The fund rebalances regularly. Before the company is dropped out its value will have dropped, of course, causing the entire fund to drop proportionally in value

The fund rebalances regularly. Before the company is dropped out its value will have dropped, of course, causing the entire fund to drop proportionally in value. Index funds typically rebalance quarterly, I believe. The index also rebalances, usually called reconstitution [1]; the Russell indexes rebalance yearly, for example. Which means there can be a discrepancy between the fund and the index at any given time. This can result in arbitrage opportunities, I believe. Interestingly, the selling and purchasing involved in adding or removing a stock from an index/fund also has an effect on the market [2]. [1] https://www.investopedia.com/terms/r/reconstitution.asp https://www.investopedia.com/terms/r/reconstitution.asp [2] https://www.cxoadvisory.com/miscellaneous/strategies-for-exploiting-index-rebalancing/ https://www.cxoadvisory.com/miscellaneous/strategies-for-exp...