How does an index rearrange its major holdings
An index will drop a company for several reasons:  A fund decides how close they want to mirror the index. Some do so exactly, others only approximate the index. S & P Index Announcements would have notes on when there are changes to the index.  For example in the S & P Small-cap 600 there is a change that takes affect on Feb. 19, 2013. As for how index funds handle changes to the fund, this depends a bit on the nature of the fund as open-end mutual funds would be different than exchange-traded funds.  The open-end fund would have to sell and purchase to keep tracking the index which can be interesting to see how well this is handled to keep the transaction costs down while the ETFs will just unload the shares in the redemption units of the stock leaving the index while taking in new shares with creation units of the newly added stock to the index.
If a stock that makes up a big part of the Dow Jones Industrial   Average decided to issue a huge number of additional shares, that will   make the index go up. At least this is what should happen, since an   index is basically a sum of the market cap of the contributing   companies. No, indices can have various weightings. The DJIA is a price-weighted index not market-cap weighted. An alternative weighting besides market-cap and price is equal weighting. From Dow Jones: Dow Jones Industrial Average™. Introduced in May 1896, the index, also   referred to as The Dow®, is a price-weighted measure of 30 U.S.   blue-chip companies. Thus, I can wonder what in the new shares makes the index go up? If a stock is split, the Dow divisor is adjusted as one could easily see how the current Dow value isn't equal to the sum or the share prices of the members of the index. In other cases, there may be a dilution of earnings but that doesn't necessarily affect the stock price directly as there may be options exercised or secondary offerings made. SO if the index, goes up, will the ETF DIA also go up automatically   although no additional buying has happened in the ETF itself? If the index rises and the ETF doesn't proportionally, then there is an arbitrage opportunity for someone to buy the DIA shares that can be redeemed for the underlying stocks that are worth more in this case. Look at the Creation and Redemption Unit process that exists for ETFs. At any given time there are buy orders and there are sell orders.  Typically there is a little bit of space between the lowest sell order and the highest buy order, this is known as the bid/ask spread.  As an example say person A will sell for $10.10 but person B will only buy at $10.00.  If you have a billion shares outstanding just the space between the bid and ask prices represents $100,000,000 of market cap. Now imagine that the CEO is in the news related to some embezzlement investigation.  A number of buyers cancel their orders.  Now the highest buy order is $7.  There isn't money involved, that's just the highest offer to buy at the time; but that's a drop from $10 to $7.  That's a change in market cap of $3,000,000,000.  Some seller thinks the stock will continue to fall, and some buyer thinks the stock has reached a fair enterprise value at $7 billion ($7 per share).  Whether or not the seller lost money depends on where the seller bought the stock.  Maybe they bought when it was an IPO for $1.  Even at $7 they made $6 per share. Value is changing, not money.  Though it would be fun, there's no money bonfire at the NYSE. You can check the website for the company that manages the fund. For example, take the iShares Nasdaq Biotechnology ETF (IBB). iShares publishes the complete list of the fund's holdings on their website. This information isn't always easy to find or available, but it's a place to start. For some index funds, you should just be able to look up the index the fund is trying to match. This won't be perfect (take Vanguard's S&P 500 ETF (VOO); the fund holds 503 stocks, while the S&P 500 index is comprised of exactly 500), but once again, it's a place to start. A few more points to keep in mind. Remember that many ETF's, including equity ETF's, will hold a small portion of their assets in cash or cash-equivalent instruments to assist with rebalancing. For index funds, this may not be reflected in the index itself, and it may not show up in the list of holdings. VOO is an example of this. However, that information is usually available in the fund's prospectus or the fund's site. Also, I doubt that many stock ETF's, at least index funds, change their asset allocations all that frequently. The amounts may change slightly, but depending on the size of their holdings in a given stock, it's unlikely that the fund's manager would drop it entirely. Now, if I'm not mistaken, tracking a value-weighted index is extremely easy - just buy the shares in the exact amount they are in the index and wait. Yes in theory. In practise this is difficult. Most funds that track S&P do it on sample basis. This is to maintain the fund size. Although I don't have / know the exact number ... if one wants to replicate the 500 stocks in the same %, one would need close to billion in fund size. As funds are not this large, there are various strategies adopted, including sampling of companies [i.e. don't buy all]; select a set of companies that mimic the S&P behaviour, etc. All these strategies result in tracking errors. There are algorithms to reduce this. The only time you would need to rebalance your holdings is when there is a change in the index, i.e. a company is dropped and a new one is added, right? So essentially rebalance is done to; If so, why do passive ETFs require frequent rebalancing and generally lose to their benchmark index? lets take an Index with just 3 companies, with below price. The total Market cap is 1000  The Minimum required to mimic this index is 200 or Multiples of 200. If so you are fine.    More Often, funds can't be this large. For example approx 100 funds track the S&P Index. Together they hold around 8-10% of Market Cap. Few large funds like Vangaurd, etc may hold around 2%. But most of the 100+ S&P funds hold something in 0.1 to 0.5 range. So lets say a fund only has 100. To maintain same proportion it has to buy shares in fraction. But it can only buy shares in whole numbers. This would then force the fund manager to allocate out of proportion, some may remain cash, etc. As you can see below illustrative, there is a tracking error. The fund is not truly able to mimic the index.  Now lets say after 1st April, the share price moved, now this would mean more tracking error if no action is taken [block 2] ... and less tracking error if one share of company B is sold and one share of company C is purchased.  Again the above is a very simplified view. Tracking error computation is involved mathematics.  Now that we have the basic concepts, more often funds tracking S&P; Thus they need to rebalance. The money goes to the seller.  There are a lot of behind the scenes things that happen, and some transactions are very complicated with many parties involved (evidenced by all the comments on @keshlam's perfectly reasonable high-level answer), but ultimately the money goes to the seller.  Sometimes the seller is the company.  The billions of shares that change hands each day are moving between other individuals like you and investment funds; these transactions have no direct impact on the company's financials, in general. "Following comments to your question here, you posted a separate question about why SPY, SPX, and the options contract don't move perfectly together.  That's here Why don't SPY, SPX, and the e-mini s&p 500 track perfectly with each other? I provided an answer to that question and will build on it to answer what I think you're asking on this question.  Specifically, I explained what it means that these are ""all based on the S&P.""  Each is a different entity, and different market forces keep them aligned.  I think talking about ""technicals"" on options contracts is going to be too confusing since they are really a very different beast based on forward pricing models, so, for this question, I'll focus on only SPY and SPX. As in my other answer, it's only through specific market forces (the creation / redemption mechanism that I described in my other answer), that they track at all.  There's nothing automatic about this and it has nothing to do with some issuer of SPY actually holding stock in the companies that comprise the SPX index. (That's not to say that the company does or doesn't hold, just that this doesn't drive the prices.)  What ever technical signals you're tracking, will reflect all of the market forces at play.  For SPX (the index), that means some aggregate behavior of the component companies, computed in a ""mathematically pure"" way.  For SPY (the ETF), that means (a) the behavior of SPX and (b) the behavior of the ETF as it trades on the market, and (c) the action of the authorized participants.  These are simply different things. Which one is ""right""?  That depends on what you want to do.  In theory you might be able to do some analysis of technical signals on SPY and SPX and, for example, use that to make money on the way that they fail to track each other.  If you figure out how to do that, though, don't post it here.  Send it to me directly. :)" The methodology for divisor changes is based on splits and composition changes. Dividends are ignored by the index. Side note - this is why, in my opinion, that any discussion of the Dow's change over a long term becomes meaningless. Ignoring even a 2% per year dividend has a significant impact over many decades.  The divisor can be found at http://wsj.com/mdc/public/page/2_3022-djiahourly.html "Since these indices only try to follow VIX and don't have the underlying constituents (as the constituents don't really exist in most meaningful senses) they will always deviate from the exact numbers but should follow the general pattern. You're right, however, in stating that the graphs that you have presented are substantially different and look like the indices other than VIX are always decreasing. The problem with this analysis is that the basis of your graphs is different; they all start at different dates... We can fix this by putting them all on the same graph:  this shows that the funds did broadly follow VIX over the period (5 years) and this also encompasses a time when some of the funds started. The funds do decline faster than VIX from the beginning of 2012 onward and I had a theory for why so I grabbed a graph for that period. My theory was that, since volatility had fallen massively after the throes of the financial crisis there was less money to be made from betting on (investing in?) volatility and so the assets invested in the funds had fallen making them smaller in comparison to their 2011-2012 basis.  Here we see that the funds are again closely following VIX until the beginning of 2016 where they again diverged lower as volatility fell, probably again as a result of withdrawals of capital as VIX returns fell. A tighter graph may show this again as the gap seems to be narrowing as people look to bet on volatility due to recent events. So... if the funds are basically following VIX, why has VIX been falling consistently over this time? Increased certainty in the markets and a return to growth (or at least lower negative growth) in most economies, particularly western economies where the majority of market investment occurs, and a reduction in the risk of European countries defaulting, particularly Portugal, Ireland, Greece, and Spain; the ""PIGS"" countries has resulted in lower volatility and a return to normal(ish) market conditions. In summary the funds are basically following VIX but their values are based on their underlying capital. This underlying capital has been falling as returns on volatility have been falling resulting in their diverging from VIX whilst broadly following it on the new basis." Now company A has been doing ok for couple of weeks, but then due to some factors in that company its stock has been tanking heavily and doesn't appear to have a chance to recover. In this kind of scenario, what does happen?  In this scenario, if that company is included in the index being tracked, you will continue holding until such time that the index is no longer including that company.   Index funds are passively managed because they simply hold the securities contained in the index and seek to keep the allocations of the fund in line with the proportions of the index being tracked.  In an actively managed fund the fund manager would try to hedge losses and make stock/security picks.  If the manager thought a particular company had bad news coming maybe they would offload some or all the position.  In an index fund, the fund follows the index on good days and bad and the managers job is to match the asset allocations of the index, not to pick stocks. An ETF manager will only allow certain financial organisations to create and redeem ETF shares.  These are called Authorised Participants (APs).  The APs have the resources to bundled up packages of shares that they already own and hold in order to match the ETFs requirements.  In the case of the EDEN ETF, this portfolio is the MSCI Denmark Index.  Only APs transact business directly with the ETF manager.   When ETF shares need to be created, the AP will bundle up the portfolio of shares and deliver them to the ETF manager.  In return, the ETF manager will deliver to the AP the corresponding number of shares in the ETF.  Note that no cash changes hands here. (These ETF shares are now available for trading in the market via the AP.  Note that investors do not transact business directly with the ETF manager.) Similarly, when ETF shares need to be redeemed, the AP will deliver the ETF shares to the ETF manager.  In return, the ETF manager will deliver to the AP the corresponding portfolio of shares.  Again, no cash changes hands here. Normally, with an established and liquid ETF, investors like you and me will transact small purchases and sales of ETF shares with other small investors in the market.  In the event that an AP needs to transact business with an  investor, they will do so by either buying or selling the ETF shares.  In the event that they have insufficient ETF shares to meet demand, they will bundle up a portfolio deliver them to the ETF provider in return for ETF shares, thus enabling them to meet demand.  In the event that a lot of investors are selling and the AP ends up holding an excessive amount of ETF shares, they will deliver unwanted shares to the ETF manager in exchange for a portfolio of the underlying shares. According to this scheme, large liquidations of ETF holdings should not effect the share prices of the underlying portfolio.  This is because the underlying shares are not sold in the market, rather they are simply returned to the AP in exchange for the ETF shares (Recall that no cash is changing hands in this type of transaction).   The corresponding trail of dividends and distributions to ETF share holders follows the same scheme. An index fund is just copying the definition of an index. The group that defines the index determines how to weight the different parts of the index. The index fund just makes sure they invest the same way the index creator wants.  Think of a non-investment scenario. A teacher can grade tests, quizzes, homework, in-class assignments, research papers. They decide how much weight to give each category and how much weight to give each part of each category. when a student wants to see how they are doing they take the information in the syllabus, and generate a few formulas in a spreadsheet to calculate their current grade. They can also calculate what they need to get on the final exam to get the grade they want. You are correct that over a short term there is no guarantee that one index will out perform another index. Every index goes through periods of feat and famine. That uis why the advice is to diversify your investments. Every index does have some small amount of management. For the parent index (the S&P 500 in this case) there is a process to divide all 500 stocks into growth and value, pure growth and pure value. This rebalancing of the 500 stocks occurs once a year. Rebalancing The S&P Style indices are rebalanced once a year in December. The   December rebalancing helps set the broad universe and benchmark for   active managers on an annual cycle consistent with active manager   performance evaluation cycles. The rebalancing date is the third   Friday of December, which coincides with the December quarterly share   changes for the S&P Composite 1500.  Style Scores,   market-capitalization weights, growth and value midpoint averages, and   the Pure Weight Factors (PWFs), where applicable across the various   Style indices, are reset only once a year at the December rebalancing. Other changes to the U.S. Style indices are made on an as-needed   basis, following the guidelines of the parent index. Changes in   response to corporate actions and market developments can be made at   any time. Constituent changes are typically announced for the parent   index two-to-five days before they are scheduled to be implemented. Please refer to the S&P U.S. Indices Methodology document for   information on standard index maintenance for the S&P 500, the S&P   MidCap 400,the S&P SmallCap 600 and all related indices. As to which is better: 500, growth,value or growth and value? That depends on what you the investor is trying to do. Points are the units of measurement of the index. They're calculated based on the index formula, which in turn based on the prices of the underlying stocks. Movement in points is not really interesting, the movement as a percentage of the base price (daily opening, usually) is more interesting since it gives more context. "One description of what happened is at 401(k) Plan Fix-It Guide.  The issue is the plan was ""Top Heavy,"" i.e. those making a high income were making disproportionately larger deposits than the lower paid employees. As the IRS article suggests, a nice matching deposit from the employer can eliminate the lower limit caused by the top heavy-ness.  Searching on [top heavy 401(k)] will yield more details if you wish to research more." "I would contact the security/fraud departments at your bank and see if you can get in contact (via your bank) with the bank that the check is drawn on. By my reading of your question, it sounds like the person you are dealing with fraudulently endorsed a third party check, which you subsequently endorsed for deposit. Explain this situation to your bank. As far as the other person goes, tell her ""I'm in contact with the frauds department at my bank, as the validity of the check is in question, and I'm not giving you a cent until the matter is resolved."" Depositing a bad check is a misdemeanor in most jurisdictions, so it's essential to bring this to the attention of the bank and authorities asap."