UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number: 811-2652

Name of Registrant: Vanguard Index Funds

Address of Registrant:
P.O. Box 2600
Valley Forge, PA 19482

Name and address of agent for service:
Heidi Stam, Esquire
P.O. Box 876
Valley Forge, PA 19482

Registrant’s telephone number, including area code: (610) 669-1000

Date of fiscal year end: December 31

Date of reporting period: January 1, 2012 – June 30, 2012

Item 1: Reports to Shareholders

 

 

 

 

> For the six months ended June 30, 2012, Vanguard 500 Index Fund closely tracked the 9.49% return of its benchmark, the Standard & Poor’s 500 Index.

> The fund’s performance mirrored that of the broad U.S. stock market, largely rising and retreating with shifting uncertainties on the global stage.

> The information technology, financial, and consumer discretionary sectors contributed most to returns; energy stocks weighed on performance.

 

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.
See the Glossary for definitions of investment terms used in this report.
About the cover: Vanguard was named for the HMS Vanguard, flagship of British Admiral Horatio Nelson. A ship—whose performance and safety depend on the work of all hands—has served as a fitting metaphor for the Vanguard crew as we strive to help clients reach their financial goals.

 

Your Fund’s Total Returns

Six Months Ended June 30, 2012

 

Admiral Shares carry lower expenses and are available to investors who meet certain account-balance requirements. Signal Shares are available to certain institutional shareholders who meet specific administrative, service, and account-size criteria. The Vanguard ETF® Shares shown are traded on the NYSE Arca exchange and are available only through brokers. The table provides 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; 7,720,749; 7,925,573; 8,090,646.

For the ETF Shares, the market price is determined by the midpoint of the bid-offer spread as of the closing time of the New York Stock Exchange (generally 4 p.m., Eastern time). The net asset value is also determined as of the NYSE closing time. For more information about how the ETF Shares' market prices have compared with their net asset value, visit vanguard.com, select your ETF, and then select the Price and Performance tab. The ETF premium/discount analysis there shows the percentages of days on which the ETF Shares' market price was above or below the NAV.

Your Fund’s Performance at a Glance
December 31, 2011, Through June 30, 2012

 

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Chairman’s Letter

Dear Shareholder,

The S&P 500 Index began the six months ended June 30, 2012, with its best first-quarter return since 1998. The second quarter, however, was rockier as investors wrestled with both renewed anxiety about Europe’s debt crisis and fear of a global economic slowdown; in May, U.S. stock markets skidded into negative territory. Vanguard 500 Index Fund delivered a solid return of about 9% for the half-year, closely tracking the Standard & Poor’s 500 Index and exceeding the average return of its peer group, large-capitalization core funds.

With the exception of energy, each of the ten industry sectors posted positive returns for the period. Information technology, financial, and consumer discretionary stocks contributed most to the overall result for the index.

In case you missed our announcement last month, George U. “Gus” Sauter, managing director and chief investment officer of Vanguard, plans to retire at the end of 2012. It’s hard to overstate the contributions that Gus has made to Vanguard in his 25-year career. He honed the strategy and built the team that have helped make Vanguard a world leader in indexing, and he developed our active quantitative equity strategies.

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We’re fortunate that Mortimer J. “Tim” Buckley, also a managing director, will succeed Gus. Tim has been a member of Vanguard’s senior staff since 2001 and has directed Vanguard’s Retail Investor Group since 2006. I’ll have more to say about Gus’s retirement at the end of the year.

U.S. stocks delivered strong returns, but Europe remained a trouble spot
U.S. stocks were the standout performers for the six months ended June 30, returning about 9%. Domestic equities seemed to benefit from the perception that they offered some shelter from the storms roiling European markets. International stocks didn’t fare as well, returning about 3%. European stocks were the weakest performers. Returns for emerging markets and for the developed markets of the Pacific region were restrained by signs of slowing growth.

Throughout the period, investors were preoccupied with Europe’s debt troubles, and global stock markets moved sharply up and down depending on whether the latest news from the region was positive or negative. Vanguard economists expect Europe to remain a trouble spot. The most likely scenario is that it will “muddle through” for several years, with occasional spikes in market volatility, as fiscal tightening continues in the face of weak economic growth.

 

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Investors’ appetite for Treasuries drove 10-year yield to a new low
Amid the turmoil in Europe, U.S. Treasury securities continued to benefit from a “flight to quality.” Investor demand nudged bond prices higher, and in early June, the yield of the 10-year U.S. Treasury note slipped below 1.5% for the first time. (Bond yields and prices move in opposite directions.) It’s worth remembering that low yields imply lower future returns: As yields tumble, the scope for further declines—and price increases—diminishes.

The broad U.S. taxable bond market posted a return of about 2% for the half-year. Municipal bonds remained a bright spot, delivering a return of more than 3%.

As it has since December 2008, the Federal Reserve Board held its target for the shortest-term interest rates between 0% and 0.25%. That policy has kept a tight lid on the returns from money market funds and savings accounts.

Second-quarter retreat didn’t fully erase stocks’ strong start
The 500 Index Fund gained more than 12% in the first quarter, then fell about 3% in the second. As I mentioned earlier in this letter, much of the fluctuation was driven by uncertainties about the solvency of European banks and governments. A slowdown in global growth, notably in China, and an uneven U.S. recovery also took a toll.

Expense Ratios
Your Fund Compared With Its Peer Group

The fund expense ratios shown are from the prospectus dated April 26, 2012, and represent estimated costs for the current fiscal year. For the six months ended June 30, 2012, the fund’s annualized expense ratios were 0.17% for Investor Shares, 0.05% for Admiral Shares, 0.05% for Signal Shares, and 0.05% for ETF Shares. The peer-group expense ratio is derived from data provided by Lipper Inc. and captures information through year-end 2011.

Peer group: Large-Cap Core Funds.

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Still, the 500 Index Fund delivered a strong performance for the half-year. In addition to the first-quarter gains—when the U.S. recovery appeared stronger and the European crisis seemed to stabilize—the index got a lift on the last trading day of the period as stocks rallied in the wake of an agreement by policymakers to aid European banks.

Information technology, the index’s largest sector and one of the market’s best performers for the six months, contributed more than a quarter of the index’s total return for the period. The sector’s best-performing holdings included companies that make tablet computers and smart-phones. Other standouts included software manufacturers, IT consulting firms, and data processors. Tech companies as a whole benefited from the optimism at the beginning of the period that a stronger economy would lead to greater consumer and business demand.

Financials, the second-largest sector in the index, contributed nearly a fifth of the index’s overall return. Although financial companies have struggled since the 2008 credit crisis, they have rebounded over the past six months. Some of the best results came from banks whose mortgage-lending businesses improved as they overcame some of the legacies associated with the deep recession and weak housing market.

The consumer discretionary sector was the next-largest contributor to returns. Media companies, including cable and satellite operators and movie makers, produced the strongest results. Specialty retailers and online shopping outlets also were bright spots. U.S. consumers benefited from lower gas prices, which provided them with some newfound savings to spend on other items. U.S. retail sales were stronger at the start of the period, but turned mixed toward the end as consumer confidence waned.

The energy sector was the market’s weakest performer, returning about –2% for the six months. Investors have grown increasingly concerned over softening global demand for oil and its potential effect on the sector’s profitability.

The good news: investors are smart, and they’re getting smarter
In recent years, I’ve often written in this space about the challenges facing investors, from the 2008–2009 financial crisis to the more recent market volatility caused by Europe’s debt troubles. Bad news inevitably seems to grab attention, and it’s our responsibility to speak to you candidly about these difficulties and to offer Vanguard’s perspective.

In the interest of presenting a full picture, I think it’s also our responsibility to point out positive developments that may have been overlooked. On that score, I’ve been especially heartened to see individual investors become more discerning over time, particularly about the costs of investing. As I said in a recent address to financial advisors: Individual investors

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are smart and getting smarter. And that’s a good thing. Increasingly, they are bringing a healthy consumer mentality to their investment portfolios. They want to know what they are buying and how much they are paying for it.

Vanguard research confirms that over the past decade investors have displayed a growing cost consciousness, directing a larger share of their money to low-cost investments. You can read the full report—

Costs Matter: Are Fund Investors Voting With Their Feet?—at vanguard.com/ research. In our view, investors are serving their interests by focusing on costs. The math is simple: The less investors pay for an investment, the more of their returns they keep. And cost savings can compound over the long term, potentially helping investors build greater wealth.

So if you’re feeling buffeted by the latest headlines, it can be constructive to direct your attention to one thing you can control: your investment costs. We continue to believe that holding a balanced and diversified portfolio of low-cost investments can give investors a greater chance of reaching their long-term financial goals. Vanguard 500 Index Fund, with its broad diversification and low-cost exposure to the large-cap segment of the U.S. stock market, can play an important role in such a portfolio.

Thank you for entrusting your assets to Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
July 13, 2012

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500 Index Fund

Fund Profile
As of June 30, 2012

 

 

These measures show the degree and timing of the fund’s fluctuations compared with the indexes over 36 months.

 

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

1 The expense ratios shown are from the prospectus dated April 26, 2012, and represent estimated costs for the current fiscal year. For the six months ended June 30, 2012, the fund’s annualized expense ratios were 0.17% for Investor Shares, 0.05% for Admiral Shares, 0.05% for Signal Shares, and 0.05% for ETF Shares.

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500 Index Fund

 

Investment Focus

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500 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 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.

Fiscal-Year Total Returns (%): December 31, 2001, Through June 30, 2012

 

Note: For 2012, performance data reflect the six months ended June 30, 2012.

Average Annual Total Returns: Periods Ended June 30, 2012

 

See Financial Highlights for dividend and capital gains information.

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500 Index Fund

Financial Statements (unaudited)

Statement of Net Assets
As of June 30, 2012

The fund reports a complete list of its holdings in regulatory filings 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 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).

 

 

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500 Index Fund

 

 

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500 Index Fund

 

 

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500 Index Fund

 

 

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500 Index Fund

 

 

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500 Index Fund

 

 

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500 Index Fund

 

 

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500 Index Fund

 

 

See Note A in Notes to Financial Statements.
^ Part of security position is on loan to broker-dealers. The total value of securities on loan is $59,578,000.
* Non-income-producing security.
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% and 0.1%, 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 $61,458,000 of collateral received for securities on loan.
4 The issuer was placed under federal conservatorship in September 2008; since that time, its daily operations have been managed by the Federal Housing Finance Agency and it receives capital from the U.S. Treasury in exchange for senior preferred stock.
5 Securities with a value of $37,147,000 have been segregated as initial margin for open futures contracts.
6 The issuer operates under a congressional charter; its securities are generally neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government.
REIT—Real Estate Investment Trust.
See accompanying Notes, which are an integral part of the Financial Statements.

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500 Index Fund

Statement of Operations

 

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

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500 Index Fund

Statement of Changes in Net Assets

 

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

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500 Index Fund

Financial Highlights

Investor Shares

The expense ratio, net income ratio, and turnover rate for the current period have been annualized.
1 Total returns do not include account service fees that may have applied in the periods shown. Fund prospectuses provide information about any applicable account service fees.
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.

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