Background: Little empirical research examines the process in which home literacy environment (HLE) in toddlerhood is associated with preschoolers' vocabulary and decoding skills using a large-scale dataset. Objective: The purposes of the current study were to (a) examine the differential effect of HLE in toddlerhood on preschoolers' vocabulary versus decoding skills, and (b) test a mediational role of children's vocabulary in the association between HLE and decoding skills based on a phonological approach (i.e. examining the contribution of vocabulary to the acquisition of decoding skills). Method: Using the ECLS-B dataset, the study investigated HLE in toddlerhood and vocabulary and decoding skills at preschool age among nearly 6050 monolingual English-speaking, typically developing children and their parents of diverse ethnic and socioeconomic backgrounds. Results: HLE measured in toddlerhood predicted both vocabulary and decoding skills measured at preschool age. Vocabulary at preschool age partially accounted for the effect of HLE at age two on decoding skills at preschool age. In other words, HLE at age two indirectly influenced children's decoding skills at preschool age through vocabulary at preschool age. Conclusion: Enriched HLE during the toddlerhood leads to preschoolers' increased vocabulary, which consequently results in preschoolers' proficiency of decoding skills.