European Stock Index Fund

Pacific Stock Index Fund

Emerging Markets Stock Index Fund

Developed Markets Index Fund

Institutional Developed Markets Index Fund

 

Please note: The opinions expressed in this report are just that—informed opinions. They should not be considered promises or advice. Also, please keep in mind that the information and opinions cover the period through the date on the front of this report. Of course, the risks of investing in your fund are spelled out in the prospectus.

 

Your Fund’s Total Returns

 

 

 

 

1 A lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund.

2 Signal Shares also carry lower costs and are available to certain institutional shareholders who meet specific administrative, service, and account-size criteria.

3 This class of shares carries low expenses and is available for a minimum initial investment of $5 million.

4 Vanguard ETF™ Shares are traded on the NYSE Arca exchange and are available only through brokers. The table shows the ETF returns based on both the NYSE Arca market price and the net asset value for a share. U.S. Pat. No. 6,879,964 B2; 7,337,138.

5 Derived from data provided by Lipper Inc.

 

 

1

Your Fund’s Total Returns

 

 

 

 

1 A lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund.

2 Signal Shares also carry lower costs and are available to certain institutional shareholders who meet specific administrative, service, and account-size criteria.

3 This class of shares carries low expenses and is available for a minimum initial investment of $5 million.

4 Vanguard ETF Shares are traded on the NYSE Arca exchange and are available only through brokers. The table shows the ETF returns based on both the NYSE Arca market price and the net asset value for a share. U.S. Pat. No. 6,879,964 B2; 7,337,138.

5 Derived from data provided by Lipper Inc.

 

 

2

Your Fund’s Performance at a Glance

 

 

 

 

1 Adjusted to reflect a 2-for-1 share split as of the close of business on June 13, 2008.

 

 

3

 

President’s Letter

 

Dear Shareholder,

After several years of generous returns, international markets dropped sharply during the past 12 months as a global credit crisis caused investors to pull back from riskier investments such as stocks. The bear market spared no country, but emerging markets suffered the most, as Vanguard Emerging Markets Stock Index Fund returned –56.66% for Investor Shares.

Losses in Europe and the Pacific region were a bit less severe, but still deep, as Vanguard European Stock Index Fund lost –47.80% and Vanguard Pacific Stock Index Fund retreated –42.71% (Investor Shares). Vanguard Developed Markets Index Fund and its institutional counterpart, which invest in the European and Pacific funds in market-weighted proportions, posted similar results.

These results for the Vanguard International Stock Index Funds (the Emerging Markets Stock Index Fund excepted) slightly exceeded the returns of their respective benchmark indexes because of short-term discrepancies that arose from fair-value pricing, which is described more fully later in this letter. The funds’ performances were also slightly better than the average returns of their peer groups.

Please note that the ETF Shares of the Emerging Markets Stock Index Fund underwent a 2-for-1 split in June. If you own one or more of the funds in a taxable account, you may wish to review the details of the funds’ after-tax returns on page 112.

 

 

4

Stock prices fell sharply in global upheaval

Global stock markets started the 12-month period near all-time highs but then declined sharply, laid low by the financial crisis that originated in the fixed income markets. The descent traced a series of jagged ups and downs. During the week ended October 10, for example, the U.S. stock market returned about –18%. When Wall Street opened the following Monday, stocks surged, returning more than 10% over the next six-and-a-half hours.

For the full 12 months, the broad U.S. stock market returned –36.43%; international stocks returned –48.27%. The pain was especially acute in emerging markets—among the strongest performers in recent years—as investors became increasingly risk-averse.

 

Bond market averages masked disparate returns

The broad U.S. taxable bond market registered an unremarkable return of 0.30% for the 12 months, but by its own typically sedate standards, the dislocations were extreme. The strong performance of U.S. Treasury and government securities was offset by double-digit declines in the corporate bond market. These dynamics led to unusually large differences between the yields of Treasuries and their corresponding private sector securities—both a reflection and a cause of the credit market’s distress. Despite their generally high creditworthiness, municipal bonds also fell in price, with the broad tax-exempt market registering a 12-month return of –3.30%.

 

 

 

 

5

 

 

 

1 The fund expense ratios shown are from the prospectus dated August 29, 2008. For the fiscal year ended October 31, 2008, the European Stock Index Fund’s expense ratios were 0.22% for Investor Shares, 0.12% for Admiral Shares, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares. The Pacific Stock Index Fund’s expense ratios were 0.22% for Investor Shares, 0.12% for Admiral Shares, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares. The Emerging Markets Stock Index Fund’s expense ratios were 0.32% for Investor Shares, 0.20% for Admiral Shares, 0.20% for Signal Shares, 0.15% for Institutional Shares, and 0.20% for ETF Shares.

2 This figure—drawn from the prospectus dated October 14, 2008, for the Developed Markets Index Fund and February 27, 2008, for the Institutional Developed Markets Index Fund—represents a weighted average of the annualized expense ratios and any transaction fees charged by the underlying mutual funds (the “acquired” funds) in which the funds invest. The Developed Markets Index Fund and Institutional Developed Markets Index Fund do not charge any expenses or fees of their own. For the fiscal year ended October 31, 2008, the acquired fund fees and expenses were 0.22% for the Developed Markets Index Fund and 0.09% for the Institutional Developed Markets Index Fund.

3 Peer groups are: for the European Stock Index Fund, the Average European Region Fund; for the Pacific Stock Index Fund, the Average Japan/Pacific Region Fund; for the Emerging Markets Stock Index Fund, the Average Emerging Markets Fund; and for the two other funds, the Average International Fund. The peer-group expense ratios are derived from data provided by Lipper Inc. and capture information through year-end 2007.

 

6

The U.S. Federal Reserve Board responded to the turmoil with new lending programs and a dramatic easing of monetary policy. Over the full 12 months, the Fed reduced its target for the federal funds rate from 4.50% to 1.00%.

Investors turned bearish in every corner of the globe

This report includes three distinct regional index funds—European, Pacific, and Emerging Markets. It also includes two funds-of-funds, the Developed Markets Index Fund and its institutional counterpart (available at a minimum initial investment of $5 million). Both invest in the European and Pacific funds in market-weighted proportions.

Vanguard Total International Stock Index Fund, which previously was included in this report and invests in European, Pacific, and emerging markets, now issues its own report.

The European Stock Index Fund’s Investor Shares lost –47.80% for the fiscal period. Each of the region’s three largest markets, the United Kingdom, France, and Germany, which together represent more than half of the index, posted similar losses. Switz-erland (–32%) was the only market that didn’t fall by at least a third.

Owing to credit woes, the worst damage came from financials (–60%), the largest European sector, which represented on average about a quarter of the region’s market value. As in the United States, banks suffered from exposure to problematic debt securities linked to falling U.S. home values.

Most other industries fell between –33% (consumer staples) and –56% (industrials). The sector that suffered the least was health care (–19%). The decline of the euro (–10%) and British pound (–25%)

 

 

 

The figures shown represent past performance, which is not a guarantee of future results. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost.

 

1 Since inception for the Developed Markets Index Fund (May 8, 2000) and the Institutional Developed Markets Index Fund (June 1, 2000).

2 Derived from data provided by Lipper Inc. against the U.S. dollar in currency markets during the fiscal year amplified losses for U.S.-based investors.

 

7

Pacific region losses were also severe

The Pacific Stock Index Fund’s Investor Shares returned –42.71% for the period. Japan, by far the largest market in the region, retreated –37% in U.S. dollar terms, a less severe loss than that experienced by Japanese investors given that the Japanese yen rose nearly 17% against the dollar during the period.

The other major Pacific markets—Australia, Hong Kong, and Singapore—lost more than half their value. As with other markets around the world, financial stocks (–50%), representing the region’s largest sector, were the leading cause of the losses.

Other sectors in the region faced similar headwinds during the global slowdown. In terms of negative impact on the fund, industrials (–47%) and materials (–54%) were most prominent. Consumer staples (–27%), typically less volatile during bear markets, and health care (–21%) were least affected by the downdraft.

Emerging markets suffered the most during the period

True to their more volatile reputation, emerging markets lost the most among international stocks during the period after stellar gains in recent years. The Emerging Markets Stock Index Fund’s Investor Shares fell –56.66%, with South Korea (–60%) and China (–68%) pulling the fund down the most. But no country was spared outsized losses, including Brazil (–54%), Taiwan (–49%), India (–62%), and Russia (–61%).

A quarter of the fund’s loss came from troubled financials, as commercial banks, brokerages, and other financial firms grappled with the unprecedented global credit squeeze. The energy sector (–57%), including coal companies and those active in oil and gas exploration and refining in Brazil, China, and Russia, was hit by rapidly falling energy prices as commodity markets anticipated slowing energy demand worldwide.

The Developed Markets Index Fund and the Institutional Developed Markets Index Fund are funds-of-funds that hold market-based weightings in the European and Pacific markets. Thus, their results were in line with proportional returns from those markets, with the two funds losing –46.24% and –46.12%, respectively.

The funds’ long-term performance is in line with the markets’

As the table on page 7 shows, the Vanguard International Stock Index Funds have met their objective of tracking their respective benchmarks over the past decade, with differences between fund and index returns of no more than 0.20 percentage point. And except for the European Stock Index Fund, their returns have also surpassed the average annual returns of their respective peer groups since inception or for the ten years ended October 31, 2008.

 

8

As noted earlier, the returns of the funds (except for the Emerging Markets Stock Index Fund) were slightly better than those of their target indexes for the past 12 months and, indeed, for the longer period shown on page 7. These differences were partly the result of fair-value pricing, which allows the funds to calculate their net asset values based on real-time developments not reflected in closing prices set in overseas markets that operate in different time zones. When fair-value pricing is used at the open or close of a reporting period, it may cause a temporary divergence between the return of a fund and that of its index. This discrepancy corrects itself when market prices reflect fair value, usually the next day.

An index fund’s performance may also differ slightly from the return of its target benchmark because the fund may hold a slightly different roster of securities than those listed in the benchmark. Of course, the most consistent performance divergence arises from the operating costs incurred by an index fund—costs not present in the return from a benchmark.

Vanguard’s Quantitative Equity Group has managed index funds for more than three decades. Its disciplined execution of the funds’ indexing mandates, combined with the funds’ extremely low costs, can help you execute a long-term strategy of seeking to capture nearly all of the returns from international markets.

 

International investing still offers valuable diversification

After enjoying several years of strong returns with few bumps along the way, investors in international stocks were harshly reminded in the past year that a bear market can come at any time—and once in a while it can come with unusual severity. Such was the case with the credit crisis of 2008, with repercussions that unsettled even the most seasoned investors.

Nevertheless, the dramatic increase of international commerce in recent years, particularly in less developed nations, continues to offer long-term growth possibilities for patient investors.

That is why it is important to have a well-thought-out investment strategy based on a diversified mix of stock, bond, and money market mutual funds that fits your goals, time horizon, and risk tolerance. For those who can tolerate the extra volatility that sometimes comes with overseas investing, the International Stock Index Funds remain a cost-effective way to add an extra element of diversification to your portfolio and thus help you maintain a durable long-term investment plan.

Thank you for your confidence in Vanguard.

Sincerely,

 

 

F. William McNabb III

President and Chief Executive Officer

November 17, 2008

 

 

9

 

 

 

 

 

 

 

1 Inception.

2 One basis point equals 1/100 of a percentage point.

 

 

10

European Stock Index Fund

 

Fund Profile

As of October 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

1 MSCI Europe Index.

2 MSCI All Country World Index ex USA.

3 The expense ratios shown are from the prospectus dated August 29, 2008. For the fiscal year ended October 31, 2008, the expense ratios were 0.22% for Investor Shares, 0.12% for Admiral Shares, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares.

4 For an explanation of R-squared, beta, and other terms used here, see the Glossary.

5 The holdings listed exclude any temporary cash investments and equity index products.

 

 

11

European Stock Index Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: October 31, 1998–October 31, 2008

Initial Investment of $10,000

 

 

 

 

 

 

 

1 Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2000; the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; or, for the Investor Shares, the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Derived from data provided by Lipper Inc.

3 Performance for the fund and its comparative standards is calculated since the following inception dates: August 13, 2001, for the Admiral Shares and October 6, 2006, for the Signal Shares.

 

12

European Stock Index Fund

 

 

 

 

 

 

 

 

1 Performance for the fund and its comparative standards is calculated since the following inception dates: May 15, 2000, for the Institutional Shares and March 4, 2005, for the ETF Shares.

2 Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2000, or the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

 

 

13

European Stock Index Fund

 

Fiscal-Year Total Returns (%): October 31, 1998–October 31, 2008

 

 

Average Annual Total Returns: Periods Ended September 30, 2008

This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

 

 

 

1 Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2000; the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; or, for the Investor Shares, the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Returns since inception.

Note: See Financial Highlights tables for dividend and capital gains information.

 

 

14

European Stock Index Fund

 

Financial Statements

 

Statement of Net Assets

As of October 31, 2008

 

The fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

 

 

 

 

15

European Stock Index Fund

 

 

 

16

European Stock Index Fund

 

 

 

17

European Stock Index Fund

 

 

 

18

European Stock Index Fund

 

 

 

19

European Stock Index Fund

 

 

 

20

European Stock Index Fund

 

 

 

 

21

European Stock Index Fund

 

 

1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 99.9% and 2.7%, respectively, of net assets.

2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.

3 Includes $434,146,000 of collateral received for securities on loan.

4 The issuer operates under a congressional charter; its securities are neither issued nor guaranteed by the U.S. government.

5 Securities with a value of $10,992,000 have been segregated as initial margin for open futures contracts.

ADR—American Depositary Receipt.

ARS—Auction Rate Security.

See accompanying Notes, which are an integral part of the Financial Statements.

22

European Stock Index Fund

 

Statement of Operations

 

 

 

1 Dividends are net of foreign withholding taxes of $75,256,000.

2 Interest income from an affiliated company of the fund was $3,179,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

23

European Stock Index Fund

 

Statement of Changes in Net Assets

 

 

 

1 Net Assets—End of Period includes undistributed net investment income of $1,073,239,000 and $954,677,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

24

European Stock Index Fund

 

Financial Highlights

 

 

 

1 Calculated based on average shares outstanding.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund's capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

25

European Stock Index Fund

 

Financial Highlights

 

 

 

1 Calculated based on average shares outstanding.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

26

European Stock Index Fund

 

Financial Highlights

 

 

 

1 Inception.

2 Calculated based on average shares outstanding.

3 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than two months.

4 Annualized.

5 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

27

European Stock Index Fund

 

Financial Highlights

 

 

 

1 Calculated based on average shares outstanding.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

28

European Stock Index Fund

 

Financial Highlights

 

 

 

1 Inception.

2 Calculated based on average shares outstanding.

3 Annualized.

4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

29

European Stock Index Fund

 

Notes to Financial Statements

 

Vanguard European Stock Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. The fund offers five classes of shares: Investor Shares, Admiral Shares, Signal Shares, Institutional Shares, and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, tenure, and account-size criteria. Signal Shares are designed for institutional investors who meet certain administrative, service, and account-size criteria. Institutional Shares are designed for investors who meet certain administrative and service criteria and invest a minimum of $5 million. ETF Shares are listed for trading on the NYSE Arca, Inc.; they can be purchased and sold through a broker.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.

 

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

 

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

 

30

European Stock Index Fund

 

3. Futures and Forward Currency Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.

 

The fund also may enter into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts. The fund’s risks in using these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the ability of the counterparties to fulfill their obligations under the contracts.

 

Futures and forward currency contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts.

 

4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended October 31, 2005–2008), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

 

5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

 

6. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents the income earned on investing cash collateral, less expenses associated with the loan.

 

7. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

 

31

European Stock Index Fund

 

B. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At October 31, 2008, the fund had contributed capital of $1,979,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 1.98% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

C. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

During the year ended October 31, 2008, the fund realized net foreign currency losses of $7,600,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income. Certain of the fund’s investments are in securities considered to be “passive foreign investment companies,” for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended October 31, 2008, the fund realized gains on the sale of passive foreign investment companies of $543,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. Unrealized appreciation of $19,314,000 on the fund’s passive foreign investment company holdings at October 31, 2007, has been distributed and is reflected in the balance of undistributed net investment income. Since October 31, 2007, the fund’s passive foreign investment company holdings have depreciated in value, reducing the amount of taxable income available for distribution as of October 31, 2008 by $14,818,000. Unrealized appreciation on the fund’s passive foreign investment company holdings at October 31, 2008, was $4,496,000.

 

During the year ended October 31, 2008, the fund realized $3,596,684,000 of net capital gains resulting from in-kind redemptions—in which shareholders exchanged fund shares for securities held by the fund rather than for cash. Because such gains are not taxable to the fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized losses to paid-in capital.

 

For tax purposes, at October 31, 2008, the fund had $1,109,431,000 of ordinary income available for distribution. The fund had available realized losses of $370,782,000 to offset future net capital gains of $13,739,000 through October 31, 2011, and $357,043,000 through October 31, 2016.

 

At October 31, 2008, the cost of investment securities for tax purposes was $25,496,864,000. Net unrealized depreciation of investment securities for tax purposes was $7,751,252,000, consisting of unrealized gains of $583,528,000 on securities that had risen in value since their purchase and $8,334,780,000 in unrealized losses on securities that had fallen in value since their purchase.

 

32

European Stock Index Fund

 

At October 31, 2008, the aggregate settlement value of open futures contracts expiring in December 2008 and the related unrealized appreciation (depreciation) were:

 

 

 

 

At October 31, 2008, the fund had open forward currency contracts to receive and deliver currencies as follows:

 

 

 

Unrealized appreciation (depreciation) on open forward currency contracts is required to be treated as realized gain (loss) for tax purposes.

 

The fund had net unrealized foreign currency losses of $2,226,000 resulting from the translation of other assets and liabilities at October 31, 2008.

 

D. During the year ended October 31, 2008, the fund purchased $8,586,185,000 of investment securities and sold $11,402,293,000 of investment securities, other than temporary cash investments.

 

 

33

European Stock Index Fund

 

E. Capital share transactions for each class of shares were:

 

 

 

 

F. In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements in financial statements.

 

 

1 Net of redemption fees of $1,724,000 and $1,200,000 (fund totals).

 

 

34

European Stock Index Fund

 

The various inputs that may be used to determine the value of the fund’s investments are summarized in three broad levels. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

 

The following table summarizes the fund’s investments as of October 31, 2008, based on the inputs used to value them:

 

 

 

 

35

Pacific Stock Index Fund

 

Fund Profile

As of October 31, 2008

 

 

 

 

 

 

 

 

 

 

 

1 MSCI Pacific Index.

2 MSCI All Country World Index ex USA.

3 The expense ratios shown are from the prospectus dated August 29, 2008. For the fiscal year ended October 31, 2008, the expense ratios were 0.22% for Investor Shares, 0.12% for Admiral Shares, 0.12% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares.

4 The fund invested a portion of its cash reserves in equity markets through the use of index futures contracts. After the effect of the futures investments, the fund’s temporary cash position was negative.

5 For an explanation of R-squared, beta, and other terms used here, see the Glossary.

6 The holdings listed exclude any temporary cash investments and equity index products.

 

 

36

Pacific Stock Index Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: October 31, 1998–October 31, 2008

Initial Investment of $10,000

 

 

 

 

 

 

 

 

1 Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2000; the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; or, for the Investor Shares, the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Derived from data provided by Lipper Inc.

3 Performance for the fund and its comparative standards is calculated since the following inception dates: August 13, 2001, for the Admiral Shares and June 4, 2007, for the Signal Shares.

 

37

Pacific Stock Index Fund

 

 

 

 

 

 

 

 

1 Performance for the fund and its comparative standards is calculated since the following inception dates: May 15, 2000, for the Institutional Shares and March 4, 2005, for the ETF Shares.

2 Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2000, or the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

 

 

38

Pacific Stock Index Fund

 

Fiscal-Year Total Returns (%): October 31, 1998–October 31, 2008

 

 

Average Annual Total Returns: Periods Ended September 30, 2008

This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

 

 

 

1 Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2000; the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; or, for the Investor Shares, the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Returns since inception.

Note: See Financial Highlights tables for dividend and capital gains information.

 

 

39

Pacific Stock Index Fund

 

Financial Statements

 

Statement of Net Assets

As of October 31, 2008

 

The fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

 

 

 

 

 

40

Pacific Stock Index Fund

 

 

41

 

Pacific Stock Index Fund

 

 

 

 

42

Pacific Stock Index Fund

 

 

 

43

Pacific Stock Index Fund

 

 

 

44

Pacific Stock Index Fund

 

 

 

45

Pacific Stock Index Fund

 

 

 

 

46

Pacific Stock Index Fund

 

 

 

 

 

 

1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 100.0% and 1.6%, respectively, of net assets.

2 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.

3 Includes $176,426,000 of collateral received for securities on loan.

4 The issuer operates under a congressional charter; its securities are neither issued nor guaranteed by the U.S. government.

5 Securities with a value of $14,458,000 have been segregated as initial margin for open futures contracts.

ADR—American Depositary Receipt.

REIT—Real Estate Investment Trust.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

47

Pacific Stock Index Fund

 

Statement of Operations

 

 

 

1 Dividends are net of foreign withholding taxes of $16,172,000.

2 Interest income from an affiliated company of the fund was $2,397,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

48

Pacific Stock Index Fund

 

Statement of Changes in Net Assets

 

 

 

1 Net Assets—End of Period includes undistributed net investment income of $100,521,000 and $131,063,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

49

Pacific Stock Index Fund

 

Financial Highlights

 

 

 

1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

50

Pacific Stock Index Fund

 

Financial Highlights

 

 

 

1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

51

Pacific Stock Index Fund

 

Financial Highlights

 

 

 

1 Inception.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares held for less than two months.

3 Annualized.

4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

52

Pacific Stock Index Fund

 

Financial Highlights

 

 

 

1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

2 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

53

Pacific Stock Index Fund

 

Financial Highlights

 

 

 

1 Inception.

2 Annualized.

3 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

54

Pacific Stock Index Fund

 

Notes to Financial Statements

 

Vanguard Pacific Stock Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. The fund offers five classes of shares: Investor Shares, Admiral Shares, Signal Shares, Institutional Shares, and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, tenure, and account-size criteria. Signal Shares are designed for institutional investors who meet certain administrative, service, and account-size criteria. Institutional Shares are designed for investors who meet certain administrative and service criteria and invest a minimum of $5 million. ETF Shares are listed for trading on the NYSE Arca, Inc.; they can be purchased and sold through a broker.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.

 

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

 

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

 

3. Futures and Forward Currency Contracts: The fund uses index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.

 

55

Pacific Stock Index Fund

 

The fund may also enter into forward currency contracts to provide the appropriate currency exposure related to any open futures contracts. The primary risk associated with the fund’s use of these contracts is that a counterparty will fail to fulfill its obligation to pay gains due to the fund under the contracts.

 

Futures and forward currency contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized gains (losses) on futures or forward currency contracts.

 

4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended October 31, 2005–2008), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

 

5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

 

6. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents the income earned on investing cash collateral, less expenses associated with the loan.

 

7. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Fees assessed on redemptions of capital shares are credited to paid-in capital.

 

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

 

B. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At October 31, 2008, the fund had contributed capital of $985,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 0.98% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

56

Pacific Stock Index Fund

 

C. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

During the year ended October 31, 2008, the fund realized net foreign currency losses of $9,327,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income. Certain of the fund’s investments are in securities considered to be “passive foreign investment companies,” for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended October 31, 2008, the fund realized gains on the sale of passive foreign investment companies of $11,640,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. Unrealized appreciation of $194,526,000 on the fund’s passive foreign investment company holdings at October 31, 2007, has been distributed and is reflected in the balance of undistributed net investment income. Since October 31, 2007, the fund’s passive foreign investment company holdings have depreciated in value, reducing the amount of taxable income available for distribution as of October 31, 2008 by $185,016,000. Unrealized appreciation on the fund’s passive foreign investment company holdings at October 31, 2008, was $9,510,000.

 

During the year ended October 31, 2008, the fund realized $1,129,766,000 of net capital gains resulting from in-kind redemptions—in which shareholders exchanged fund shares for securities held by the fund rather than for cash. Because such gains are not taxable to the fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized losses to paid-in capital.

 

For tax purposes, at October 31, 2008, the fund had $125,413,000 of ordinary income available for distribution. The fund had available realized losses of $532,747,000 to offset future net capital gains of $1,920,000 through October 31, 2009, $68,660,000 through October 31, 2010, $4,471,000 through October 31, 2011, $4,674,000 through October 31, 2013, and $453,022,000 through October 31, 2016.

 

At October 31, 2008, the cost of investment securities for tax purposes was $12,616,600,000. Net unrealized depreciation of investment securities for tax purposes was $3,729,421,000, consisting of unrealized gains of $154,068,000 on securities that had risen in value since their purchase and $3,883,489,000 in unrealized losses on securities that had fallen in value since their purchase.

 

57

Pacific Stock Index Fund

 

At October 31, 2008, the aggregate settlement value of open futures contracts expiring in December 2008 and the related unrealized appreciation (depreciation) were:

 

 

 

 

At October 31, 2008, the fund had open forward currency contracts to receive and deliver currencies as follows:

 

 

 

Unrealized appreciation (depreciation) on open forward currency contracts is treated as realized gain (loss) for tax purposes.

 

The fund had net unrealized foreign currency gains of $4,954,000 resulting from the translation of other assets and liabilities at October 31, 2008.

 

D. During the year ended October 31, 2008, the fund purchased $3,238,517,000 of investment securities and sold $4,194,545,000 of investment securities, other than temporary cash investments.

 

 

58

Pacific Stock Index Fund

 

E. Capital share transactions for each class of shares were:

 

 

 

 

1 Net of redemption fees of $911,000 and $508,000 (fund totals).

 

 

59

Pacific Stock Index Fund

 

F. In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements in financial statements.

 

The various inputs that may be used to determine the value of the fund’s investments are summarized in three broad levels. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

 

The following table summarizes the fund’s investments as of October 31, 2008, based on the inputs used to value them:

 

 

 

60

Emerging Markets Stock Index Fund

 

Fund Profile

As of October 31, 2008

 

 

 

 

 

 

 

 

 

 

1 MSCI Emerging Markets Index.

2 MSCI All Country World Index ex USA.

3 The expense ratios shown are from the prospectus dated August 29, 2008. For the fiscal year ended October 31, 2008, the expense ratios were 0.32% for Investor Shares, 0.20% for Admiral Shares, 0.20% for Signal Shares, 0.15% for Institutional Shares, and 0.20% for ETF Shares.

4 For an explanation of R-squared, beta, and other terms used here, see the Glossary.

5 The holdings listed exclude any temporary cash investments and equity index products.

 

 

61

Emerging Markets Stock Index Fund

 

 

 

 

1 MSCI Emerging Markets Index.

 

 

62

Emerging Markets Stock Index Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: October 31, 1998–October 31, 2008

Initial Investment of $10,000

 

 

 

 

 

 

1 Performance figures are adjusted for the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases and redemptions. Total returns do not reflect the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or, for Investor Shares, the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Select Emerging Markets Index through August 23, 2006; MSCI Emerging Markets Index thereafter.

3 Derived from data provided by Lipper Inc.

4 Performance for the fund’s Admiral Shares and comparative standards is calculated since the Admiral Shares’ inception: June 23, 2006.

 

 

63

Emerging Markets Stock Index Fund

 

 

 

 

 

 

 

 

 

 

1 Performance for the fund and its comparative standards is calculated since the following inception dates: January 19, 2007, for the Signal Shares; June 22, 2000, for the Institutional Shares; and March 4, 2005, for the ETF Shares.

2 Performance figures are adjusted for the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases and redemptions. Total returns do not reflect the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

3 Select Emerging Markets Index through August 23, 2006; MSCI Emerging Markets Index thereafter.

 

64

Emerging Markets Stock Index Fund

 

Fiscal-Year Total Returns (%): October 31, 1998–October 31, 2008

 

 

Average Annual Total Returns: Periods Ended September 30, 2008

This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

 

 

 

1 Select Emerging Markets Index through August 23, 2006; MSCI Emerging Markets Index thereafter.

2 Returns do not reflect the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Performance figures are adjusted for the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases and redemptions.

4 Return since inception.

Note: See Financial Highlights tables for dividend and capital gains information.

 

 

65

Emerging Markets Stock Index Fund

 

Financial Statements

 

Statement of Net Assets

As of October 31, 2008

 

The fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

 

 

 

66

Emerging Markets Stock Index Fund

 

 

 

67

Emerging Markets Stock Index Fund

 

 

 

68

Emerging Markets Stock Index Fund

 

 

 

69

Emerging Markets Stock Index Fund

 

 

 

70

Emerging Markets Stock Index Fund

 

 

 

71

Emerging Markets Stock Index Fund

 

 

 

72

Emerging Markets Stock Index Fund

 

 

 

73

Emerging Markets Stock Index Fund

 

 

 

74

Emerging Markets Stock Index Fund

 

 

 

75

Emerging Markets Stock Index Fund

 

 

 

76

Emerging Markets Stock Index Fund

 

 

 

77

Emerging Markets Stock Index Fund

 

 

 

 

 

78

Emerging Markets Stock Index Fund

 

 

 

 

 

1 The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts. After giving effect to futures investments, the fund’s effective common stock and temporary cash investment positions represent 99.9% and 5.4%, respectively, of net assets.

2 Security exempt from registration under Rule 144A of the Securities Act of 1933. Such securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At October 31, 2008, the value of this security represented 0.5% of net assets.

3 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.

4 Includes $632,927,000 of collateral received for securities on loan.

5 The issuer operates under a congressional charter; its securities are neither issued nor guaranteed by the U.S. government.

6 Securities with a value of $6,992,000 have been segregated as initial margin for open futures contracts.

ADR—American Depositary Receipt.

GDR—Global Depositary Receipt.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

79

Emerging Markets Stock Index Fund

 

Statement of Operations

 

 

 

1 Dividends are net of foreign withholding taxes of $61,493,000.

2 Interest income from an affiliated company of the fund was $796,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

80

Emerging Markets Stock Index Fund

 

Statement of Changes in Net Assets

 

 

 

1 Net Assets—End of Period includes undistributed net investment income of $540,785,000 and $344,566,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

81

Emerging Markets Stock Index Fund

 

Financial Highlights

 

 

 

1 Calculated based on average shares outstanding.

2 Includes increases from redemption fees of $.02, $.01, $.01, $.00, and $.00.

3 Total returns do not reflect the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases; the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; the 0.25% (0.50% prior to June 26, 2008) fee on all other redemptions; or the account service fee that may be applicable to certain accounts with balanced below $10,000.

4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

82

Emerging Markets Stock Index Fund

 

Financial Highlights

 

 

 

1 Inception.

2 Calculated based on average shares outstanding.

3 Includes increases from redemption fees of $.03, $.01, and $.01.

4 Total returns do not reflect the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases and redemptions.

5 Annualized.

6 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

83

Emerging Markets Stock Index Fund

 

Financial Highlights

 

 

 

1 Inception.

2 Calculated based on average shares outstanding.

3 Includes increases from redemption fees of $.02 and $.00.

4 Total returns do not reflect the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases and redemptions.

5 Annualized.

6 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

84

Emerging Markets Stock Index Fund

 

Financial Highlights

 

 

 

1 Calculated based on average shares outstanding.

2 Includes increases from redemption fees of $.01, $.01, $.01, $.00, and $.00.

3 Total returns do not reflect the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases; the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; or the 0.25% (0.50% prior to June 26, 2008) fee on all other redemptions.

4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

85

Emerging Markets Stock Index Fund

 

Financial Highlights

 

 

 

1 Adjusted to reflect a 2-for-1 share split as of the close of business on June 13, 2008.

2 Inception.

3 Calculated based on average shares outstanding.

4 Includes increases from redemption fees of $.02, $.03, $.03, and $.00.

5 Annualized.

6 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares, including ETF Creation Units.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

86

Emerging Markets Stock Index Fund

 

Notes to Financial Statements

 

Vanguard Emerging Markets Stock Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund invests in securities of foreign issuers, which may subject it to investment risks not normally associated with investing in securities of U.S. corporations. The fund offers five classes of shares: Investor Shares, Admiral Shares, Signal Shares, Institutional Shares, and ETF Shares. Investor Shares are available to any investor who meets the fund’s minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, service, tenure, and account-size criteria. Signal Shares are designed for institutional investors who meet certain administrative, service, and account-size criteria. Institutional Shares are designed for investors who meet certain administrative and service criteria and invest a minimum of $5 million. ETF Shares are listed for trading on the NYSE Arca, Inc.; they can be purchased and sold through a broker.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.

 

1. Security Valuation: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been affected by events occurring before the fund’s pricing time but after the close of the securities’ primary markets, are valued at their fair values calculated according to procedures adopted by the board of trustees. These procedures include obtaining quotations from an independent pricing service, monitoring news to identify significant market- or security-specific events, and evaluating changes in the values of foreign market proxies (for example, ADRs, futures contracts, or exchange-traded funds), between the time the foreign markets close and the fund’s pricing time. When fair-value pricing is employed, the prices of securities used by a fund to calculate its net asset value may differ from quoted or published prices for the same securities. Investments in Vanguard Market Liquidity Fund are valued at that fund’s net asset value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value.

 

2. Foreign Currency: Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using exchange rates obtained from an independent third party as of the fund’s pricing time on the valuation date. Realized gains (losses) and unrealized appreciation (depreciation) on investment securities include the effects of changes in exchange rates since the securities were purchased, combined with the effects of changes in security prices. Fluctuations in the value of other assets and liabilities resulting from changes in exchange rates are recorded as unrealized foreign currency gains (losses) until the assets or liabilities are settled in cash, at which time they are recorded as realized foreign currency gains (losses).

 

3. Futures Contracts: The fund uses index futures contracts to a limited extent, with the objectives of maintaining full exposure to the stock market, enhancing returns, maintaining liquidity, and minimizing transaction costs. The fund may purchase futures contracts to immediately invest incoming cash in the market, or sell futures in response to cash outflows, thereby simulating a fully invested position in the underlying index while maintaining a cash balance for liquidity. The fund may seek to enhance returns by using futures contracts instead of the underlying securities when futures are believed to be priced more attractively than the underlying securities. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market.

 

87

Emerging Markets Stock Index Fund

 

Futures contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the Statement of Net Assets. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses).

 

4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended October 31, 2005–2008), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

 

5. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

 

6. Security Lending: The fund may lend its securities to qualified institutional borrowers to earn additional income. Security loans are required to be secured at all times by collateral at least equal to the market value of securities loaned. The fund invests cash collateral received in Vanguard Market Liquidity Fund, and records a liability for the return of the collateral, during the period the securities are on loan. Security lending income represents the income earned on investing cash collateral, less expenses associated with the loan.

 

7. Other: Dividend income is recorded on the ex-dividend date. Interest income includes income distributions received from Vanguard Market Liquidity Fund and is accrued daily. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Fees assessed on capital share transactions are credited to paid-in capital.

 

Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) and shareholder reporting. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets.

 

B. The Vanguard Group furnishes at cost investment advisory, corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At October 31, 2008, the fund had contributed capital of $1,567,000 to Vanguard (included in Other Assets), representing 0.01% of the fund’s net assets and 1.57% of Vanguard’s capitalization. The fund’s trustees and officers are also directors and officers of Vanguard.

 

C. The fund’s custodian bank has agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the year ended October 31, 2008, custodian fee offset arrangements reduced the fund’s expenses by $375,000.

 

D. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

88

Emerging Markets Stock Index Fund

 

During the year ended October 31, 2008, the fund realized net foreign currency losses of $15,685,000, which decreased distributable net income for tax purposes; accordingly, such losses have been reclassified from accumulated net realized losses to undistributed net investment income. The fund’s realized losses for the year ended October 31, 2008, include a refund for taxes paid on Indian securities of $67,000, which is treated as an increase to taxable income; accordingly, this amount has been reclassified from accumulated net realized losses to undistributed net investment income.

 

Certain of the fund’s investments are in securities considered to be “passive foreign investment companies,” for which any unrealized appreciation and/or realized gains are required to be included in distributable net income for tax purposes. During the year ended October 31, 2008, the fund realized gains on the sale of passive foreign investment companies of $3,817,000, which have been included in current and prior periods’ taxable income; accordingly, such gains have been reclassified from accumulated net realized losses to undistributed net investment income. Unrealized appreciation of $41,815,000 on the fund’s passive foreign investment company holdings at October 31, 2007, has been distributed and is reflected in the balance of undistributed net investment income. Since October 31, 2007, the fund’s passive foreign investment company holdings have depreciated in value, reducing the amount of taxable income available for distribution as of October 31, 2008 by $38,708,000. Unrealized appreciation on the fund’s passive foreign investment company holdings at October 31, 2008, was $3,107,000.

 

During the year ended October 31, 2008, the fund realized $795,501,000 of net capital gains resulting from in-kind redemptions—in which shareholders exchanged fund shares for securities held by the fund rather than for cash. Because such gains are not taxable to the fund, and are not distributed to shareholders, they have been reclassified from accumulated net realized losses to paid-in capital.

 

For tax purposes, at October 31, 2008, the fund had $562,586,000 of ordinary income available for distribution. The fund had available realized losses of $643,327,000 to offset future net capital gains of $15,143,000 through October 31, 2012, $167,331,000 through October 31, 2014, and $460,853,000 through October 31, 2016.

 

At October 31, 2008, the cost of investment securities for tax purposes was $18,025,084,000. Net unrealized depreciation of investment securities for tax purposes was $4,860,941,000, consisting of unrealized gains of $1,104,758,000 on securities that had risen in value since their purchase and $5,965,699,000 in unrealized losses on securities that had fallen in value since their purchase.

 

At October 31, 2008, the aggregate settlement value of open futures contracts expiring in November 2008 and the related unrealized appreciation (depreciation) were:

 

 

The fund had net unrealized foreign currency losses of $1,409,000 resulting from the translation of other assets and liabilities at October 31, 2008.

 

E. During the year ended October 31, 2008, the fund purchased $9,315,325,000 of investment securities and sold $5,904,943,000 of investment securities, other than temporary cash investments.

 

89

Emerging Markets Stock Index Fund

 

F. Capital share transactions for each class of shares were:

 

 

 

 

1 Net of redemption fees of $14,015,000 and $7,194,000 (fund totals).

2 Shares adjusted to reflect a 2-for-1 split as of the close of business on June 13, 2008.

 

 

90

Emerging Markets Stock Index Fund

 

G. In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements in financial statements.

 

The various inputs that may be used to determine the value of the fund’s investments are summarized in three broad levels. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

 

The following table summarizes the fund’s investments as of October 31, 2008, based on the inputs used to value them:

 

 

 

 

91

Developed Markets Index Fund

 

Fund Profile

As of October 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

1 This figure—drawn from the prospectus dated October 14, 2008—represents a weighted average of the annualized expense ratios and any transaction fees charged by the underlying mutual funds (the “acquired” funds) in which the Developed Markets Index Fund invests. The Developed Markets Index Fund does not charge any expenses or fees of its own. For the fiscal year ended October 31, 2008, the acquired fund fees and expenses figure was 0.22%.

2 Reflects holdings of underlying funds.

3 MSCI EAFE Index.

4 MSCI All Country World Index ex USA.

5 For an explanation of R-squared, beta, and other terms used here, see the Glossary.

 

 

92

Developed Markets Index Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: May 8, 2000–October 31, 2008

Initial Investment of $10,000

 

 

 

 

 

1 Performance for the fund and its comparative standards is calculated since the fund’s inception: May 8, 2000.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.

3 Derived from data provided by Lipper Inc.

 

 

93

Developed Markets Index Fund

 

Fiscal-Year Total Returns (%): May 8, 2000–October 31, 2008

 

 

Average Annual Total Returns: Periods Ended September 30, 2008

This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

 

 

 

1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.

Note: See Financial Highlights table for dividend and capital gains information.

 

 

94

Developed Markets Index Fund

 

Financial Statements

 

Statement of Net Assets

As of October 31, 2008

 

The fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

 

 

 

 

 

1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

95

Developed Markets Index Fund

 

Statement of Operations

 

 

 

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

96

Developed Markets Index Fund

 

Statement of Changes in Net Assets

 

 

 

1 Includes fiscal 2008 and 2007 short-term gain distributions totaling $1,386,000 and $1,108,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes.

2 The fund collected redemption fees of $298,000 and $202,000, which were reallocated proportionately to the funds in which it invests.

3 Net Assets—End of Period includes undistributed net investment income of $1,334,000 and $1,437,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

97

Developed Markets Index Fund

 

Financial Highlights

 

 

 

1 Calculated based on average shares outstanding.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.

3 The acquired fund fees and expenses were 0.22%.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

98

Developed Markets Index Fund

 

Notes to Financial Statements

 

Vanguard Developed Markets Index Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund seeks to match the performance of its target index by investing in the European and Pacific Stock Index Funds. The fund’s indirect investments in foreign securities involve investment risks not normally associated with investing in securities of U.S. corporations.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.

 

1. Security Valuation: Investments are valued at the net asset value of each underlying Vanguard fund determined as of the close of the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date.

 

2. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended October 31, 2005–2008), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

 

3. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

 

4. Other: Income and capital gain distributions received are recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

 

B. Under a service agreement, The Vanguard Group furnishes investment advisory, corporate management, administrative, marketing, and distribution services to the fund. The service agreement provides that the fund’s expenses may be reduced or eliminated to the extent of savings realized by the Vanguard funds by the operation of the fund. Accordingly, all incremental expenses for services provided by Vanguard and all other expenses incurred by the fund during the year ended October 31, 2008, were borne by the funds in which the fund invests. The fund’s trustees and officers are also directors and officers of Vanguard and the funds in which the fund invests.

 

C. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

For tax purposes, at October 31, 2008, the fund had $1,285,000 of ordinary income available for distribution. The fund had available realized losses of $11,015,000 to offset future net capital gains through October 31, 2016.

 

At October 31, 2008, the cost of investment securities for tax purposes was $2,891,993,000. Net unrealized depreciation of investment securities for tax purposes was $588,354,000, consisting entirely of unrealized losses on securities that had fallen in value since their purchase.

 

D. During the year ended October 31, 2008, the fund purchased $816,948,000 of investment securities and sold $451,715,000 of investment securities, other than temporary cash investments.

 

99

Developed Markets Index Fund

 

E. Capital shares issued and redeemed were:

 

 

 

 

F. In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements in financial statements.

 

The various inputs that may be used to determine the value of the fund’s investments are summarized in three broad levels. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

 

At October 31, 2008, 100% of the fund’s investments were valued based on Level 1 inputs.

 

 

100

Institutional Developed Markets Index Fund

 

Fund Profile

As of October 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

1 This figure—drawn from the prospectus dated February 27, 2008—represents a weighted average of the annualized expense ratios and any transaction fees charged by the underlying mutual funds (the “acquired” funds) in which the Institutional Developed Markets Index Fund invests. The Institutional Developed Markets Index Fund does not charge any expenses or fees of its own. For the fiscal year ended October 31, 2008, the acquired fund fees and expenses figure was 0.09%.

2 Reflects holdings of underlying funds.

3 MSCI EAFE Index.

4 MSCI All Country World Index ex USA.

5 For an explanation of R-squared, beta, and other terms used here, see the Glossary.

 

 

101

Institutional Developed Markets Index Fund

 

Performance Summary

 

All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (Current performance may be lower or higher than the performance data cited. For performance data current to the most recent month-end, visit our website at www.vanguard.com/performance.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor’s shares, when sold, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares.

 

Cumulative Performance: June 1, 2000–October 31, 2008

Initial Investment of $5,000,000

 

 

 

 

 

1 Performance for the fund and its comparative standards is calculated since the fund’s inception: June 1, 2000.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

3 Derived from data provided by Lipper Inc.

 

 

102

Institutional Developed Markets Index Fund

 

Fiscal-Year Total Returns (%): June 1, 2000–October 31, 2008

 

 

Average Annual Total Returns: Periods Ended September 30, 2008

This table presents average annual total returns through the latest calendar quarter—rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information.

 

 

 

 

1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

Note: See Financial Highlights table for dividend and capital gains information.

 

 

103

Institutional Developed Markets Index Fund

 

Financial Statements

 

Statement of Net Assets

As of October 31, 2008

 

The fund provides a complete list of its holdings four times in each fiscal year, at the quarter-ends. For the second and fourth fiscal quarters, the lists appear in the fund’s semiannual and annual reports to shareholders. For the first and third fiscal quarters, the fund files the lists with the Securities and Exchange Commission on Form N-Q. Shareholders can look up the fund’s Forms N-Q on the SEC’s website at www.sec.gov. Forms N-Q may also be reviewed and copied at the SEC’s Public Reference Room (see the back cover of this report for further information).

 

 

 

 

1 Affiliated money market fund available only to Vanguard funds and certain trusts and accounts managed by Vanguard. Rate shown is the 7-day yield.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

104

Institutional Developed Markets Index Fund

 

Statement of Operations

 

 

 

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

105

Institutional Developed Markets Index Fund

 

Statement of Changes in Net Assets

 

 

 

1 The fund collected redemption fees of $16,000 and $14,000, which were reallocated proportionately to the funds in which it invests.

2 Net Assets—End of Period includes undistributed net investment income of $1,409,000 and $1,959,000.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

106

Institutional Developed Markets Index Fund

 

Financial Highlights

 

 

 

1 Calculated based on average shares outstanding.

2 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months.

3 The acquired fund fees and expenses were 0.09%.

4 Excludes the value of portfolio securities received or delivered as a result of in-kind purchases or redemptions of the fund’s capital shares.

See accompanying Notes, which are an integral part of the Financial Statements.

 

 

107

Institutional Developed Markets Index Fund

 

Notes to Financial Statements

 

Vanguard Institutional Developed Markets Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund seeks to match the performance of its target index by investing in the European and Pacific Stock Index Funds. The fund’s indirect investments in foreign securities involve investment risks not normally associated with investing in securities of U.S. corporations.

 

A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements.

 

1. Security Valuation: Investments are valued at the net asset value of each underlying Vanguard fund determined as of the close of the New York Stock Exchange (generally 4 p.m., Eastern time) on the valuation date.

 

2. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Management has analyzed the fund’s tax positions taken on federal income tax returns for all open tax years (tax years ended October 31, 2005–2008), and has concluded that no provision for federal income tax is required in the fund’s financial statements.

 

3. Distributions: Distributions to shareholders are recorded on the ex-dividend date.

 

4. Other: Income and capital gain distributions received are recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold.

 

B. Under a service agreement, The Vanguard Group furnishes investment advisory, corporate management, administrative, marketing, and distribution services to the fund. The service agreement provides that the fund’s expenses may be reduced or eliminated to the extent of savings realized by the Vanguard funds by the operation of the fund. Accordingly, all incremental expenses for services provided by Vanguard and all other expenses incurred by the fund during the year ended October 31, 2008, were borne by the funds in which the fund invests. The fund’s trustees and officers are also directors and officers of Vanguard and the funds in which the fund invests.

 

C. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes.

 

For tax purposes, at October 31, 2008, the fund had $1,409,000 of ordinary income available for distribution. The fund had available realized losses of $8,141,000 to offset future net capital gains through October 31, 2011.

 

At October 31, 2008, the cost of investment securities for tax purposes was $4,993,237,000. Net unrealized depreciation of investment securities for tax purposes was $1,333,914,000, consisting entirely of unrealized losses on securities that had fallen in value since their purchase.

 

D. During the year ended October 31, 2008, the fund purchased $2,219,370,000 of investment securities and sold $821,024,000 of investment securities, other than temporary cash investments.

 

108

Institutional Developed Markets Index Fund

 

E. Capital shares issued and redeemed were:

 

 

 

 

F. In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 establishes a framework for measuring fair value and expands disclosures about fair value measurements in financial statements.

 

The various inputs that may be used to determine the value of the fund’s investments are summarized in three broad levels. The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

 

Level 1—Quoted prices in active markets for identical securities.

Level 2—Other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.).

Level 3—Significant unobservable inputs (including the fund’s own assumptions used to determine the fair value of investments).

 

At October 31, 2008, 100% of the fund’s investments were valued based on Level 1 inputs.

 

 

109

Report of Independent Registered Public Accounting Firm

 

To the Trustees of Vanguard International Equity Index Funds and the Shareholders of Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, Vanguard Developed Markets Index Fund and Vanguard Institutional Developed Markets Index Fund:

 

In our opinion, the accompanying statements of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, Vanguard Developed Markets Index Fund and Vanguard Institutional Developed Markets Index Fund (separate portfolios of Vanguard International Equity Index Funds, hereafter referred to as the “Funds”) at October 31, 2008, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 2008 by correspondence with the custodians and brokers, and by agreement to the underlying ownership records of the Vanguard funds, provide a reasonable basis for our opinion.

 

 

PricewaterhouseCoopers LLP

Philadelphia, Pennsylvania

 

December 19, 2008

 

 

 

 

This information for the fiscal year ended October 31, 2008, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $1,082,542,000 of qualified dividend income to shareholders during the fiscal year.

 

The fund will pass through to shareholders foreign source income of $1,293,621,000 and foreign taxes paid of $75,188,000. The pass-through of foreign taxes paid will affect only shareholders on the dividend record date in December 2008. Shareholders will receive more detailed information along with their Form 1099-DIV in January 2009.

 

110

 

This information for the fiscal year ended October 31, 2008, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $228,642,000 of qualified dividend income to shareholders during the fiscal year.

 

The fund will pass through to shareholders foreign source income of $377,281,000 and foreign taxes paid of $16,059,000. The pass-through of foreign taxes paid will affect only shareholders on the dividend record date in December 2008. Shareholders will receive more detailed information along with their Form 1099-DIV in January 2009.

 

 

This information for the fiscal year ended October 31, 2008, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $264,663,000 of qualified dividend income to shareholders during the fiscal year.

 

The fund will pass through to shareholders foreign source income of $712,123,000 and foreign taxes paid of $59,213,000. The pass-through of foreign taxes paid will affect only shareholders on the dividend record date in December 2008. Shareholders will receive more detailed information along with their Form 1099-DIV in January 2009.

 

 

This information for the fiscal year ended October 31, 2008, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $7,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year.

For nonresident alien shareholders, 100% of short-term capital gain dividends distributed by the fund are qualified short-term capital gains.

 

The fund distributed $82,020,000 of qualified dividend income to shareholders during the fiscal year.

 

 

This information for the fiscal year ended October 31, 2008, is included pursuant to provisions of the Internal Revenue Code.

 

The fund distributed $105,483,000 of qualified dividend income to shareholders during the fiscal year.

 

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Your Fund’s After-Tax Returns

 

This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund’s distributions, and (2) assuming that an investor paid taxes on the fund’s distributions and sold all shares at the end of each period.

 

Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect any qualified dividend income, using actual prior-year figures and estimates for 2008. (In the example, returns after the sale of fund shares may be higher than those assuming no sale. This occurs when the sale would have produced a capital loss. The calculation assumes that the investor received a tax deduction for the loss.)

 

The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes.

 

Finally, keep in mind that a fund’s performance—whether before or after taxes—does not guarantee future results.

 

 

 

 

1 Total returns do not reflect the 0.25% transaction fee on purchases through March 31, 2000; the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months; or the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Performance figures are adjusted for the 0.25% (0.50% prior to June 26, 2008) transaction fee on purchases and redemptions. Total returns do not reflect the 2% fee assessed until March 23, 2005, on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or the account service fee that may be applicable to certain accounts with balances below $10,000.

 

 

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1 Total returns do not reflect the 2% fee assessed on redemptions of shares purchased on or after June 27, 2003, and held for less than two months, or for the Developed Markets Index Fund, the account service fee that may be applicable to certain accounts with balances below $10,000.

2 Returns since inception. Inception dates are May 8, 2000, for the Developed Markets Index Fund and June 1, 2000, for the Institutional Developed Markets Index Fund.

 

 

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About Your Fund’s Expenses

 

As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund’s gross income, directly reduce the investment return of the fund.

 

A typical fund’s expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. “Funds of funds,” such as the Developed Markets Index Fund and Institutional Developed Markets Index Fund, have no direct expenses, but each fund bears its proportionate share of the expenses of the underlying funds in which it invests. These indirect expenses make up the fund’s acquired fund fees and expenses, also expressed as a percentage of average net assets.

 

The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period. The costs are calculated using each fund’s acquired fund fees and expenses.

 

The accompanying tables illustrate your fund’s costs in two ways:

 

• Based on actual fund return. This section helps you to estimate the actual expenses that you paid over the period. The “Ending Account Value” shown is derived from the fund’s actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period.

 

To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading “Expenses Paid During Period.”

 

• Based on hypothetical 5% yearly return. This section is intended to help you compare your fund’s costs with those of other mutual funds. It assumes that the fund had a yearly return of 5% before expenses, but that the expense ratio is unchanged. In this case—because the return used is not the fund’s actual return—the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund’s costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds.

 

Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect transaction costs incurred by the fund for buying and selling securities. Further, the expenses do not include the transaction fees or the account service fee described in the prospectus. If such fees were applied to your account, your costs would be higher. Your fund does not carry a “sales load.”

 

The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions.

 

You can find more information about the fund’s expenses, including annual expense ratios, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to your fund’s current prospectus.

 

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1 These calculations are based on expenses incurred in the most recent six-month period, except for the two “funds of funds,” for which calculations are based on the acquired fund fees and expenses charged by the underlying mutual funds in which the funds of funds invest. The funds of funds’ annualized expense figures for the same period are 0.22% for the Developed Markets Index Fund and 0.09% for the Institutional Developed Markets Index Fund. The annualized six-month expense ratios for the European, Pacific, and Emerging Markets funds are as follows: European Stock Index Fund—0.24% for Investor Shares, 0.13% for Admiral Shares, 0.13% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares; Pacific Stock Index Fund—0.24% for Investor Shares, 0.13% for Admiral Shares, 0.13% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares and Emerging Markets Stock Index Fund—0.31% for Investor Shares, 0.19% for Admiral Shares, 0.20% for Signal Shares, 0.14% for Institutional Shares, and 0.20% for ETF Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.

2 Calculations do not reflect the fund’s 0.25% (0.50% prior to June 26, 2008) purchase fee, which is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains.

 

 

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1 These calculations are based on expenses incurred in the most recent six-month period, except for the two “funds of funds,” for which calculations are based on the acquired fund fees and expenses charged by the underlying mutual funds in which the funds of funds invest. The funds of funds’ annualized expense figures for the same period are 0.22% for the Developed Markets Index Fund and 0.09% for the Institutional Developed Markets Index Fund. The annualized six-month expense ratios for the European, Pacific, and Emerging Markets funds are as follows: European Stock Index Fund—0.24% for Investor Shares, 0.13% for Admiral Shares, 0.13% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares; Pacific Stock Index Fund—0.24% for Investor Shares, 0.13% for Admiral Shares, 0.13% for Signal Shares, 0.09% for Institutional Shares, and 0.11% for ETF Shares and Emerging Markets Stock Index Fund—0.31% for Investor Shares, 0.19% for Admiral Shares, 0.20% for Signal Shares, 0.14% for Institutional Shares, and 0.20% for ETF Shares. The dollar amounts shown as “Expenses Paid” are equal to the annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent six-month period, then divided by the number of days in the most recent 12-month period.

2 Calculations do not reflect the fund’s 0.25% (0.50% prior to June 26, 2008) purchase fee, which is deducted from all purchases (including exchanges from other Vanguard funds) but not from reinvested dividends and capital gains.

 

 

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Glossary

 

Acquired Fund Fees and Expenses. Funds that invest in other Vanguard funds incur no direct expenses, but they do bear proportionate shares of the operating, administrative, and advisory expenses of the underlying funds, and they must pay any fees charged by those funds. The figure for acquired fund fees and expenses represents a weighted average of these underlying costs. Acquired is a term that the Securities and Exchange Commission applies to any mutual fund whose shares are owned by another fund.

 

Beta. A measure of the magnitude of a fund’s past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. For this report, beta is based on returns over the past 36 months for both the fund and the index. Note that a fund’s beta should be reviewed in conjunction with its R-squared (see definition). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility.

 

Equity Exposure. A measure that reflects a fund’s investments in stocks and stock futures. Any holdings in short-term reserves are excluded.

 

Expense Ratio. The percentage of a fund’s average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors.

 

Inception Date. The date on which the assets of a fund (or one of its share classes) are first invested in accordance with the fund’s investment objective. For funds with a subscription period, the inception date is the day after that period ends. Investment performance is measured from the inception date.

 

R-Squared. A measure of how much of a fund’s past returns can be explained by the returns from the market in general, as measured by a given index. If a fund’s total returns were precisely synchronized with an index’s returns, its R-squared would be 1.00. If the fund’s returns bore no relationship to the index’s returns, its R-squared would be 0. For this report, R-squared is based on returns over the past 36 months for both the fund and the index.

 

Short-Term Reserves. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash.

 

Turnover Rate. An indication of the fund’s trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). The turnover rate excludes in-kind transactions, which have minimal impact on costs.

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The People Who Govern Your Fund

 

The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund’s trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis.

 

A majority of Vanguard’s board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals.

 

Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members’ responsibilities are selecting investment advisors for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers.

 

Each trustee serves a fund until its termination; or until the trustee’s retirement, resignation, or death; or otherwise as specified in the fund’s organizational documents. Any trustee may be removed at a shareholders’ meeting by a vote representing two-thirds of the net asset value of all shares of the fund together with shares of other Vanguard funds organized within the same trust. The table on these two pages shows information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.

 

 

 

 

 

More information about the trustees is in the Statement of Additional Information, available from The Vanguard Group.

 

 

Connect with Vanguard^® > www.vanguard.com