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Morningstar's Take | 03-14-02	by William Harding

"Bogle's Folly" remains a great core holding.  Vanguard 500 Index
wasn't immune to the market's recent swoon--it lost 12.46% in 2001.
Large-cap stocks that dominate the S&P 500 were especially hard hit,
with tech shares (about 20% of the fund's assets) leading the
downward charge. The fund was exposed to a few high-profile
implosions, including Enron, but its broad diversification limited
the impact of such disasters. In all, the fund's 2001 showing still
outpaced the majority of its large-blend peers'. This fund has
silenced most of its critics in the 25 years since its launch.

Contrary to popular belief at that time, investors haven't followed a
path to mediocrity here. The fund's annualized return over the past
15 years ended Feb. 28, 2002, tops the typical actively managed large-
blend offering's by 158 basis points. That margin of victory would be
even greater if the returns of funds that have gone out of business
were included.  Opponents of indexing also argued that the fund would
be a tax nightmare because investors would jump ship when stocks
turned south, forcing manager Gus Sauter to sell shares and realize
gains. That concern proved to be hogwash. Most investors have stayed
the course here, and when Sauter has had to sell shares, he has
limited the tax pain by unloading the highest-cost shares first.

Indeed, the fund didn't make a capital-gains distribution in 2000 or
2001.  The only drawback here is that the fund's emphasis on mega-cap
stocks will keep it from participating much when small- and mid-cap
stocks rally. Therefore, investors should consider complementing this
offering with a small-cap index fund like Vanguard Small Cap Index
NAESX or an actively managed small-cap offering. But for a large-cap
fund to anchor one's portfolio, this fund's low costs, diversified
portfolio, and tax efficiency make it tough to beat.

	Year	Total Return (%)	+/- Category
	02-02	-3.4	                 0.6
	2001	-12.0	                 1.7
	2000	-9.1	                -2.5
	1999	21.1	                 0.3
	1998	28.6	                 6.1
	Data through 02-28-02

	Fund Family Grade: A

	Vanguard is the premier shop for index funds, but its actively
managed domestic-stock funds are also pretty decent. Both active and
passive funds at Vanguard have an edge on their competition thanks to
low expense ratios. The able Gus Sauter runs its index offerings and
usually manages to pick up a basis point or two over the indexes'
returns each year. For its active funds, Vanguard hires subadvisors
from the best firms in the country. Vanguard holds its subadvisors to
high standards and won't hesitate to replace them if performance lags.

	Role in Portfolio
	Core. With broad sector diversification, skilled management, low
costs, and high tax efficiency, what's not to like?

Kudos
Low costs.
Excellent management.
High tax efficiency.

Risks
Huge median market cap may cause the fund to lag in smaller-stock
rallies.

Strategy
The core of the fund's strategy is simple: Manager Gus Sauter buys
and holds the stocks that compose the S&P 500 index. Sauter attempts
to add value on the margins by opportunistically buying futures
contracts, among other techniques, and he actively tries to reduce
trading costs.

Management
Sauter has run index money for more than a decade and is as good as
anyone in the business at adding value here and there.

Inside Scoop
This fund shows that sometimes you can beat 'em by joining 'em.
Management doesn't try to outguess the market; rather it buys and
holds the stocks in the S&P 500 index. That strategy, combined with
low expenses, has given the fund one of the best long-term records
around.