shares of the second class of shares in an
account based on the equivalent number of shares less the whole
number of shares of the second class of shares.
3. The method of claim 1 wherein the shares of the second class of
shares that are bought and sold by the one or more investors at
negotiated market prices through the one or more second entities
are electronically purchased by the one or more second entities
from a first entity using a computer, and wherein the first entity
maintains firm bid and offer prices in the second class of shares
by automatically buying or selling shares of the second class of
shares at publicly quoted prices.
4. The method of claim 1 wherein each Creation Unit comprises at
least 30,000 shares of the second class of shares.
5. The method of claim 1 wherein the value of each Creation Unit of
the second class of shares is at least $1,000,000.
6. The method of claim 1 further comprising calculating, by a
processor, the net asset value of each share of the first class of
shares once per day at the close of a finance market.
7. The method of claim 1, wherein account data representative of
the number of shares of the second class of shares held by each of
the one or more investors is maintained in one or more computers at
the one or more second entities and not in one or more computers at
the investment company.
8. The method of claim 1 wherein the first entity is an authorized
participant and is a member of a clearinghouse and the one or more
second entities comprise one or more brokers.
9. A system comprising: (a) one or more first computers configured
to: (i) receive, from one or more investors, data representing
purchase or sell orders on a secondary market for a second class of
shares issued by a single investment company that are listed for
trading on a national securities exchange and that are bought and
sold at negotiated market prices, wherein the single investment
company has also issued a first class of shares that are bought
from and redeemed with the single investment company at a net asset
value, and wherein an owner of any share of the first or second
class of shares has an undivided interest in the single investment
company, (ii) maintain account data for each of the one or more
investors that reflects the number of shares of the second class of
shares held by the investor, (iii) send the data representing the
purchase or sell orders to a second computer, and (iv) send an
electronic request to the single investment company to convert a
designated number or dollar value of shares of the first class of
shares that are bought from and redeemed with the single investment
company at a net asset value for a monetarily equivalent number of
shares of the second class of shares that are listed for trading on
a national securities exchange to the single investment company;
and (b) one or more second computers in electronic communication
with the one or more first computers, the one or more second
computers configured to: (i) maintain firm bid and offer prices in
the second class of shares by automatically buying or selling
shares of the second class of shares at publicly quoted prices,
(ii) receive data representing the purchase or sell orders from the
one or more first computers, (iii) automatically fulfill the
purchase or sell orders by providing data to the one or more broker
computers indicating the purchase or sale is complete, and (iv)
generate data representing a basket of securities that has an
equivalent monetary value to a predetermined number of shares of
the second class of shares; and
10. The system of claim 9 wherein the one or more first computers
comprise one or more broker computers and the one or more second
computers comprise one or more market maker computers.
11. A system comprising: (a) a first processor which records a
first class of shares issued by the single investment company that
are bought from and redeemed with the single investment company at
a net asset value; (b) a second processor which records a second
class of shares issued by the single investment company that are
listed for trading on a national securities exchange and that are
bought and sold at negotiated market prices, wherein the second
class of shares are exchange-traded shares, and wherein investors
may purchase or sell the exchange-traded shares on the secondary
market by sending a request through one or more first computers,
and wherein account data for each of investors is maintained at the
one or more first computers to reflect the number of shares of the
second class of shares held by the investor; (c) one or more second
computers that maintain data of the outstanding shares of the first
and second class of shares, wherein an owner of any share of any
share class has an undivided interest in the single investment
company; and (d) a third processor configured to: (i) receive and
implement an electronic request for conversion of a designated
number or dollar value of shares belonging to the first class of
shares that are bought from and redeemed with the single investment
company at a net asset value for a monetarily equivalent number of
shares of the second class of shares that are exchange-traded
shares of the single investment company, and (ii) update the data
in the one or more second computers to reflect the new number of
outstanding shares of the first and second class of shares.
12. The system of claim 11 further comprising: (e) a third computer
in communication with the second processor, wherein the third
computer maintains data on all exchange-traded shares issued by the
single investment company; and (f) a fourth computer in
communication with the third computer, wherein the fourth computer
maintains firm bid and offer prices in the second class of shares
by automatically buying or selling shares of the second class of
shares at publicly quoted prices, and wherein the fourth computer
is further in communication with the one or more first computers
which communicate purchase or sell orders of the second class of
shares to the fourth computer on behalf of the one or more
investors to fulfill the investor's purchase or sell order.
13. The system of claim 12 further comprising: (g) a fourth
processor configured to: (i) receive, from the third computer, data
representing a basket of securities that has an equivalent monetary
value to a predetermined number of shares of the second class of
shares, wherein the predetermined number of shares comprises a
Creation Unit; (ii) provide data representing a Creation Unit of
shares of the second class of shares to the third computer in
response to receiving the data representing the basket of
securities, wherein the third computer provides the data
representing the Creation Unit to an authorized participant, and
(iii) update the data in the one or more second computers to
reflect the newly purchased shares of the second class of
shares.
14. The system of claim 12 wherein the first computer comprises a
broker, the third computer comprises a clearinghouse computer, and
the fourth computer comprises a market maker computer.
15. The system of claim 11 wherein the one or more second computers
do not maintain account data that reflects the number of shares of
the second class of shares held by investors and are located at the
single investment company.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] This application is a continuation of copending U.S.
application Ser. No. 13/857,473 filed Apr. 5, 2003, which is a
continuation of U.S. application Ser. No. 13/342,328 filed Jan. 3,
2012, now U.S. Pat. No. 8,417,623, which is a continuation of U.S.
application Ser. No. 13/084,199 filed Apr. 11, 2011, now U.S. Pat.
No. 8,090,646, which is a continuation of U.S. application Ser. No.
12/781,203 filed May 17, 2010, now U.S. Pat. No. 7,925,573, which
is a continuation of U.S. application Ser. No. 12/036,626 filed
Feb. 25, 2008, now U.S. Pat. No. 7,720,749, which is a continuation
of U.S. application Ser. No. 11/093,183 filed Mar. 28, 2005, now
U.S. Pat. No. 7,337,138, which is a continuation of U.S.
application Ser. No. 09/801,128 filed Mar. 7, 2001, now U.S. Pat.
No. 6,879,964. The entire disclosures of each of these prior
applications are incorporated herein by reference.
COPYRIGHT NOTICE AND AUTHORIZATION
[0002] Portions of the documentation in this patent document
contain material that is subject to copyright protection. The
copyright owner has no objection to the facsimile reproduction by
anyone of the patent document or the patent disclosure as it
appears in the Patent and Trademark Office file or records, but
otherwise reserves all copyright rights whatsoever.
BACKGROUND OF THE INVENTION
[0003] Investment companies are corporations or trusts that are in
the business of buying and selling securities. Such companies issue
shares that are bought by investors. The value of an investment
company's shares is measured by adding up the value of the
securities it owns (and any other assets), subtracting liabilities,
and dividing by the number of outstanding shares. This figure is
known as the investment company's "net asset value" (NAV). It is
typically calculated once per day, at the close of the financial
markets.
[0004] There are three main types of investment companies: open-end
funds, closed-end funds, and unit investment trusts (UITs). The
shares issued by open-end funds and UITs are redeemable, i.e., they
can be tendered back to the issuer in exchange for cash (or in rare
cases securities) in an amount equal to the NAV of the shares
tendered. Closed-end fund shares are not redeemable. To provide
liquidity to an investment in a closed-end fund, the fund sponsor
typically lists the shares for trading on a stock exchange. After
the initial issuance of shares by a closed-end fund, the fund's
shares are bought and sold over the exchange at market prices
determined by supply and demand.
[0005] Investors who want to sell shares of a closed-end fund can
do so at any time that the stock exchange is open at the
then-current market price. The market price of a closed-end fund's
shares differ from, and are often well below, the NAV of those
shares. Shares of open-end funds and UIT's, by contrast, can be
redeemed only at the NAV determined at the end of the day.
[0006] A hybrid investment company, commonly known as an
"exchange-traded fund" (ETF), has recently arisen that seeks to
provide investors with the best aspects of closed-end funds
(intra-day liquidity) on the one hand and open-end funds and UITs
(redeeming one's shares at or above NAV) on the other. ETF's are
open-end funds or UIT's whose shares are listed for trading on a
stock exchange. (The shares issued by ETFs are referred to herein
as "ETSs," for "exchange-traded shares.") Unlike the conventional
shares issued by open-end funds or UIT's, ETSs have certain
characteristics that more closely resemble common stock or the
shares of closed-end funds:
[0007] (1) ETSs are listed for trading on a stock exchange;
[0008] (2) ETSs may be bought and sold at any time during the
exchange's trading hours at prevailing market prices; and
[0009] (2) The market price of ETSs fluctuates throughout the day
based on supply and demand.
[0010] Although there is no requirement that they do so, ETSs
issued to date track stock indices, such as the S&P 500 Index
or the Nasdaq 100 Index. ETSs are particularly popular with
short-term investors and traders, market timers, and
speculators.
[0011] The current approach taken by an investment company sponsor
that wants to offer ETSs is to create a new investment company for
that purpose. The new investment company issues the ETSs.
Shareholders are allowed to buy or sell the ETSs which are held in
brokerage accounts.
[0012] Investment company sponsors that do not currently provide
ETSs face competitive pressures to offer ETSs to their shareholders
so as to retain the assets of the existing shareholders who prefer
ETSs to conventional fund shares, and to attract the assets of new
shareholders who may wish to trade ETSs as part of their portfolio.
However, there are significant disadvantages to the current
approach of creating a new investment company to offer ETSs to
customers:
[0013] (1) Creation of a new investment company creates additional
overhead costs for the sponsor.
[0014] (2) In the case of an index fund, a new investment company
may not immediately attract a sufficient quantity of assets to
accurately track its target index.
[0015] (3) Lack of cash purchases into an investment company, no
matter what its size, impedes the ability of the company to track
its target index and adjust the portfolio of securities.
[0016] Accordingly, there is an unmet need for a scheme that would
allow investment company sponsors to offer ETSs without having to
create new investment companies for this purpose. The present
invention fulfills such a need.
BRIEF DESCRIPTION OF THE DRAWING
[0017] The foregoing summary as well as the following detailed
description of preferred embodiments of the invention, will be
better understood when read in conjunction with the appended
drawing. For the purpose of illustrating the invention, there is
shown in the drawing an embodiment that is presently preferred. It
should be understood, however, that the invention is not limited to
the precise arrangements and instrumentalities shown. In the
drawing:
[0018] FIG. 1 shows a schematic block diagram of one preferred
embodiment of the present invention.
[0019] FIGS. 2-6 show bar charts of annual total returns.
BRIEF SUMMARY OF THE INVENTION
[0020] An investment company issues one or more classes of
conventional shares that are bought from and redeemed with the
company (either directly or through an intermediary) at NAV, and
one or more classes of shares that are listed for trading on a
national securities exchange and that are bought and sold at
negotiated market prices. Account data for outstanding shares of
all classes of shares are maintained in one or more computers. The
investment company may be an open-end fund, a closed-end fund, or a
UIT. The investment company could have an investment objective of
tracking a specific target index of securities or the investment
company could be actively managed by an investment advisor.
[0021] A shareholder can acquire ETSs of the investment company in
one of three ways:
[0022] (1) by purchasing the ETSs in the secondary market through a
broker, at the prevailing market price;
[0023] (2) by converting a designated number of conventional shares
into ETSs issued by the same company with an equal NAV; or
[0024] (3) if the purchaser is pre-approved as an "authorized
participant," by acquiring a predetermined number of ETSs directly
from the issuing fund in exchange for a specified or individually
negotiated basket of securities (or securities and cash) with an
equal NAV.
DETAILED DESCRIPTION OF THE INVENTION
[0025] Certain terminology is used herein for convenience only and
is not to be taken as a limitation on the present invention. In the
drawings, the same reference letters are employed for designating
the same elements throughout the several figures.
[0026] The present invention provides a computer-implemented
process of administering an investment company. The investment
company offers multiple share classes, including at least one class
of conventional shares and at least one class of ETSs. Thus, in
contrast to the current approach of offering ETSs by creating a new
investment company that offers only ETSs, the present invention
permits a sponsor to offer ETSs as a separate share class of a
multi-class fund. The present invention could be used by existing
investment companies that offer only conventional shares to provide
ETSs to investors. Alternatively, the present invention could be
used by newly established investment companies to provide both
conventional shares and ETSs to investors.
[0027] The investment company could be an open-end fund (e.g.,
open-end mutual fund), a closed-end fund (e.g., closed-end mutual
fund), or a UIT. The ETSs issued by the investment company are
publicly listed and traded on a national stock exchange, such as
the American Stock Exchange (AMEX). The investment company could
have an investment objective of tracking a specific target index of
securities (i.e., an index fund). Alternatively, the investment
company could be actively managed by an investment advisor in a
manner that does not attempt to track a target index.
[0028] Creating a new ETS class of an investment company that also
offers conventional shares provides the following benefits:
[0029] (1) The investment company sponsor will incur less overhead
costs since it is cheaper to create an additional share class of an
existing fund than to create a new fund.
[0030] (2) An investment company that offers more classes may
attract more assets. All other things being equal, an investment
company with more assets generally can track its target index more
accurately.
[0031] (3) Redemptions from the exchange-traded class will be
fulfilled in kind by selecting the lowest cost lots of each stock
distributed. This process reduces the unrealized capital gains that
currently exist in an existing fund, thereby benefiting existing
shareholders.
[0032] (4) The intra-day trading feature of the ETS class will draw
market timers out of the conventional shares, where they cause
problems, into the ETSs, where they do not. Market timers cause
problems because their frequent purchase and redemption requests
cause a fund to buy and sell portfolio securities more often, which
increases transaction costs (e.g., brokerage commissions) and
administrative costs (e.g., processing the timer's trades, sending
out confirmations). Additional costs lower the fund's performance
and make it harder for the fund to track its target index. In
addition, frequent portfolio transactions can increase the fund's
realization of capital gains. The uncertainty of frequent cash
flows makes it more difficult to keep the portfolio appropriately
balanced. These problems do not occur when the market timers hold
ETSs because a timer's frequent trading of ETSs is effected on the
secondary market with other investors, and does not affect the
fund's portfolio.
[0033] (5) The conversion feature allows market timers and other
investors to move from the conventional share class to the ETS
class without disrupting the fund's portfolio. If market timers had
to redeem conventional shares of a fund to move to an ETS class of
the same fund or to an exchange-traded fund with the same
investment objective, the fund would have to sell portfolio
securities, causing the problems described above. The conversion
feature eliminates those problems. It permits market timers and
other investors to move from one class of shares to another without
incurring capital gains because, under Internal Revenue Service
rules, exchanges between classes of the same fund are not taxable
transactions.
[0034] In one preferred embodiment of the present invention, ETSs
may be acquired in one of three different ways:
[0035] (1) If a shareholder owns conventional shares in the
multi-class investment company, the shareholder may acquire ETSs by
requesting conversion of a designated number or dollar value of
conventional shares to a monetarily equivalent number of ETSs. The
shareholder's account data is then updated to reflect the new
number of conventional shares and ETSs.
[0036] (2) An investor may purchase ETSs directly from the
investment company in exchange for a basket of securities of
generally equivalent monetary value. Preferably, the direct
purchase requires a purchase of a predetermined number of ETSs,
known as a "Creation Unit." The account data is then updated to
include the newly purchased shares. A "Creation Unit" will
preferably cost millions of dollars, and thus, Creation Units will
be purchased primarily by institutional investors who have been
pre-approved.
[0037] (3) An investor may purchase ETSs on the secondary market
through a broker. The account data of the investor is then updated
to reflect the new number of shares held by the investor.
[0038] In one preferred embodiment of the present invention, ETSs
may be sold or redeemed in one of two different ways:
[0039] (1) An investor may redeem ETSs directly with the mutual
fund in exchange for a basket of securities of generally equivalent
monetary value. Preferably, only Creation Units may be redeemed in
this manner.
[0040] (2) A shareholder may sell ETSs directly on the secondary
market through a broker.
[0041] In one preferred embodiment of the present invention, a
conversion from ETSs to conventional shares will not be
permitted.
[0042] The investment company of the present invention is less
likely to suffer from the disruptive effects of short-term
investors. As discussed above, short-term investors raise expenses
by forcing an investment company to incur brokerage expenses and
other transaction costs as portfolio securities are bought and sold
to meet frequent purchase and redemption requests. They also
increase the chance that the investment company might have to sell
stock to raise cash to pay a redeeming shareholder, causing the
fund to incur capital gains and decreasing the tax efficiency of
the fund. They also make it more difficult to ensure that the
portfolio is appropriately invested with the desired amount of cash
on hand. The present invention may also make it possible for an
investment company to track its target index more closely by
reducing transaction costs, reducing the need for the fund to hold
cash reserves to meet redemption requests, and spreading fixed
costs over a larger asset base, thereby helping the investment
company realize further economies of scale.
[0043] In addition to the benefits listed above, the present
invention will have the added benefit of making available, in
response to market demand, a security that provides a low-cost
market basket product for investors that offers intra-day
liquidity. Short-term investors are expected to prefer ETSs to
conventional shares when selecting the class of shares that the
investor wishes to hold in the investment company.
[0044] One example of a commercial implementation of the present
invention is provided in Appendices A and B. In the example,
selected funds of The Vanguard Group offer a conventional class of
shares, and a class of ETSs referred to as the VIPER Share Class.
VIPER is an acronym for Vanguard Index Participation Equity
Receipts. VIPER shares are thus a class of exchange-traded
securities that represent an interest in a portfolio of stocks held
by a particular Vanguard index mutual fund.
[0045] Appendix A includes selected portions of a prospectus of a
Registration Statement for VIPER shares. Appendix B includes
selected portions of a Statement of Additional Information (SAI) of
a Registration Statement for VIPER shares.
[0046] FIG. 1 shows a schematic block diagram of a system 10 in one
preferred embodiment of the present invention. The system 10
coincides with the description of the investment company set forth
in the Registration Statement.
[0047] The system 10 includes an investment company 12, investors
A, B and C (labeled as 14, 16 and 18, respectively), a market maker
or specialist 19, brokers 20 and a clearinghouse 22. The investment
company 12 includes a first processor 24 that records one or more
classes of conventional shares issued by the investment company 12,
and a second processor 26 that records one or more classes of ETSs
issued by the investment company 12. In the presently described
embodiment, the first processor 24 records one class of
conventional shares issued by the investment company 12, such as a
class of conventional shares that has a relatively small minimum
investment of $1,000 or $3,000 ("investor shares"). Alternatively,
the class of conventional shares could have a relatively large
minimum investment, such as $10 million ("institutional shares").
In the presently described embodiment, the second processor 26
records one class of ETSs issued by the investment company 12.
However, the scope of the present invention includes embodiments
wherein plural classes of ETSs are issued. The investment company
12 also includes a computer 28 for maintaining shareholder account
data. For each shareholder of the investment company 12, the
computer 28 maintains a record of the amount of conventional
shares.
[0048] Investor A represents one or more investors who have
purchased conventional investor shares in exchange for cash.
Investor B represents one or more investors who have purchased
conventional institutional shares.
[0049] Investors who wish to purchase VIPER shares in quantities
smaller than a Creation Unit must purchase the shares on the
secondary market through a broker. This process is represented by
the investors C (labeled as 18), the brokers 20, the market maker
or specialist 19, and the clearinghouse 22.
[0050] A market maker is a financial entity that maintains firm bid
and offer prices in a given security by standing ready to buy or
sell round lots at publicly quoted prices. On an exchange, a
specialist is the member firm that makes a market in the stock and
maintains the limit order book. In the present invention, the
market maker or specialist 19 (hereafter, "the market maker 19")
purchases VIPER shares in Creation Units from the investment
company 12 which are settled through the clearinghouse. The market
maker 19 has a computer 37 for tracking its account data. In the
current financial industry, the clearinghouse 22 is the Depository
Trust Company (DTC). The DTC is a national clearinghouse for the
settlement of trades in corporate and municipal securities and
performs securities custody-related services for its participating
banks and broker-dealers. DTC is owned by members of the financial
industry and by their representatives who are its users. The use of
other clearinghouses is within the scope of the present
invention.
[0051] If an investor C wants to purchase VIPER shares, the
investor C places an order with its broker 20. The broker 20 then
purchases the VIPER shares from the market maker 19 for the
investor C. In this example, the brokers 20 are labeled as broker
34 (broker 1) and broker 36 (broker n). Each broker 34, 36 has a
computer for tracking brokerage account data for its shareholders,
labeled as elements 38 and 40, respectively. Each broker 34, 36 may
have many investors. In this example, investor 42 (investor
C1.sub.1) and investor 44 (investor C1.sub.n) have accounts with
broker 34, and investor 46 (investor Cn.sub.1) and investor 48
(investor Cn.sub.n) have accounts with broker 36.
[0052] The clearinghouse 22 also tracks and records all VIPER
shares that are issued as a result of a conversion of conventional
shares to VIPER shares. Thus, the clearinghouse 22 has a record of
all outstanding VIPER shares issued by the investment company 12.
In one preferred embodiment of the present invention, a broker 20
executes the conversion through the same process described above
for investors C. That is, the shareholder places the conversion
request directly with a broker.
[0053] FIG. 1 shows only purchase transactions. Sell-type
transactions are performed by a reverse of the purchase
transactions with the exception noted above that a shareholder
cannot convert a VIPER share into a conventional share.
[0054] The present invention may be implemented with any
combination of hardware and software. If implemented as a
computer-implemented apparatus, the present invention is
implemented using means for performing all of the steps and
functions described above.
[0055] The present invention can be included in an article of
manufacture (e.g., one or more computer program products) having,
for instance, computer useable media. The media has embodied
therein, for instance, computer readable program code means for
providing and facilitating the mechanisms of the present invention.
The article of manufacture can be included as part of a computer
system or sold separately.
[0056] It will be appreciated by those skilled in the art that
changes could be made to the embodiments described above without
departing from the broad inventive concept thereof. It is
understood, therefore, that this invention is not limited to the
particular embodiments disclosed, but it is intended to cover
modifications within the spirit and scope of the present
invention.
APPENDIX A
An Introduction to VIPER Shares
What are VIPER Shares?
[0057] Vanguard Index Participation Equity Receipts, or "VIPER"
Shares, are a class of exchange-traded securities that represent an
interest in a portfolio of stocks held by a particular Vanguard
index mutual fund. Five funds, each of which seeks to track a
different segment of the U.S. stock market (as represented by a
benchmark index), offer a VIPER Share class:
TABLE-US-00001 Fund VIPER Shares Seeks to Track Vanguard Total
Stock Market Total Stock The overall stock Index Fund Market VIPERs
market Vanguard 500 Index Fund VIPERs Large-Cap stocks Vanguard
Small-Cap Small-Cap Small-Cap Index Fund Index Fund VIPERs Vanguard
Growth Index Fund Growth VIPERs Large-Cap growth stocks Vanguard
Value Index Fund Value VIPERs Large-Cap value stocks In addition to
VIPER Shares, each of these funds offers one or more conventional
classes of fund shares. This prospectus, however, relates only to
VIPER Shares.
How are VIPER Shares Different from Conventional Mutual Fund
Shares?
[0058] Conventional mutual fund shares are bought from and redeemed
with the issuing fund for cash at a net asset value typically
calculated once a day. VIPER Shares, by contrast, can not be
purchased directly from or redeemed directly with the issuing fund
except by or through Authorized Participants (defined below), and
then only for an in-kind basket of securities.
[0059] Unlike conventional mutual fund shares, an organized
secondary market is expected to exist for VIPER Shares because
VIPER Shares will be listed for trading on the American Stock
Exchange (AMEX). Investors can purchase and sell VIPER Shares on
the secondary market through a broker. Secondary market
transactions occur not at net asset value, but at market prices
that change throughout the day based on the supply of, and demand
for, VIPER Shares.
[0060] Although the market price of VIPER Shares typically will
approximate its NAV, there may be limes when the market price and
the NAV vary, so you may receive more or less than NAV when you
sell your Shares on the secondary market. Also, it is possible that
an active trading market may not develop or be maintained.
How do I Buy and Sell VIPER Shares?
[0061] Each fund issues and redeems VIPER Shares only in bundles of
a specified number. 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 funds' Distributor. Vanguard will provide you
with a list of Authorized Participants upon request. Because
Creation Units likely will cost millions of dollars, and can be
purchased only in exchange for a basket of securities (and
generally not for cash), it is expected that only a limited number
of institutional investors will purchase and redeem VIPER Shares
directly with an issuing fund.
[0062] Investors who cannot afford to purchase a Creation Unit can
acquire VIPER Shares in one of two ways. If you own Investor Shares
of a fund that issues VIPER Shares, you can convert those shares
into VIPER Shares of equivalent value. For more information about
the conversion privilege, see "Conversions and Exchanges" under
More on VIPER Shares. In addition, any investor may purchase VIPER
Shares on the secondary market (i.e., not from the issuing fund)
through a broker; VIPER Shares are listed on the AMEX and publicly
traded. To acquire VIPER Shares through either means, you must have
a brokerage account. For information about acquiring VIPER Shares
through conversion of Investor Shares or through a secondary market
purchase, please contact your broker If you want to sell VIPER
Shares, you must do so through your broker; VIPER Shares can not be
converted back into Investor Shares.
[0063] Note:
[0064] When you buy or sell VIPER Shares on the secondary market,
your broker may charge you a commission. In addition, because
secondary market transactions occur at market prices, you may pay
more than net asset value when you buy VIPER Shares, and receive
less than net asset value when you sell those shares.
Profile--VIPERs.TM.
[0065] The following profile summarizes key features of VIPERs, an
exchange-traded share class of Vanguard 500 Index Fund.
Investment Objective
[0066] VIPERs seek to match the performance of a benchmark index
that measures the investment return of large-capitalization
stocks.
Investment Strategies
[0067] Vanguard 500 Index Fund employs a passive management
strategy designed to track the performance of the Standard &
Poor's 500 Index, which is dominated by the stocks of large U.S.
companies. The Fund attempts to replicate the target index by
investing all or substantially all of its assets in the stocks that
comprise the Index.
Primary Risks
[0068] VIPERs' total return, like stock prices generally, will
fluctuate within a wide range, so an investor could lose money over
short or even long periods. Stock markets tend to move in cycles,
with periods of rising prices and periods of falling prices. [0069]
VIPERs are subject to investment style risk, which is the chance
that returns from large-capitalization stocks will trail returns
from other asset classes or the overall stock market. Large-cap
stocks tend to go through cycles of doing better--or worse--than
the stock market in general. These periods have, in the past,
lasted for as long as several years. [0070] VIPERs will be listed
for trading on the AMEX and can be sold in the secondary market at
market prices. Although it is expected that the market price of a
VIPER typically will approximate its NAV, there may be times when
the market price and the NAV vary significantly. Thus, if you sell
VIPERs on the secondary market, you may receive less than NAV.
[0071] Although VIPERs will be listed for trading on the AMEX, it
is possible that an active trading market may not develop or be
maintained. [0072] Trading of VIPERs on the AMEX may be halted if
AMEX officials deem such action appropriate, VIPERs are delisted
from the AMEX, or the activation of marketwide "circuit breakers"
hafts stock trading generally.
Performance/Risk Information
[0073] The bar chart and table below provide an indication of the
risks of investing in VIPERs. Because calendar-year performance
information for VIPERs is not yet available, the information
presented in the bar chart and table reflects the performance of
the Investor Shares of Vanguard 500 Index Fund. (Investor Shares
are offered through a separate prospectus). Performance information
for the Investor Shares would be substantially similar, since both
share classes are invested in the same portfolio of securities;
their returns differ only to the extent that the expenses of the
two classes differ.
[0074] During the period shown in the bar chart of FIG. 2, the
highest return for a calendar quarter was 21.39% (quarter ended
Dec. 31, 1998) and the lowest return for a quarter was -13.76%
(quarter ended Sep. 30, 1990).
TABLE-US-00002 Average Annual Total Returns (Investor Shares) for
Years Ended Dec. 31, 2000 1 Year 5 Years 10 Years Vanguard 500
Index Fund -9.06% 18.31% 17.35% S&P 500 Index -9.10 18.33
17.46
Fees and Expenses
[0075] The following table describes the fees and expenses you may
pay if you buy and hold VIPERs. The expenses shown under Annual
Operating Expenses are based on estimated amounts for the current
fiscal year. VIPERs have no operating history; actual operating
expenses could be different.
[0076] Shareholder Fees (Fees Paid Directly from Your
Investment)
TABLE-US-00003 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* Transaction Fee Imposed on
Reinvested Dividends: None Annual Operating Expenses (expenses
deducted from the Fund's assets) Management Expenses: 0.10% 12b-1
Distribution Fee: None Other Expenses: 0.02% Total Annual Operating
Expenses: 0.12% *An investor purchasing or redeeming Creation Units
of VIPERs will pay to the issuing fund a transaction fee of S, plus
an additional transaction fee of up to $ if the investor does not
purchase or redeem through the Continuous Net Settlement System of
the National Securities Clearing Corporation. An investor buying or
selling VIPERs in the secondary market will pay a commission to his
or her broker in an amount established by the broker.
[0077] The following example is intended to help retail investors
compare the cost of investing in VIPERs 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 VIPERs. This example assumes that VIPERs 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 VIPERs. It also does not include the
transaction fee on purchases and redemptions of Creation Units,
since this fee will not be imposed on retail investors.
TABLE-US-00004 1 Year 3 Years 5 Years 10 Years $12 $39 $68 $154
[0078] The value of a VIPERs Creation Unit as of the date of this
prospectus was approximately $.cndot.. Assuming an investment of
$.cndot., payment of the standard.cndot.transaction fee to purchase
and then to redeem the Creation Unit, a 5% return each year, and no
change in operating expenses, the total cost of holding a VIPER
Creation Unit would be $.cndot. if the Creation Unit is redeemed
after one year and $.cndot. if redeemed after three years.
[0079] 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.
TABLE-US-00005 Additional Information Dividends and Capital Gains
Net Assets (all.share Dividends are distributed quarterly in March,
classes) as of June; September, and December; capital gains,
June-30, 2000 if any are distributed annually in December $105.6
billion Investment Adviser Vanguard Fund Number 968 The Vanguard
Group, Valley Forge, Pa., Cusip Number since inception 922908777
Inception Date AMEX Trading Symbol Feb. 9, 2001 VV Number of VIPERs
in a Creation Unit 60,000
Profile--Total Stock Market VIPERs.TM.
[0080] The following profile summarizes key features of Total Stock
Market VIPERs, and exchange-traded share class of Vanguard Total
Stock Market Index Fund.
Investment Objective
[0081] Total Stock Market VIPERs seek to match the performance of a
benchmark index that measures the investment return of the overall
stock market.
Investment Strategies
[0082] Vanguard Total Stock Market Index Fund employs a passive
management strategy designed to track the performance of the
Wilshire 5000 Total Market Index, which consists of all the U.S.
common stocks regularly traded on the New York and American Stock
Exchanges and the Nasdaq over-the-counter market. The Fund invests
all or substantially all of its assets in a representative sample
of the stocks that comprise the Index.
Primary Risks
[0083] a Total Stock Market VIPERs' total return, like stock prices
generally, will fluctuate within a wide range, so an investor could
lose money over short or even long periods. Stock markets tend to
move in cycles, with periods of rising prices and periods of
falling prices. [0084] Total Stock Market VIPERs will be listed for
trading on the AMEX and can be sold in the secondary market at
market prices. Although it is expected that the market price of a
Total Stock Market VIPER typically will approximate its NAV, there
may be times when the market price and the NAV vary significantly.
Thus, if you sell Total Stock Market VIPERs on the secondary
market, you may receive less than NAV [0085] Although Total Stock
Market VIPERs will be listed for trading on the AMEX, it is
possible that an active trading market may not develop or be
maintained. [0086] Trading of Total Stock Market VIPERs on the AMEX
may be halted if AMEX officials deem such action appropriate, Total
Stock Market VIPERs are delisted from the AMEX, or the activation
of marketwide "circuit breakers" halts stock trading generally.
Performance/Risk Information
[0087] The bar chart and table below provide an indication of the
risks of investing in Total Stock Market VIPERs. Because
calendar-year performance information for Total Stock Market VIPERs
is not yet available, the information presented in the bar chart
and table reflects the performance of the Investor Shares of
Vanguard Total Stock Market Index Fund. (Investor Shares are
offered through a separate prospectus). Performance information for
Total Stock Market VIPERs would be substantially similar, since
both share classes are invested in the same portfolio of
securities; their returns differ only to the extent that the
expenses of the two classes differ.
[0088] During the period shown in the bar chart of FIG. 3, the
highest return for a calendar quarter was 21.51% (quarter ended
Dec. 31, 1998) and the lowest return for a quarter was -12.07%
(quarter ended Sep. 30, 1998).
TABLE-US-00006 Average Annual Total Returns (Investor Shares) for
Years Ended Dec. 31, 2000 1 Year 5 Years Since Inception* Vanguard
Total Stock Market -10.57% 16.68% 15.83% Index Fund Wilshire 5000
Index -10.99 16.66 16.01 *Apr. 27, 1992.
Fees and Expenses
[0089] The following table describes the fees and expenses you may
pay if you buy and hold Total Stock Market VIPERs. The expenses
shown under Annual Operating Expenses are based on estimated
amounts for the current fiscal year. Total Stock Market VIPERs have
no operating history; actual operating expenses could be
different.
TABLE-US-00007 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* Transaction Fee Imposed on
Reinvested Dividends: None Annual Operating Expenses (expenses
deducted from the Fund's assets) Management Expenses: 0.13% 12b-1
Distribution Fee: None Other Expenses: 0.02% Total Annual Operating
Expenses: 0.15% *An investor purchasing or redeeming Creation Units
of Total Stock Market VIPERs will pay to the issuing fund a
transaction fee of $, plus an additional transaction fee of up to
S. if the investor does not purchase or redeem through the
Continuous Net Settlement System of the National Securities
Clearing Corporation. An investor buying or selling Total Stock
Market VIPERs in the secondary market will pay a commission to his
or her broker in an amount established by the broker.
[0090] The following example is intended to help retail investors
compare the cost of investing in Total Stock Market VIPERs 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 Total Stock Market VIPERS. This example
assumes that Total Stock Market VIPERs 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 Total Stock Market VIPERs. It also does
not include the transaction fee on purchases and redemptions of
Creation Units, since this fee will not be imposed on retail
investors.
TABLE-US-00008 1 Year 3 Years 5 Years 10 Years $15 $48 $85 $192
[0091] The value of a Total Stock Market VIPERs Creation Unit as of
the date of this prospectus was approximately $.cndot.. Assuming an
investment of $.cndot., payment of the standard $.cndot.transaction
fee to purchase and then to redeem the Creation Unit, a 5% return
each year and no change in operating expenses, the total cost of
holding a Total Stock Market VIPER Creation Unit would be $. if the
Creation Unit is redeemed after one year and $.cndot. if redeemed
after three years.
[0092] 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.
TABLE-US-00009 Additional Information Dividends and Capital Gains
Net Assets (all.share Dividends are distributed quarterly in March,
classes) as of June; September, and December; capital gains, Jun.
30, 2000 if any are distributed annually in December $24.3 billion
Investment Adviser Vanguard Fund Number 970 The Vanguard Group,
Valley Forge, Pa., Cusip Number since inception 922908769 Inception
Date AMEX Trading Symbol Feb. 9, 2001 VTI Number of Total Stock
Market VIPERs in a Creation Unit 60,000
Profile--Small-Cap VIPERs.TM.
[0093] The following profile summarizes key features of Small-Cap
VIPERs, an exchange-traded share class of Vanguard Small-Cap Index
Fund.
Investment Objective
[0094] Small-Cap VIPERS seek to match the performance of a
benchmark index that measures the investment return of the overall
stock market.
Investment Strategies
[0095] Vanguard Small-Cap Index Fund employs a passive management
strategy designed to track the performance of the Russell 2000
Small Stock Index which is made up of the stocks of smaller U.S.
companies. The Russell 2000 Index is comprised of the 2,000
smallest companies out of the 3,000 largest U.S. companies. The
Fund invests all or substantially all of its assets in a.
representative sample of the stocks that comprise the Index.
Primary Risks
[0096] Small-Cap VIPERS' total return, like stock prices generally,
will fluctuate within a wide range, so an investor could lose money
over short or even long periods. Stock markets tend to move in
cycles, with periods of rising prices and periods of failing
prices. [0097] Small-Cap VIPERs are subject to investment style
risk, which is the chance that returns from small-capitalization
stocks will trail returns from other asset classes or the overall
stock market. Small-cap stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods
have, in the past, lasted for as long as several years. [0098]
Small-Cap VIPERs will be listed for trading on the AMEX and can be
sold in the secondary market at market prices. Although it is
expected that the market price of a Small-Cap VIPER typically will
approximate its NAV, there may be times when the market price and
the NAV vary significantly. Thus, if you sell Small-Cap VIPERs on
the secondary market, you may receive less than NAV. [0099]
Although Small-Cap VIPERs will be listed for trading on the AMEX,
it is possible that an active trading market may not develop or be
maintained. [0100] Trading of Small-Cap VIPERs on the AMEX may be
halted if AMEX officials deem such action appropriate, Small-Cap
VIPERs are delisted from the AMEX, or the activation of marketwide
"circuit breakers" halts stock trading generally.
Performance/Risk Information
[0101] The bar chart and table below provide an indication of the
risks of investing in Small-Cap VIPERs. Because calendar year
performance information for Small-Cap VIPERs is not yet available,
the information presented in the bar chart and table reflects the
performance of the Investor Shares of Vanguard Small-Cap Index
Fund. (Investor Shares are offered through a separate prospectus).
Performance information for the Small-Cap VIPERs would be
substantially similar, since both share classes are invested in the
same portfolio of securities; their returns differ only to the
extent that the expenses of the two classes differ.
[0102] During the period shown in the bar chart of FIG. 4, the
highest return for a calendar quarter was 29.29% (quarter ended
Mar. 31, 1991) and the lowest return for a quarter was -24.00%
(quarter ended Sep. 30, 1990).
TABLE-US-00010 Average Annual Total Returns (Investor Shares) for
Years Ended Dec. 31, 2000 1 Year 5 Years 10 Years Vanguard
Small-Cap Index Fund -2.67% 11.43% 16.19% Russell 2000 Index -3.03
10.31 15.53
Fees And Expenses
[0103] The following table describes the fees and expenses you may
pay if you buy and hold Small-Cap VIPERs. The expenses shown under
Annual Operating Expenses are based on estimated amounts for the
current fiscal year. Small-Cap VIPERs have no operating history;
actual operating expenses could be different.
TABLE-US-00011 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* Transaction Fee Imposed on
Reinvested Dividends: None Annual Operating Expenses (expenses
deducted from the Fund's assets) Management Expenses: 0.16% 12b-1
Distribution Fee: None Other Expenses: 0.04% Total Annual Operating
Expenses: 0.20% *An investor purchasing or redeeming Creation Units
of Small-Cap VIPERS will pay to the issuing fund a transaction fee
of S, plus an additional transaction fee of up to S. if the
investor does not purchase or redeem through the Continuous Net
Settlement System of the National Securities Clearing Corporation.
An investor buying or selling Small-Cap VIPERs in the secondary
market will pay a commission to his or her broker in an amount
established by the broker.
[0104] The following example is intended to help retail investors
compare the cost of investing in Small-Cap VIPERS 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 Small-Cap VIPERS. This example assumes that Small-Cap
VIPERS 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
Small-Cap VIPERS. It also does not include the transaction fee on
purchases and redemptions of Creation Units, since this fee will
not be imposed on retail investors.
TABLE-US-00012 1 Year 3 Years 5 Years 10 Years $20 $64 $113
$255
[0105] The value of a Small-Cap VIPERS Creation Unit as of the date
of this prospectus was approximately $.cndot.. Assuming an
investment of $.cndot., payment of the standard $.cndot.
transaction fee to purchase and then to redeem the Creation Unit, a
5% return each year, and no change in operating expenses, the total
cost of holding a Small-Cap VIPER Creation Unit would be $.cndot.
if the Creation Unit is redeemed after one year and $.cndot. if
redeemed after three years.
[0106] 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.
TABLE-US-00013 Additional Information Net Assets (all.share
Dividends and Capital Gains classes) as of Dividends are
distributed quarterly in March, Jun. 30, 2000 June; September, and
December; capital gains, $4.6 billion if any are distributed
annually in December Vanguard Fund Number Investment Adviser 969
The Vanguard Group, Valley Forge, Pa., Cusip Number since inception
922908751 Inception Date AMEX Trading Symbol Feb. 9, 2001 VRY
Number of Small-CapVIPERs in a Creation Unit 30,000
Profile--Value VIPERs.TM.
[0107] The following profile summarizes key features of Value
VIPERS, an exchange-traded share class of Vanguard Value Index
Fund.
Investment Objective
[0108] Value VIPERs seek to match the performance of a benchmark
index that measures the investment return of large-capitalization
value stocks.
Investment Strategies
[0109] Vanguard Value Index Fund employs a passive management
strategy designed to track the performance of the Standard &
Poor's 500/BARRA Value Index, which includes those stocks of the
S&P 500 Index with lower-than-average price/book ratios. The
Fund attempts to replicate the target index by investing all or
substantially all of its assets in the stocks that comprise the
Index.
Primary Risks
[0110] Value VIPERs' total return, like stock prices generally,
will fluctuate within a wide range, so an investor could lose money
over short or even long periods. Stock markets tend to move in
cycles, with periods of rising prices and periods of falling
prices. [0111] Value VIPERs are subject to investment style risk,
which is the chance that returns from large-capitalization value
stocks will trail returns from other asset classes or the overall
stock market. Value stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods
have, in the past, lasted for as long as several years. [0112]
Value VIPERs will be listed for trading on the AMEX and can be sold
in the secondary market at market prices. Although it is expected
that the market price of a Value VIPER typically will approximate
its NAV, there may be times when the market price and the NAV vary
significantly. Thus, if you sell Value VIPERs on the secondary
market, you may receive less than NAV [0113] Although Value VIPERs
will be listed for trading on the AMEX, it is possible that an
active trading market may not develop or be maintained. [0114]
Trading of Value VIPERs on the AMEX may be halted if AMEX officials
deem such action appropriate, Value VIPERs are delisted from the
AMEX, or the activation of marketwide "circuit breakers" halts
stock trading generally.
Performance/Risk Information
[0115] The bar chart and table below provide an indication of the
risks of investing in Value VIPERS. Because calendar-year
performance information for Value VIPERs is not yet available, the
information presented in the bar chart and table reflects the
performance of the Investor Shares of Vanguard Value Index Fund.
(Investor Shares are offered through a separate prospectus).
Performance information for the Value VIPERs would be substantially
similar, since both share classes are invested in the same
portfolio of securities; their returns differ only to the extent
that the expenses of the two classes differ.
[0116] During the period shown in the bar chart of FIG. 5, the
highest return for a calendar quarter was 17.50% (quarter ended
Dec. 31, 1998) and the lowest return for a quarter was -12.96%
(quarter ended Sep. 30, 1998).
TABLE-US-00014 Average Annual Total Returns (Investor Shares) for
Years Ended Dec. 31, 2000 1 Year 5 Years Since Inception* Vanguard
Value Index Fund* 6.08% 16.70% 17.04% S&P 500/BARRA Value Index
6.08 16.81 17.17 *Nov. 2, 1992.
Fees and Expenses
[0117] The following table describes the fees and expenses you may
pay if you buy and hold Value VIPERs. The expenses shown under
Annual Operating Expenses are based on estimated amounts for the
current fiscal year. Value VIPERs have no operating history; actual
operating expenses could be different.
TABLE-US-00015 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* Transaction Fee Imposed on
Reinvested Dividends: None Annual Operating Expenses (expenses
deducted from the Fund's assets) Management Expenses: 0.14% 12b-1
Distribution Fee: None Other Expenses: 0.03% Total Annual Operating
Expenses: 0.17% *An investor purchasing or redeeming Creation Units
of Value VIPERs will pay to the issuing fund a transaction fee of
$, plus an additional transaction fee of up to $ if the investor
does not purchase or redeem through the Continuous Net Settlement
System of the National Securities Clearing Corporation. An investor
buying or selling Value VIPERs in the secondary market will pay a
commission to his or her broker in an amount established by the
broker.
[0118] The following example is intended to help retail investors
compare the cost of investing in Value VIPERs 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 Value VIPERs. This example assumes that Value VIPERS
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 Value VIPERs. It
also does not include the transaction fee on purchases and
redemptions of Creation Units, since this fee will not be imposed
on retail investors.
TABLE-US-00016 1 Year 3 Years 5 Years 10 Years $17 $55 $96 $217
[0119] The value of a Value VIPERs Creation Unit as of the date of
this prospectus was approximately $.cndot.. Assuming an investment
of $.cndot., payment of the standard $.cndot. transaction fee to
purchase and then to redeem the Creation Unit, a 5% return each
year, and no change in operating expenses, the total cost of
holding a Value VIPER Creation Unit would be S. if the Creation
Unit is redeemed after one year and $.cndot. if redeemed after
three years.
[0120] 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.
TABLE-US-00017 Additional Information Net Assets (all.share
Dividends and Capital Gains classes) as of Dividends are
distributed quarterly in March, Jun. 30, 2000 June; September, and
December; capital gains, $4.6 billion if any are distributed
annually in December Vanguard Fund Number Investment Adviser 969
The Vanguard Group, Valley Forge, Pa., Cusip Number since inception
922908744 Inception Date AMEX Trading Symbol Feb. 9, 2001 VLP
Number of Small-CapVIPERs in a Creation Unit 30,000
Profile--Growth VIPERs.TM.
[0121] The following profile summarizes key features of Growth
VIPERs, an exchange-traded share class of Vanguard Growth Index
Fund.
Investment Objective
[0122] Growth VIPERs seeks to match the performance of a benchmark
index that measures the investment return of large-capitalization
growth stocks.
Investment Strategies
[0123] Vanguard Growth Index Fund employs a passive management
strategy designed to track the performance of the Standard &
Poor's 500/BARRA Growth Index, which includes those stocks of the
S&P 500 Index with higher-than-average price/book ratios. The
Fund attempts to replicate the target index by investing all or
substantially all of its assets in the stocks that comprise the
Index.
Primary Risk
[0124] Growth VIPERs' total return, like stock prices generally,
will fluctuate within a wide range, so an investor could lose money
over short or even long periods. Stock markets tend to move in
cycles, with periods of rising prices and periods of falling
prices. [0125] Growth VIPERs are subject to investment style risk,
which is the chance that returns from large-capitalization growth
stocks will trail returns from other asset classes or the overall
stock market. Growth stocks tend to go through cycles of doing
better--or worse--than the stock market in general. These periods
have, in the past, lasted for as long as several years. [0126]
Growth VIPERs will be listed for trading on the AMEX and can be
sold in the secondary market at market prices. Although it is
expected that the market price of a Growth VIPER typically will
approximate its NAV, there may be times when the market price and
the NAV vary significantly. Thus, if you sell Growth VIPERs on the
secondary market, you may receive less than NAV. [0127] Although
Growth VIPERs will be listed for trading on the AMEX, it is
possible that an active trading market may not develop or be
maintained. [0128] Trading of Growth VIPERs on the AMEX may be
halted it AMEX officials deem such action appropriate, Growth
VIPERs are delisted from the AMEX, or the activation of marketwide
"circuit breakers" halts stock trading generally.
Performance/Risk Information
[0129] The bar chart and table below provide an indication of the
risks of investing in Growth VIPERs. Because calendar-year
performance information for Growth VIPERs is not yet available, the
information presented in the bar chart and table reflects the
performance of the Investor Shares of Vanguard Growth Index Fund.
(Investor Shares are offered through a separate prospectus).
Performance information for the Growth VIPERs would be
substantially similar, since both share classes are invested in the
same portfolio of securities; their returns differ only to the
extent that the expenses of the two classes differ.
[0130] During the period shown in the bar chart of FIG. 6, the
highest return for a calendar quarter was 24.64% (quarter ended
Dec. 31, 1998) and the lowest return for a quarter was -16.88%
(quarter ended Dec. 11, 2000).
TABLE-US-00018 Average Annual Total Returns (Investor Shares) for
Years Ended Dec. 31, 2000 1 Year 5 Years Since Inception* Vanguard
Growth Index Fund -22.21% 19.17% 16.90% S&P 500/BARRA Growth
Index -22.08 19.18 17.01 *Nov. 2, 1992.
Fees and Expenses
[0131] The following table describes the fees and expenses you may
pay it you buy and hold Value VIPERs. The expenses shown under
Annual Operating Expenses are based on estimated amounts for the
current fiscal year. Growth VIPERs have no operating history;
actual operating expenses could be different.
TABLE-US-00019 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* Transaction Fee Imposed on
Reinvested Dividends: None Annual Operating Expenses (expenses
deducted from the Fund's assets) Management Expenses: 0.14% 12b-1
Distribution Fee: None Other Expenses: 0.03% Total Annual Operating
Expenses: 0.17% *An investor purchasing or redeeming Creation Units
of Growth VIPERs will pay to the issuing fund a transaction fee of
S, plus an additional transaction fee of up to E if the investor
does not purchase or redeem through the Continuous Net Settlement
System of the National Securities Clearing Corporation. An investor
buying or selling Growth VIPERs in the secondary market will pay a
commission to his or her broker in an amount established by the
broker.
[0132] The following example is intended to help retail investors
compare the cost of investing in Growth VIPERs with the cost of
investing in other funds. It illustrates the hypothetical expenses
that such investor would incur over various periods if they invest
$10,000 in Growth VIPERs. This example assumes that Growth VIPERs
provide a return of 5% a year, and that operating expenses remain
the same. The results apply whether or not you redeem your
investment at the end of each period. This example does not include
the brokerage commissions that retail investors will pay to buy and
sell Growth VIPERs. It also does not include the transaction fee on
purchases and redemptions of Creation Units, since this fee will
not be imposed on retail investors.
TABLE-US-00020 1 Year 3 Years 5 Years 10 Years $17 $55 $96 $217
[0133] The value of a Growth VIPERs Creation Unit as of the date of
this prospectus was approximately $.cndot.. Assuming an investment
of $.cndot., payment of the standard $.cndot. transaction fee to
purchase and then to redeem the Creation Unit, a 5% return each
year, and no change in operating expenses, the total cost of
holding a Growth VIPER Creation Unit would be S. if the Creation
Unit is redeemed after one year and S. if redeemed after three
years.
[0134] 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.
TABLE-US-00021 Additional Information Net Assets (all share
Dividends and Capital Gains classes) as of Dividends are
distributed quarterly in March, Jun. 30, 2000 June; September, and
December; capital gains, $17.2 billion if any are distributed
annually in December Vanguard Fund Number Investment Adviser 969
The Vanguard Group, Valley Forge, Pa., Cusip Number since inception
922908736 Inception Date AMEX Trading Symbol Feb. 9, 2001 VB Number
of Small-CapVIPERs in a Creation Unit 30,000
More on VIPER Shares
[0135] The following sections discuss other important features of
VIPERS, Total Stock Market VIPERs, Small-Cap VIPERs, Value VIPERs,
and Growth VIPERs.
Indexing Methods
[0136] In seeking to track a particular index, a fund generally
uses one of two methods to select stocks.
[0137] Some index funds hold each stock found in their target
indexes in about the same proportions as represented in the indexes
themselves. This is called a "replication" method. For example, if
5% of the S&P 500 Index were made up of the stock of a specific
company, a fund tracking that index would invest about 5% of its
assets in that company. The 500, Value, and Growth Index Funds
employ the replication method of indexing.
[0138] Because it would be very expensive to buy and sell all of
the stocks held in certain indexes (the Wilshire 5000 Index, for
example, included more than 6,800 stocks as of Jun. 30, 2000), many
funds tracking these larger indexes use a "sampling" technique. At
Vanguard, we use a sophisticated computer program to select a
representative sample of stocks from a fund's target index that
will resemble the full index in terms of industry weightings,
market capitalization, price/earnings ratio, dividend yield, and
other characteristics. For instance, if 10% of the Wilshire 5000
Index were made up of utility stocks, a fund tracking that index
would invest about 10% of its assets in some--but not all--of those
utility stocks. The particular utility stocks selected by the fund,
as a group, would have investment characteristics similar to those
of the utility stocks in the Index. The Total Stock Market and
Small-Cap Index Funds employ the sampling method of indexing.
[0139] The following table shows the number of stocks held by each
of the issuing funds, and the number of stocks in each fund's
target index, as of Jun. 30, 2000.
TABLE-US-00022 Number of Number of Stocks Fund Stocks Held in
Target Index Total Stock Market 3,440 6,875 500 Index 516 500
Small-Cap 2,029 2,000 Value 401 391 Growth 120 109
Additional Risk Information
[0140] VIPER Shares are subject to market risk, which is the chance
that stock prices overall will decline over short or even long
periods. Stock markets tend to move in cycles, with periods of
rising stock prices and periods of falling stock prices.
[0141] To illustrate the volatility of stock prices, the following
table shows the best, worst, and average total returns for the U.S.
stock market over various periods as measured by the S&P 500
Index, which--in addition to being the target index for Vanguard
500 Index Fund--is a widely used barometer of stock market
activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs
of buying and selling stocks or other expenses that a real-world
investment portfolio would incur. Note, also, that the gap between
best and worst tends to narrow over the long term.
TABLE-US-00023 U.S. Stock Market Returns (1926-2000) 1 Year 5 Years
10 Years 20 Years Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4
-0.8 3.1 Average 12.9 11.1 11.2 11.2
[0142] The table covers all of the 1-, 5-, 10-, and 20-year periods
from 1926 through 2000. You can see, for example, that while the
average return on common stocks for all of the 5-year periods was
111%, returns for individual 5-year periods ranged from a -12.4%
average (from 1928 through 1932) to 28.6% (from 1995 through 1999).
These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from
either the stock market as a whole or any VIPER Shares in
particular.
[0143] VIPER shares are also subject, in varying degrees, to
investment style risk, which is the chance that returns from a
specific type of stock (for instance, small-cap or value) will
trail returns from other asset classes or the overall stock market.
Each type of stock tends to go through cycles of doing better--or
worse--than common stocks in general. These periods have, in the
past, lasted for as long as several years.
Risk of Nondeversification
[0144] As index funds, each of the U.S. Stock Index Funds holds the
largest stocks in its target index in approximately the same
percentages as those stocks are represented in its index. When a
target index becomes less diversified, a fund that tracks that
index similarly becomes less diversified. This has happened to the
Growth Index Fund. Due to the rapid appreciation of certain stocks
in its target index, the Fund's top four holdings, as of Jun. 30,
2000, represent more than 26% of its total assets. By tracking its
target index, the Fund technically has become "nondiversified"
under SEC standards, although it continues to hold more than 100
stock positions in a variety of market sectors. As the market
values of the Fund's largest holdings rise and fall, there may be
times when the Fund is diversified under SEC standards and other
times when it is not. Holders of Growth VIPERs are subject to the
risk that the Fund's performance could be hurt disproportionately
by a decline in the price of just a few stocks.
[0145] In the unlikely event that the target index of any of the
other Vanguard U.S. Stock Index Funds becomes dominated by just a
few companies, holders of VIPER Shares issued by those Funds would
similarly be subject to the risk of nondiversification.
Special Risks of Exchange-Traded Shares
[0146] VIPER Shares are not individually redeemable. They can be
redeemed with the Fund at net asset value only in large blocks
known as Creation Units. You may incur brokerage costs in
purchasing enough VIPER Shares to constitute a Creation Unit.
[0147] The market price of VIPER Shares may differ from net asset
value. Individual VIPER Shares will be listed for trading on the
AMEX and can be bought and sold in the secondary market at market
prices. Although it is expected that the market price of a VIPER
Share typically will approximate its net asset value (NAV), there
may be times when the market price and the NAV vary significantly.
Thus, you may pay more than NAV when buying VIPER Shares on the
secondary market, and you may receive less than NAV when you sell
those shares.
[0148] The market price of VIPER Shares, like the price of any
exchange-traded security, includes a "bid-offered spread" charged
by the exchange specialist and other market makers that cover the
particular security. In times of severe market disruption, the
bid-offered spread often increases significantly. This means that
VIPER Shares are most likely to be traded at a discount to NAV, and
the discount is likely to be greatest, when the price of VIPER
Shares is falling fastest--and this may be the time that you most
want to sell VIPER Shares.
Absence of Active Trading Market.
[0149] Although VIPER Shares will be listed on the AMEX, it is
possible that an active trading market may not develop. If an
active trading market develops, there can be no guarantee that it
will continue.
Trading Halts.
[0150] Trading of VIPER 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 VIPER Shares also
would be halted if (i) VIPER Shares are delisted from the AMEX
without first being listed on another exchange, or (ii) AMEX
officials determine that such action is appropriate in the interest
of a fair and orderly market or to protect investors.
Note:
[0151] If trading of VIPER Shares on the AMEX is halted, qualified
investors (see below) will still be able to purchase Creation Units
of VIPER Shares directly from an issuing fund or redeem such units
with the fund.
Purchasing Viper Shares from an Issuing Fund
[0152] You can purchase VIPER Shares from an issuing fund if you
meet the following criteria and comply with the following
procedures. [0153] Eligible Investors. To purchase VIPER Shares
from an issuing 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 that has executed a Participant Agreement with the Fund's
Distributor (typically a brokerage firm). [0154] Creation Units.
You must purchase VIPER Shares in large blocks, known as "Creation
Units." The number of VIPER Shares that comprise a Creation Unit,
and the minimum number of Creation Units you must purchase, are as
follows:
TABLE-US-00024 [0154] Number of Minimum Fund Shares in a Unit
Purchase Vanguard 500 Index Fund 60,000 1 unit Vanguard Total Stock
Market 60,000 1 unit Index Fund Vanguard Small-Cap Index Fund
30,000 1 unit Vanguard Value Index Fund 30,000 1 unit Vanguard
Growth Index Fund 30,000 1 unit
[0155] For any particular fund, the number of VIPER Shares in a
Creation Unit will not change, except in the event of a stock split
or similar revaluation. The Funds will not issue fractional
Creation Units. [0156] In-kind Deposits. To purchase VIPER Shares
directly from an issuing fund, you must deposit with the fund a
basket of securities. Each business day, prior to the opening of
trading on the AMEX, the fund's adviser will make available, on the
NSCC bulletin board, a list of the names and number of shares of
each security to be included in that day's creation basket Note:
Each fund reserves the right to accept a non-conforming creation
basket. [0157] Balancing Amount. In addition to the in-kind deposit
of securities, you will either pay to, or receive from, the issuing
fund a specified amount of cash (the Balancing Amount). This amount
is designed to ensure that the NAV of your in-kind deposit is
identical to the NAV of the Creation Unit it is used to purchase.
The Balancing Amount is equal to the difference between the NAV of
a Creation Unit and the value of the securities in the creation
basket. The fund's adviser will publish, on a daily basis,
information about the previous day's Balancing Amount. You also
must pay a Transaction Fee, described below, in cash. The Balancing
Amount and the Transaction Fee, taken together are referred to as
the "Cash Component." [0158] Placement of Purchase Orders. All
purchase orders must be placed with Vanguard by or through an
Authorized Participant. Purchase orders will be processed either
through a manual clearing process run by the DTC or through an
enhanced clearing process that is available only to those DTC
participants that also are participants in the Continuous Net
Settlement System of the National Securities Clearing Corporation
(NSCC). Authorized Participants that do not use the NSCC's enhanced
clearing process will be charged a higher Transaction Fee
(discussed below). A purchase order must be received by the Fund's
Distributor prior to the close of regular trading on the New York
Stock Exchange (ordinarily 4:00 pm New York 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. [0159] Transaction Fee on Purchases
of Creation Units. A fixed Transaction Fee of $.cndot. is
applicable to each creation transaction, regardless of the number
of Creation Units purchased. An additional fee of up to S. (for a
total of $.cndot.) is imposed on transactions effected through the
DTC clearing process described above. Investors that elect to
substitute cash in lieu of one or more deposit securities are
subject to an additional charge determined at the discretion of the
Fund. The Transaction Fee is paid to the fund, not to Vanguard or
other third party. It protects existing shareholders of the fund
from the costs associated with the purchase of Creation Units.
Redeeming Viper Shares with an Issuing Fund
[0160] The redemption process is essentially the reverse of the
purchase process. [0161] Eligible Investors. To redeem VIPER Shares
with an issuing fund, you must be an Authorized Participant or you
must redeem through a broker that is an Authorized Participant.
[0162] Creation Units. To redeem VIPER Shares with an issuing fund,
you must tender the shares in Creation Unit-size blocks. [0163]
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. Note: Each fund reserves the right to honor a
redemption request with a non-conforming redemption basket, with
the consent of the redeeming investor. [0164] Balancing Amount.
Depending on whether the NAV of a Creation Unit is higher or lower
than the value of the redemption securities, you will either
receive from or pay to the issuing fund a Balancing Amount in cash.
If you are receiving a Balancing Amount, the amount due will be
reduced by the amount of the applicable Transaction Fee. [0165]
Placement of Redemption Orders. As with purchases, redemptions may
be processed either through the DTC process or the enhanced NSCC
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
all other procedures set forth in the Participation Agreement are
followed. [0166] Transaction Fee on Redemption of Creation Units. A
fixed Transaction Fee of $.cndot. is applicable to each redemption
transaction, regardless of the number of Creation Units redeemed.
An additional fee of up to $.cndot. (for a total of $.cndot.) may
be imposed on transactions effected through the DTC clearing
process. Investors that elect to receive cash in lieu of one or
more securities in the redemption basket are subject to an
additional charge determined at the discretion of the Fund. The
Transaction Fee is paid to the fund, not to Vanguard or other third
party. It protects existing shareholders of the fund from the costs
associated with the redemption of Creation Units.
Purchasing and Selling Viper Shares on the Secondary Market
[0167] You can buy and sell VIPER 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 VIPER Shares, i.e., the market price, may be more or
less than the net asset value of the shares. Unless imposed by your
broker, there is no minimum dollar amount you must invest and no
minimum number of VIPER Shares you must buy.
Conversions and Exchanges
Conversions.
[0168] Owners of conventional shares issued by one of the Vanguard
Index Funds may convert those shares into VIPER Shares of
equivalent value of the same Fund. Note: Investors who own
conventional shares of a Vanguard fund through a 401(k) plan or
other employer-sponsored retirement or benefit plan may not convert
those shares into VIPER Shares. Vanguard will impose a charge on
conversion transactions and reserves the right, in the future, to
limit or terminate the conversion privilege. VIPER Shares, whether
acquired through a conversion or purchased in the secondary market,
cannot be converted into shares of another class of the same
Fund.
[0169] Unless you are an Authorized Participant, you must hold
VIPER Shares in a brokerage Account. Thus, before converting
conventional shares into VIPER Shares, you must have an existing,
or open a new, brokerage account. To initiate a conversion of
conventional shares into VIPER Shares, please contact your broker.
Your broker may charge you a fee, over and above Vanguard's fee, to
process a conversion request.
[0170] Converting conventional shares into VIPER Shares generally
is accomplished as follows. First, after your broker notifies
Vanguard of your request to convert, Vanguard will transfer your
conventional shares from your account 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 you as an investor; your ownership of
conventional shares and VIPER Shares will be known only to your
broker. Next, your broker will instruct Vanguard to convert the
appropriate amount of conventional shares in its omnibus account
into VIPER. Shares of equivalent value. These shares will be held
in an account at Vanguard in the name of DTC. (DTC will keep track
of which VIPER Shares belong to your broker and your broker, in
turn, will keep track of which VIPER Shares belong to you.) Because
DTC is unable to handle fractional shares, only whole shares will
be converted. For example, if you owned 300.250 conventional
shares, and this was equivalent in value to 90.750 VIPER Shares,
the DTC account would receive 90 VIPER Shares. Conventional shares
worth 0.750 VIPER Shares (in this example, that would be 2.481
conventional shares) would remain in the broker's omnibus account
with Vanguard. Your broker then could either (i) take certain
internal actions necessary to credit your account with 0.750 VIPER
Shares rather than 2.481 conventional shares, or (ii) redeem the
2.481 conventional shares at net asset value, in which case you
would receive cash in lieu 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.
[0171] The conversion process works differently if you opt to hold
your VIPER Shares through an account at Vanguard Brokerage Services
(VBS). If you convert your conventional shares to VIPER Shares
through VBS, all conventional shares for which you request
conversion will be converted into the equivalent of VIPER Shares.
Because no fractional shares will have to be sold, the transaction
will be 100% tax-free. Here are some important points to keep in
mind when converting conventional shares of a Vanguard fund into
VIPER Shares: [0172] The conversion transaction is tax-free except,
as applicable, to the limited extent described above. [0173] The
conversion process can take anywhere from several days to several
weeks, depending on your broker. Vanguard generally will process
conversion requests, once received, on the same or next business
day, although processing may take up to three days depending on
when the conversion request is received. [0174] During the
conversion process, 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. [0175]
During the conversion process, you will be able to liquidate all or
part of your investment by instructing Vanguard or your broker
(depending on whether your shares are held in your own account or
your broker's omnibus account) to redeem your conventional shares.
After the conversion process is complete, you will be able to
liquidate all or part of your investment by instructing your broker
to sell your VIPER Shares.
Exchanges.
[0176] VIPER Shares of one Fund may not be exchanged for VIPER
Shares of another Fund.
Precautionary Notes
A Precautionary Note to Retail Investors.
[0177] DTC or its nominee will be the registered owner of all
outstanding VIPER Shares. Your ownership of VIPER Shares will be
shown on the records of DTC and the DTC Participant broker through
whom you hold the shares.
Vanguard Will not have any Record of Your Ownership.
[0178] Your account information will be maintained by your broker,
who will provide you with account statements, confirmations of your
purchases and sales of VIPER Shares, and tax information. Your
broker also will be responsible for ensuring that you receive
shareholder reports and other communications from the Fund whose
VIPER Shares you own. You will receive 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:
[0179] You should be aware of certain legal risks unique to
investors purchasing Creation Units directly from the issuing fund.
Because new VIPER Shares may be issued on an ongoing basis, a
"distribution" of VIPER shares could be occurring at any time. As a
dealer, certain activities on your part 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 an issuing fund, break them down into the
constituent VIPER Shares, and sell those shares directly to
customers, or if you choose to couple the creation of a supply of
new VIPER Shares with an active selling effort involving
solicitation of secondary market demand for VIPER 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 VIPER 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:
[0180] For purposes of the Investment Company Act of 1940, VIPER
Shares are issued by registered investment companies, and the
acquisition of VIPER Shares by other investment companies is
subject to the restrictions of Section 12(d)(1) of that Act.
A Note on Unusual Circumstances:
[0181] Vanguard 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.
Investment Policies
[0182] Each of the funds issuing VIPER Shares reserves the right to
substitute a different index for the index it currently tracks if
the current index is discontinued, the fund's license 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 every
such instance, the substitute index will measure the same general
market (large- or small-cap, growth or value) as the current
index.
[0183] Each fund may invest in foreign securities to the extent
necessary to carry out its investment strategy of holding all, or a
representative sample, of the stocks that comprise the index it
tracks. It is not expected that a fund will invest more than 5% of
its assets in foreign securities.
[0184] Although index funds, by their nature, tend to be
tax-efficient investment vehicles, the funds generally are managed
without regard to tax ramifications.
[0185] To track their target indexes as closely as possible, the
funds attempt to remain fully invested (at least 95% of total
assets) in stocks. To help stay fully invested, and to reduce
transaction costs, the Funds may invest, to a limited extent, in
stock futures and options contracts, warrants, convertible
securities, and swap agreements, which are types of derivatives.
Losses (or gains) involving futures can sometimes be substantial-in
part because a relatively small price movement in a futures
contract may result in an immediate and substantial loss (or gain)
for a fund. Similar risks exist for warrants (securities that
permit their owners to purchase a specific number of stock shares
at a predetermined price), convertible securities (securities that
may be exchanged for another asset), and swap agreements (contracts
in which each party agrees to make payments to the other based on
the return of a specified index or asset).
[0186] For this reason, the funds will not use futures, options,
warrants, convertible securities, or swap agreements for
speculative purposes or as leveraged investments that magnify the
gains or losses of an investment. A fund's obligation under futures
contracts will not exceed 20% of that fund's total assets.
[0187] The reasons for which a fund will invest in futures and
options are: [0188] To keep cash on hand to meet shareholder
redemptions or other needs while simulating full investment in
stocks. [0189] To reduce the fund's transaction costs or add value
when these instruments are favorably priced.
VIPER Shares and Vanguard
[0190] The funds issuing VIPER shares are members of The Vanguard
Group, a family of more than 35 investment companies with more than
100 funds holding assets worth more than $550 billion. All of the
funds that are members of The Vanguard Group share in the expenses
associated with business operations, such as personnel, office
space, equipment, and advertising. Vanguard also provides marketing
services to the member funds. Although shareholders do not pay
sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
Investment Adviser
[0191] The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge,
Pa. 19482, founded in 1975, serves as adviser to the funds issuing
VIPER Shares through its Quantitative Equity Group. As of Dec. 31,
2000, Vanguard served as adviser for about $386.4 billion in
assets. Vanguard manages the funds on an at-cost basis, subject to
the control of the trustees and officers of the funds.
[0192] The funds have authorized Vanguard to choose brokers or
dealers to handle the purchase and sale of securities for the
funds, and to get the best available price and most favorable
execution from these brokers with respect to all transactions. The
funds may direct Vanguard to use a particular broker for certain
transactions in exchange for commission rebates or research
services provided to the funds.
Dividends, Capital Gains, and Taxes
Fund Distributions
[0193] Each fund issuing VIPER Shares distributes to shareholders
virtually all of its net income (interest and dividends, less
expenses), as well as any capital gains realized from the sale of
its holdings. Income dividends for the 500, Total Stock Market,
Value, and Growth Index Funds generally are distributed in March,
June, September, and December; income dividends, for the Small-Cap
Index Fund generally are distributed in December Capital gains
distributions generally occur in December. In addition, the funds
may occasionally be required to make supplemental dividend or
capital gains distributions at some other time during the year.
Dividend Reinvestment Service
[0194] Brokers may make available to their customers who own VIPER
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 VIPER Shares of the same Fund. Without this
service, investors would have to take 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, please consult your broker.
Basic Tax Points
[0195] Taxable investors should be aware of the following basic tax
points: [0196] Distributions are taxable to you for federal income
tax purposes whether or not you reinvest these amounts in
additional VIPER Shares. [0197] 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. [0198] Any
dividends and short-term capital gains that you receive are taxable
to you as ordinary income for federal income tax purposes. [0199]
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 VIPER Shares. [0200] Capital gains
distributions may vary considerably from year to year as a result
of the funds' normal investment activities and cash flows. [0201] A
sale of VIPER 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.
Daily NAV Pricing
[0202] The net asset value, or NAM, of each fund's VIPER Shares is
calculated each business day after the close of regular trading on
the New York Stock Exchange (the NAV is not calculated on holidays
or other days when the Exchange is closed). NAV per share is
computed by adding up the fund's net assets attributable to VIPER
Shares and then dividing by the number of VIPER Shares
outstanding.
[0203] Remember: If you sell VIPER Shares on the secondary market,
you will receive the market price, which may be higher or lower
than NAV You will receive NAV only if you redeem your VIPER Shares
in Creation Unit blocks.
A Note on Pricing:
[0204] In calculating a fund's NAV, the fund's investments will be
priced at their market value when market quotations are readily
available. When these quotations are not readily available,
investments will be priced at their fair value, calculated
according to procedures adopted by the funds' board of
trustees.
[0205] The market price of a VIPER Share, for each issuing fund,
can be found daily in the business section of most major newspapers
in the listing of securities traded on the AMEX.
[0206] Note: This prospectus offers the funds' VIPER Shares, not
the Investor Shares. Information for the Investor Shares is shown
here because each of the fund's VIPER Shares are new. However, the
two share classes are invested in the same portfolio of securities
and will have the same financial performance except to the extent
that their operating expenses differ.
GLOSSARY OF INVESTMENT TERMS
Active Management
[0207] 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 seq.
Capital Gains Distribution
[0208] Payment to fund shareholders of gains realized on securities
that a fund has sold at a profit, minus any realized losses.
Common Stock
[0209] 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.
Creation Unit
[0210] A large block of a specified number of VIPER shares,
determined by the issuing fund. Depository Trust Company
participants must buy VIPER shares in creation unit-size
aggregations.
Dividend Income
[0211] Payment to shareholders of income from interest or dividends
generated by a fund's investments.
Expense Ratio
[0212] The percentage of a fund's average net assets used to pay
its expenses. The expense ratio includes management fees,
administrative fees, and any 12b-1 distribution fees.
Growth Stock Fund
[0213] A mutual fund that emphasizes stocks of companies believed
to have above-average prospects for growth. Reflecting market
expectations for superior growth, these stocks typically have low
dividend yields and above-average prices in relation to such
measures as revenue, earnings, and book value.
Index
[0214] An unmanaged group of securities whose overall performance
is used as a standard to measure investment performance.
Investment Adviser
[0215] An organization that makes the day-today decisions regarding
a fund's investments.
Passive Management
[0216] A low-cost investment strategy in which a fund attempts to
match--rather than outperform--a particular stock or bond market
index. Also known as indexing.
Value Stock Fund
[0217] A mutual fund that emphasizes stocks of companies whose
growth prospects are generally regarded as subpar by the market.
Reflecting these market expectations, the prices of value stocks
typically are below-average in comparison with such measures as
earnings and book value, and these stocks typically pay
above-average dividend yields.
VIPER Shares
[0218] Vanguard Index Participation Equity Receipts, which are a
class of exchange-traded shares issued by certain Vanguard mutual
funds that are bought and sold continuously throughout the day.
Volatility
[0219] The fluctuations in value of a fund or other security. The
greater a fund's volatility, the wider the fluctuations between its
high and low prices.
Yield
[0220] Income (interest or dividends) earned by an investment,
expressed as a percentage of the investment's price.
APPENDIX B
Information about the Viper Share Class of Vanguard Index Funds
[0221] Each Fund offers and issues VIPER Shares, at their net asset
value, only in bundles of a specified number of VIPER 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 ("DTC") that has executed a Participant Agreement with
Vanguard Marketing Corporation, the Funds' Distributor.
[0222] Each Fund issues Creation Units in kind, in exchange for a
basket of stocks that are part of (or soon to be part of) its
target index ("Deposit Securities"). Each Fund also redeems
Creation Units in kind; an investor who tenders a Creation Unit
will receive, as redemption proceeds, a basket of stocks that are
part of the fund's portfolio holdings ("Redemption Securities").
The Deposit Securities and the Redemption Securities may not
necessarily be the same. As part of any creation or redemption
transaction, the investor will either pay or receive some cash in
addition to the securities, as described more fully below. The
Funds reserve the right to issue Creation Units for cash, rather
than in kind, although they have no current intention of doing
so.
Exchange Listing and Trading
[0223] VIPER 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.
[0224] There can be no assurance that, in the future, VIPER Shares
will continue to meet all of the AMEX's listing requirements. The
AMEX may, but is not required to, remove the VIPER Shares of any
Fund from listing if: (1) following the initial 12-month period
beginning upon the commencement of trading, there are fewer than 50
beneficial owners of the VIPER Shares of a Fund for 30 or 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 remove the VIPER Shares of a Fund from listing and trading
upon termination of that Fund's VIPER Share class.
[0225] As with any stock traded on an exchange, purchases and sales
of VIPER Shares will be subject to usual and customary brokerage
commissions.
Conversions and Exchanges
[0226] Owners of conventional shares issued by one of the Vanguard
Index Funds may convert those shares into VIPER Shares of
equivalent value of the same Fund. Note: Investors who own
conventional shares of a Vanguard fund through a 401(k) plan or
other employer-sponsored retirement or benefit plan may not convert
those shares into VIPER Shares. Vanguard will impose a charge on
conversion transactions and reserves the right, in the future, to
limit or terminate the conversion privilege. VIPER Shares, whether
acquired through a conversion or purchased in the secondary market,
cannot be converted into shares of another class of the same Fund.
In addition, VIPER Shares of one fund may not be exchanged for
VIPER Shares of another fund.
[0227] Investors that are not Authorized Participants must hold
VIPER Shares in a brokerage account. Thus, before converting
conventional shares into VIPER Shares, an investor must have an
existing, or open a new, brokerage account. To initiate a
conversion of conventional shares into VIPER Shares, an investor
must contact her broker. The broker may charge a fee, over and
above Vanguard's fee, to process a conversion request.
[0228] Converting conventional shares into VIPER Shares generally
is accomplished as follows. First, after the broker notifies
Vanguard of an investor's request to convert, Vanguard will
transfer conventional shares from the investor's account with
Vanguard to the broker's omnibus account with Vanguard (an account
maintained by the broker on behalf of all its customers who hold
conventional Vanguard fund shares through the broker). At this
point, Vanguard will no longer have any record of the investor; her
ownership of conventional shares and VIPER Shares will be known
only to her broker. Next, the broker will instruct Vanguard to
convert the appropriate amount of conventional shares in its
omnibus account into VIPER Shares of equivalent value. These shares
will be held in an account at Vanguard in the name of DTC. (DTC
will keep track of which VIPER Shares belong to the broker and the
broker, in turn, will keep track of which VIPER Shares belong to
its customers.) Because DTC is unable to handle fractional shares,
only whole shares will be converted. For example, if the investor
owned 300.250 conventional shares, and this was equivalent in value
to 90.750 VIPER Shares, the DTC account would receive 90 VIPER
Shares. Conventional shares worth 0.750 VIPER Shares (in this
example, that would be 2.481 conventional shares) would remain in
the broker's omnibus account with Vanguard. The broker then could
either (i) take certain internal actions necessary to credit the
investor's account with 0.750 VIPER Shares rather than 2.481
conventional shares, or (ii) 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 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.
[0229] The conversion process works differently if the investor
opts to hold VIPER Shares through an account at Vanguard Brokerage
Services (VBS). If the investor converts her conventional shares to
VIPER Shares through VBS, all conventional shares for which she
requests conversion will be converted into the equivalent amount of
VIPER Shares. Because no fractional shares will have to be sold,
the transaction will be 100% tax-free.
[0230] Here are some important points to keep in mind when
converting conventional shares of a Vanguard fund into VIPER
Shares: [0231] The conversion transaction is tax-free except, as
applicable, to the limited extend described above. [0232] The
conversion process can take anywhere from several days to several
weeks, depending on the broker. Vanguard generally will process
conversion requests, once received, on the same or next business
day, although processing may take up to three days depending on
when the conversion request is received. [0233] During the
conversion process, the investor will remain fully invested in the
fund's conventional shares, and her investment will increase or
decrease in value in tandem with the net asset value of those
shares. [0234] During the conversion process, the investor will be
able to liquidate all or part of her investment by instructing
Vanguard or her broker (depending on whether her shares are held in
her own account or her broker's omnibus account) to redeem her
conventional shares. After the conversion process is complete, the
investor will be able to liquidate all or part of her investment by
instructing her broker to sell her VIPER Shares.
Book Entry Only Systems
[0235] VIPER Shares of each Fund are registered in the name of DTC
or its nominee, Cede & Co., and deposited with, or on behalf
of, DTC. DTC is a limited-purpose trust company that was created to
hold securities of its participants (the "DTC Participants") and to
facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic
book-entry changes in accounts of the DTC Participants, thereby
eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain
other organizations, some of whom (and/or their representatives)
own DTC. More specifically, DTC is owned by a number of its DTC
Participants and by the New York Stock Exchange ("NYSE"), the 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").
[0236] Beneficial ownership of VIPER Shares is limited to DTC
Participants, Indirect Participants, and persons holding interests
through DTC Participants and Indirect Participants. Ownership of
beneficial interests in VIPER Shares (owners of such beneficial
interests are referred to herein as "Beneficial Owners") is shown
on, and the transfer of ownership is effected only through, records
maintained by DTC (with respect to DTC Participants) and on the
records of DTC Participants (with respect to Indirect Participants
and Beneficial Owners that are not DTC Participants). Beneficial
Owners will receive from or through the DTC Participant a written
confirmation relating to their purchase of VIPER Shares.
[0237] The Funds recognize DTC or its nominee as the record owner
of all VIPER Shares for all purposes. Beneficial Owners of VIPER
Shares are not entitled to have VIPER Shares registered in their
names, and will not receive or be entitled to physical delivery of
share certificates. Each Beneficial Owner must rely on the
procedures of DTC and any DTC Participant and/or Indirect
Participant through which such Beneficial Owner holds its
interests, to exercise any rights of a holder of VIPER Shares.
[0238] Conveyance of all notices, statements and other
communications to Beneficial Owners is effected as follows.
Pursuant to the Depositary Agreement between the Trust and DTC, DTC
is required to make available to the Trust upon request and for a
fee to be charged to the Trust a listing of the VIPER Shares of
each Fund held by each DTC Participant. The Trust shall inquire of
each such DTC Participant as to the number of Beneficial Owners
holding VIPER Shares, directly or indirectly, through such DTC
Participant. The Trust shall provide each such DTC Participant with
copies of such notice, statement, or other communication, in such
form, number and at such place as such DTC Participant may
reasonably request, in order that such notice, statement or
communication may be transmitted by such DTC Participant, 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.
[0239] Share distributions shall be made to DTC or its nominee as
the registered holder of all VIPER Shares. DTC or its nominee, upon
receipt of any such distributions, shall credit immediately DTC
Participants' accounts with payments in amounts proportionate to
their respective beneficial interests in VIPER Shares of each Fund
as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of
VIPER Shares held through such DTC Participants will be governed by
standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form
or registered in a "street name," and will be the responsibility of
such DTC Participants.
[0240] The Trust has no responsibility or liability for any aspects
of the records relating to or notices to Beneficial Owners, or
payments made on account of beneficial ownership interests in such
VIPER Shares, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests, or for any
other aspect of the relationship between DTC and the DTC
Participants or the relationship between such DTC Participants and
the Indirect Participants and Beneficial Owners owning through such
DTC Participants.
[0241] DTC may determine to discontinue providing its service with
respect to VIPER Shares at any time by giving reasonable notice to
the Trust and discharging its responsibilities with resect thereto
under applicable law. Under such circumstances, the Trust shall
take action either to find a replacement for DTC to perform its
functions at a comparable cost or, if such replacement is
unavailable, to issue and deliver printed certificates representing
ownership of VIPER Shares, unless the Trust makes other
arrangements with respect thereto satisfactory to the AMEX (or such
other exchange on which VIPER Shares may be listed).
Purchase and Issuance of Viper Shares in Creation Units
[0242] Each Fund issues and sells VIPER Shares only in Creation
Units on a continuous basis through the Distributor, without a
sales load, at their net asset value next determined after receipt,
on any Business Day, of an order in proper form. The Funds will not
issue fractional Creation Units.
[0243] A "Business Day" with respect to each Fund 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
[0244] The consideration for purchase of a Creation Unit from a
Vanguard U.S. Stock Index 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."
[0245] 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).
[0246] Vanguard, through the National Securities Clearing
Corporation ("NSCC") (discussed below), makes available on each
Business Day, immediately prior to the opening of business on the
AMEX (currently 9:30 a.m., New York time), a list of the names and
the required number of shares of each Deposit Security to be
included in the current Fund Deposit (based on information at the
end of the previous Business Day) for each Fund. Such Fund Deposit
is applicable, subject to any adjustments as described below, in
order to effect purchases of Creation Units of a given Fund until
such time as the next-announced Fund Deposit composition is made
available. Each Fund reserves the right to accept a non-conforming
Fund Deposit.
[0247] The identity and number of shares of the Deposit Securities
required for a Fund Deposit for each Fund changes as rebalancing
adjustments and corporate action events are reflected from time to
time by Vanguard with a view to the investment objective of the
Fund. The composition of the Deposit Securities may also change 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 which may not be
available in sufficient quantity for delivery or which may not be
eligible for transfer through the Clearing Process (discussed
below), or which may not be eligible for trading by an Authorized
Participant (as defined below) or the investor for which an
Authorized Participant is acting. Brokerage commissions incurred in
connection with acquisition of Deposit Securities not eligible for
transfer through the systems of DTC and hence not eligible for
transfer through the Clearing Process (discussed below) will be an
expense of the Fund. However, Vanguard may adjust the Transaction
Fee (described below) to protect existing shareholders from this
expense.
[0248] 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 issuing Fund, and the Fund's determination shall
be final and binding.
[0249] Procedures for Purchasing Creation Units
[0250] 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.
[0251] An Authorized Participant may place an order to purchase (or
redeem) Creation Units of VIPER Shares either (i) through the
Continuous Net Settlement ("CNS") clearing processes of NSCC as
such processes have been enhanced to effect purchases (and
redemptions) of Creation Units, such processes being referred to
herein as the "Clearing Process," or (ii) outside the Clearing
Process. To purchase or redeem through the Clearing Process, an
Authorized Participant must be a member of NSCC that is eligible to
use the Continuous Net Settlement system. Purchases (and
redemptions) of Creation Units cleared through the Clearing Process
will be subject to a lower Transaction Fee than those cleared
outside the Clearing Process.
[0252] To initiate a purchase order for a Creation Unit, whether
through the Clearing Process A or outside the Clearing Process, an
Authorized Participant must give notice to the Distributor. The
order must be in proper form and must be received by the
Distributor prior to the closing time of the regular trading
session on the NYSE ("Closing Time") (ordinarily 4:00 p.m., New
York time) to receive that day's NAV. The date on which an order to
purchase (or redeem) Creation Units is placed is referred to as the
"Transmittal Date." Orders must be transmitted by an Authorized
Participant by a transmission method acceptable to the Distributor
pursuant to procedures set forth in the Participation
Agreement.
[0253] Purchase orders effected outside the Clearing Process are
likely to require transmittal by the Authorized Participant earlier
on the Transmittal Date than orders effected using the Clearing
Process. Those persons placing orders outside the Clearing Process
should ascertain the deadlines applicable to DTC and the Federal
Reserve Bank wire system by contacting the operations department of
the broker or depository institution effectuating such transfer of
Deposit Securities and Cash Component.
[0254] 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.)
[0255] 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.
[0256] Placement of Purchase Orders Using Clearing Process
[0257] For purchase orders placed through the Clearing Process, the
Authorized Participant Agreement authorizes the Distributor to
transmit through the Transfer Agent to NSCC, on behalf of an
Authorized Participant, such trade instructions as are necessary to
effect the Authorized Participant's purchase order. Pursuant to
such trade instructions to NSCC, the Authorized Participant agrees
to deliver the requisite Deposit Securities and the Cash Component
to the Trust, together with such additional information as may be
required by the Distributor.
[0258] An order to purchase Creation Units through the Clearing
Process is deemed received on the Transmittal Date if (i) such
order is received by the Distributor not later than the Closing
Time on such Transmittal Date, and (ii) all other procedures set
forth in the Participant Agreement are properly followed. Such
order will be effected based on the NAV of the Fund next determined
on that day. An order to purchase Creation Units through the
Clearing Process made in proper form but received after Closing
Time on the Transmittal Date will be deemed received on the next
Business Day immediately following the Transmittal Date and will be
effected at the NAV next determined on that day. The Deposit
Securities and the Cash Component will be transferred by the third
NSCC Business Day following the date on which the purchase request
is deemed received.
Placement of Purchase Orders Outside Clearing Process
[0259] An Authorized Participant that wishes to place an order to
purchase Creation Units outside the Clearing Process must state
that it is not using the Clearing Process and that the purchase
instead will be effected through a transfer of securities and cash
directly through DTC. An order to purchase Creation Units outside
the Clearing Process is deemed received by the Distributor on the
Transmittal Date if (i) such order is received by the Distributor
not later than the Closing Time on such Transmittal Date; and (ii)
all other procedures set forth in the Participant Agreement are
properly followed. If the Fund's custodian does not receive the
Deposit Securities and Cash Component by the settlement date (T+3
unless otherwise agreed), the Fund shall be entitled to cancel the
purchase order and/or charge the purchaser for any costs (including
investment losses, attorney's fees, and interest) sustained by the
Fund as a result of the late delivery or failure to deliver.
[0260] 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 115% of the market value of
the undelivered Deposit Securities (the "Additional Cash Deposit").
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 and federal funds in
the appropriate amount are deposited with the Custodian by 11:00
a.m., New York time, the following Business Day. If the order is
not placed in proper form by 4:00 p.m. or federal funds in the
appropriate amount are not received by 11:00 a.m. the next Business
Day, then the Fund may reject the order and the investor shall be
liable to the Fund for losses, if any, resulting therefrom. Pending
delivery of the missing Deposit Securities, the purchaser must
deposit additional cash with the Fund to the extent necessary to
maintain the Additional Cash Deposit in an amount at least equal to
115% of the daily marked-to-market value of the missing Deposit
Securities. If the purchaser fails to deliver missing Deposit
Securities by 1:00 p.m. on the third Business Day following the day
on which the purchase order is deemed received by the Distributor,
or fails to pay additional money to maintain the Additional Cash
Deposit at 115% of the marked-to-market value of the missing
securities within one Business Day following notification by the
Distributor that such a payment is required, the Fund may use the
cash on deposit to purchase the missing Deposit Securities.
Authorized Participants will be liable to the Fund for the costs
incurred by the Fund in connection with any such purchases. These
costs will be deemed to include the amount by which the actual
purchase price of the Deposit Securities exceeds the market value
of such Deposit Securities on the day the purchase order was deemed
received by the Distributor, plus the brokerage and related
transaction costs associated with such purchases. The Fund will
return any unused portion of the Additional Cash Deposit once all
of the missing Deposit Securities have been properly received by
the Custodian or purchased by the Fund. In addition, the Fund will
be entitled to collect a transaction fee of $4,000 in all such
cases. The delivery of Creation Units so purchased will occur no
later than the third Business Day following the day on which the
purchase order is deemed received by the Distributor.
Rejection of Purchase Orders
[0261] Each Fund reserves the absolute right to reject a purchase
order transmitted to it by the Distributor. By way of example, and
not limitation, a Fund will reject a purchase order if: [0262] the
order is not in proper form; [0263] the investor(s), upon obtaining
the VIPER Shares ordered, would own 80% or more of the total
combined voting power of all classes of stock issued by the Fund;
[0264] the Deposit Securities delivered are not as disseminated
through the facilities of the AMEX for that date by the Custodian,
as described above; [0265] acceptance of the Deposit Securities
would have certain adverse tax consequences to the Fund; [0266]
acceptance of the Fund Deposit would, in the opinion of counsel, be
unlawful; [0267] 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 [0268] circumstances
outside the control of the Fund, the Transfer Agent, the Custodian,
the Distributor, and Vanguard make it for all practical purposes
impossible to process the order. Examples of such circumstances
include acts of God; public service or utility problems such as
fires, floods, extreme weather conditions, and power outages
resulting in telephone, telecopy, and computer failures; market
conditions or activities causing trading halts; systems failures
involving computer or other information systems affecting the
Trust, Vanguard, the Distributor, DTC, NSCC, or any other
participant in the purchase process, and similar extraordinary
events.
[0269] 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
Fund, the Transfer Agent, the Custodian, and the Distributor are
under no duty, however, to give notification of any defects or
irregularities in the delivery of a Fund Deposit, nor shall any of
them incur any liability for the failure to give any such
notification.
A Transaction Fee on Purchases of Creation Units
[0270] Each Fund imposes a transaction fee (payable to the Fund) to
compensate the Fund for the transfer and other transaction costs
associated with the issuance of Creation Units. For purchases
effected through the Clearing Process, the Transaction Fee is
$.cndot., regardless of how many Creation Units are purchased. An
additional charge of up to $.cndot. may be imposed for purchases
effected outside the Clearing Process.
[0271] When a Fund permits a purchaser to substitute cash in lieu
of depositing one or more Deposit Securities, the purchaser will be
assessed an additional variable charge on the "cash in lieu"
portion of its investment. The amount of this variable charge shall
be established by the Fund in its sole discretion, but shall not be
more than is reasonably needed to compensate the Fund for the
brokerage costs associated with purchasing the relevant Deposit
Securities and, if applicable, the estimated market impact costs of
purchasing such securities.
Redemption of Viper Shares in Creation Units
[0272] VIPER Shares may be redeemed only in Creation Units; the
Funds will not redeem VIPER Shares tendered in less than Creation
Unit-size aggregations. Investors should expect to incur brokerage
and other costs in connection with assembling a sufficient number
of VIPER Shares to constitute a redeemable Creation Unit. There can
be no assurance, however, that there will be sufficient liquidity
in the public trading market at any time to permit assembly of a
Creation Unit. Redemption requests in good order will receive the
NAV next determined after the request is made.
[0273] 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.
[0274] With respect to each Fund, Vanguard, through the NSCC, makes
available immediately prior to the opening of business on the AMEX
(currently 9:30 a.m., New York 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
such investor with a basket of Redemption Securities that differs
from the composition of the redemption basket published through
NSCC.
Transaction Fees on Redemptions of Creation Units
[0275] Each Fund 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. For redemptions
effected through the Clearing Process, the Transaction Fee is
$.cndot., regardless of how many Creation Units are redeemed. An
additional charge of up to $.cndot. may be imposed for redemptions
effected outside the Clearing Process.
[0276] When a 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 established 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.
Placement of Redemption Orders Using Clearing Process
[0277] An order to redeem Creation Units through the Clearing
Process is deemed received on the Transmittal Date if (i) such
order is received by the Distributor not later than the Closing
Time on such Transmittal Date, and (ii) all other procedures set
forth in the Participant Agreement are properly followed. Such
order will be effected based on the NAV of the Fund next determined
on that day. An order to redeem Creation Units through the Clearing
Process made in proper form but received by the Fund after Closing
Time on the Transmittal Date will be deemed received on the next
Business Day immediately following the Transmittal Date and will be
effected at the NAV next determined on that day. The Redemption
Securities and the Cash Redemption Amount will be transferred by
the third NSCC Business Day following the date on which the
redemption request is deemed received.
Placement of Redemption Orders Outside Clearing Process
[0278] An Authorized Participant that wishes to place an order to
redeem a Creation Unit outside the Clearing Process must state that
it is not using the Clearing Process and that redemption instead
will be effected through a transfer of VIPER Shares directly
through DTC. An order to redeem a Creation Unit of a Fund outside
the Clearing Process is deemed received on the Transmittal Date if
(i) such order is received by the Fund's Transfer Agent prior to
the Closing Time on such Transmittal Date; "and (ii) all other
procedures set forth in the Participant Agreement are properly
followed. If the Fund's custodian does not receive the required
number of VIPER Shares from the redeeming investor by the
settlement date (T+3 unless otherwise agreed), the Fund shall be
entitled to charge the redeeming investor for any costs (including
investment losses, attorney's fees, and interest) sustained by the
Fund as a result of the late delivery or failure to deliver.
[0279] After the Transfer Agent has deemed an order for redemption
outside the Clearing Process received, the Transfer Agent will
initiate procedures to transfer the Redemption Securities and the
Cash Redemption Amount to the Authorized Participant on behalf of
the redeeming Beneficial Owner by the third Business Day following
the Transmittal Date on which such redemption order is deemed
received by the Transfer Agent.
[0280] The calculation of the value of the Redemption Securities
and the Cash Redemption Amount to be delivered upon redemption will
be made by the Custodian according to the procedures set forth
under "Calculation of Net Asset Value," computed on the Business
Day on which a redemption order is deemed received by the Transfer
Agent. Therefore, if a redemption order in proper form is submitted
to the Transfer Agent by an Authorized Participant prior to the
Closing Time on the Transmittal Date, "then the value of the
Redemption Securities and the Cash Redemption Amount will be
determined by the Custodian on such Transmittal Date. A
[0281] 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 VIPER Shares based on
the NAV of the Fund's VIPER Shares next determined after the
redemption request is received in proper form (minus a transaction
fee, including a charge for cash redemptions, described above).
[0282] If a redeeming investor (or an Authorized Participant
through which it is acting) is subject to a legal restriction with
respect to a particular stock included in the basket of Redemption
Securities, such investor may be paid an equivalent amount of cash
in lieu of the stock. In addition, each Fund reserves the right to
redeem Creation Units partially for cash to the extent that the
Fund could not lawfully deliver one or more Redemption Securities
or could not do so without first registering such securities under
federal or state law.
* * * * *