Vanguard to Use Floating Benchmarks

Some index funds to use Barclays Capital float-adjusted bond indexes

Several of Vanguard's index funds will be switching to Barclays Capital's float-adjusted bond indexes from the Barclays indexes that currently serve as the funds' target benchmarks. According to Vanguard, the new benchmarks better represent actual liquidity in the marketplace and should help insulate Vanguard's bond index funds from securities whose prices may be distorted by significant reduction in supply as a result of Federal Reserve buybacks.

The term "float" refers to the amount of a given security available for public trading; it excludes amounts such as those held by company insiders, affiliates, or governments. "We believe that float-adjusted indexes more accurately represent an investor's opportunities in a particular market," said Gus Sauter, Vanguard's chief investment officer, in a release announcing the shift. "Whenever possible, Vanguard's index funds will seek to track benchmarks that follow this best practice."

The company indicated that no significant change in the funds' risk attributes, including duration, is expected once the new benchmarks are adopted, which is scheduled for some time in the fourth quarter of this year.

The migration to the new indexes will affect the following portfolios:

? Vanguard Total Bond Market Index Fund (VITBX)

? Vanguard Short-Term Bond Index Fund (VBISX)

? Vanguard Intermediate-Term Bond Index Fund (VBIIX)

? Vanguard Long-Term Bond Index Fund (VBLTX)

? Vanguard Balanced Index Fund (VBINX); and

? Variable Annuity--Total Bond Market Portfolio.

Adjusting for float is a practice more commonly associated with stock benchmarks. Governments, company insiders, or a company itself may own a large proportion of the company's securities and have no intention of selling. Non-float-adjusted benchmarks include these securities, even though they represent a part of the market that is not available to portfolio managers and other investors. Some indexes adjust for float, including only those securities actually available to investors.

Barclays Capital indexes have historically been adjusted to account for Federal Reserve purchases of Treasury obligations. Barclays developed the new float-adjusted indexes to reflect the impact of the Fed's recent purchase of nearly $1 trillion in mortgage-backed securities and $125 billion in agency bonds. The buyback program effectively removed these bonds from the universe of securities available to investors. The new Barclays Capital U.S. Aggregate Float Adjusted Index and its subindexes exclude these bonds as they are taken out of public supply, and will add them back once they are sold by the Federal Reserve.

Vanguard shifted all of its stock index funds to float-adjusted benchmarks in 2005.

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