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: 811-02652

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, 2013 – June 30, 2013

Item 1: Reports to Shareholders

 

Semiannual Report | June 30, 2013

Vanguard 500 Index Fund

 

> For the six months ended June 30, 2013, Vanguard 500 Index Fund closely tracked the 13.82% return of its benchmark, the Standard & Poor’s 500 Index.

> The fund finished with its strongest first half of any year since 1998.

> Financial, health care, and consumer discretionary stocks contributed the most to the fund’s return.

 

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: Our cover photograph shows rigging on the HMSSurprise, a replica of an 18th-century Royal Navy frigate. It was featured in the 2003 movie Master and Commander: The Far Side of the World, which was based on Patrick O’Brian’s sea novels, set amid the Napoleonic Wars. Vanguard was named for another ship of that era, the HMSVanguard, which was the flagship of British Admiral Horatio Nelson at the Battle of the Nile.

 

Your Fund’s Total Returns

Six Months Ended June 30, 2013

 

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, 2012, Through June 30, 2013

 

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Chairman’s Letter

Dear Shareholder,

Vanguard 500 Index Fund produced its strongest first-half result in 15 years, despite turbulence late in the six-month period ended June 30, 2013.

For most of the period, U.S. stocks were on the ascent amid signs that the housing recovery was progressing and the job market was perking up. But markets turned rocky after Federal Reserve Chairman Ben Bernanke said June 19 that the central bank might decide to begin scaling back its stimulative bond-buying later this year.

Still, U.S. stocks remained a safe haven for many investors anxious about unrest in Brazil and the Middle East, the recession in Europe, and signs of trouble in China’s economy. Outside the United States, results were muted for stocks in developed markets from Europe to Asia. Stocks in emerging markets tumbled.

The 500 Index Fund returned nearly 14% for the half year, closely tracking its benchmark, the Standard & Poor’s 500 Index, and surpassing the average return of its peer group, which consists of large-capitalization core funds.

All ten industry sectors posted positive returns. Financial, health care, and consumer discretionary stocks contributed the most to the fund’s advance. Information technology stocks, the fund’s largest sector holding, turned in modest results.

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As domestic stocks rallied, their bond counterparts retreated
While U.S. stocks generated robust returns for the six months, the same cannot be said for the U.S. bond market, which had its worst first-half performance since 1994.

Bond returns, which sputtered along through most of the half year, turned negative in May and retreated further in June. The broad U.S. taxable bond market returned –2.44% for the six months as concerns about the Fed’s plans roiled fixed income investors even more than equity investors. Municipal bonds fared worse than taxable issues, returning –2.69%.

The yield of the 10-year Treasury note finished the six months at 2.47%, jumping from 2.11% at the end of May and 1.67% at the end of April. (Bond yields and prices move in opposite directions.) The Fed kept its target for short-term rates between 0% and 0.25%. Returns from money market funds and savings accounts have been minuscule since the Fed imposed the historically low rates in December 2008 to combat the financial crisis.

Markets were clearly unsettled by the prospect of the Fed’s scaling back its stimulus measures, known as quantitative easing. However, Vanguard’s chief economist, Joe Davis, pointed to a positive message in the Fed’s evolving stance. “The Federal Reserve is coming closer to the realization that the U.S. economy is stronger today than it was a year ago and so does not need the insurance, so to speak, of additional quantitative easing,” he said.

 

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Financial and health care stocks were the leading performers
The S&P 500 Index achieved a succession of new highs in March, April, and May amid solid corporate earnings and encouraging U.S. economic data. As I mentioned above, the rally was briefly interrupted in June, when the index slid by more than 1 percent. But that did not significantly detract from the fund’s total return for the period.

For the six months, each of the index’s economic sectors did well, with six of ten posting double-digit gains.

Financials, the second-largest sector, contributed more than a fifth of the index’s overall return with a broad-based advance. Diversified financial services companies and commercial banks profited from better lending conditions and the recovering housing market. Asset managers also thrived as the investing climate kept improving.

Health care was the next-largest contributor to returns. Pharmaceutical and biotech companies were among the best performers for the half-year as the industry continued to benefit from favorable rulings by the Food and Drug Administration and improved pipelines of new medicines. Health care providers and services also turned in impressive results.

The consumer discretionary sector performed strongly, too. U.S. consumers were more confident about the economy and employment than they have been in

Expense Ratios
Your Fund Compared With Its Peer Group

The fund expense ratios shown are from the prospectus dated April 12, 2013, and represent estimated costs for the current fiscal year. For the six months ended June 30, 2013, 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 2012.

Peer group: Large-Cap Core Funds.

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several years. They spent more on entertainment, shopping, and eating out. Media companies, including cable and satellite operators, notched gains. Specialty retailers, hotels, and restaurants did well.

The index did not benefit as much from its heavy weighting in information technology, which turned in the second-lowest sector return for the period. Some personal computer manufacturers did better by cutting costs. But the sector was hurt most by its holdings in the tablet and smartphone business; competition in it is fierce, and several key players fell short of earnings expectations as new products failed to deliver.

In pursuing investment goals, long-term asset mix is key
As I mentioned earlier, financial markets were rattled in June by the prospect that the Fed would begin scaling back its massive bond-buying program. Bond yields jumped (and so prices fell), and the stock market experienced some turmoil.

Volatility and increased uncertainty can tempt investors to deviate from their investment plan. In the mutual fund industry, for example, the recent rise in bond yields has led to net redemptions from bond funds as investors try to sidestep losses that might arise from a sustained climb in interest rates.

Keep in mind, however, that although interest rates remain low, nobody is certain what their next move will be—much less how financial markets will react to the change. In fact, it’s precisely because short-term market movements are unpredictable that trying to time the markets often fails, as Vanguard and other researchers have found. A recent Vanguard research paper notes that although many investors alter their portfolios based on emotional reactions to market movements, investment success actually is “largely determined by the long-term mixture of assets in a portfolio.” (You can find the full report, Vanguard’s Framework for Constructing Diversified Portfolios, at vanguard.com/research.)

We continue to believe that sticking to a well-diversified portfolio of stocks, bonds, and money market instruments over the long haul—rather than making impulsive changes to try to avoid potential losses or capitalize on perceived opportunities—gives you the best chance of meeting your investment goals.

Thank you for entrusting your assets to Vanguard.

Sincerely,

F. William McNabb III
Chairman and Chief Executive Officer
July 11, 2013

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500 Index Fund

Fund Profile
As of June 30, 2013

 

 

Sector Diversification (% of equity exposure)

 

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

Ten Largest Holdings (% of total net assets)

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

1 The expense ratios shown are from the prospectus dated April 12, 2013, and represent estimated costs for the current fiscal year. For the six months ended June 30, 2013, 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, 2002, Through June 30, 2013

Note: For 2013, performance data reflect the six months ended June 30, 2013.

Average Annual Total Returns: Periods Ended June 30, 2013

 

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, 2013

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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See Note A in Notes to Financial Statements.
* Non-income-producing security.
^ Part of security position is on loan to broker-dealers. The total value of securities on loan is $39,220,000.
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 0.2%, 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 $42,683,000 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, as needed to maintain a positive net worth, in exchange for senior preferred stock.
5 Securities with a value of $28,690,000 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

1 Net Assets—End of Period includes undistributed (overdistributed) net investment income of ($81,821,000) and ($131,485,000).

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

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500 Index Fund

Financial Highlights

 

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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500 Index Fund

Financial Highlights

 

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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