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Do S&P 500 index fund managers buy and sell the stocks the index tracks every day? Let us say fund like VFIAX has $500 million in assets. Do the fund managers buy and sell some of these stocks based on market indicators on daily basis? What happens if a large number of investors sell their holdings ? The fund has to sell its stock holding to pay for the investors right ?IN such situation do the fund manager sell out the holdings proportionately ?

RKA
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An index fund is rarely identical to the index it tracks. Often sufficient shares of those companies are not available. The prospectus should make this very clear; it will say something like "the goal is to track the performance of the index", not to hold exactly and only the index.

The prospectus will also give you enough information about their holdings that you can decide whether you trust their approach.

Yes, the fund sells and buys to maintain its strategic distribution of holdings in response to the total change in investment each day. It may not do so precisely proportionately (many funds include a small amount of cash holdings for flexibility and/or some derivatives to fine-tune the mix), but in general that's an accurate enough description. Again, the prospectus addresses some of this.

keshlam
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  • Thank you for your answer. Is there a book or resource available to explain the index funds , ETFs if I want to learn more ? Fund prospectus are too technical for general reading. – RKA Feb 02 '23 at 02:51
  • I haven't gone looking for books, so I have no recommendations there. There's a lot of info on the web, and most of it is even correct for these basics; the disagreements start when folks start trying to use the facts to make investing decisions, and get worse as they start trying to do better than market rate of return. – keshlam Feb 02 '23 at 11:05
  • You don't have to read the whole prospectus to get useful information from it, by the way. – keshlam Feb 03 '23 at 16:58