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Suppose I have invested in ETF VOO. This Vanguard ETF tracks the S&P 500.

If a stock such as Goodyear (GT) that is contained in the S&P500 gets removed and replaced with another stock such as Bitcoin (BTC) - does VOO incur a net loss? If so, who foots the bill?

Are the incoming and outgoing stocks usually around the same price? Is the incoming one usually a tiny bit higher (since the outgoing one is probably trending downwards), resulting in the net loss?

And is this net loss part of the expense ratio? I would have thought the tiny expense ratio wouldn't cover what could be a significant net loss.

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    BTC is not a stock. – snap Sep 1 at 10:47
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The NAV of an ETF changes because of the share price of its components. It's actual price increases or decreases because buying or selling of ETF shares in the marketplace.

If a stock is removed from the index that the ETF tracks, the portfolio composition changes. The ETF rebalances and realigns the weightings of its assets. While this may incur additional commissions, it doesn't cause losses to the ETF's NAV.

  • Thanks for the reply. Why is there no loss when replacing a stock? Is the incoming stock the same price as the outgoing one? – Sridhar Sarnobat Oct 17 '18 at 20:03
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    Per your example, GT lost almost 11 points this year. That's a loss due to share price decrease (and that exerted downward pressure on the ETF's price). Constituent replacement is a separate issue. Suppose the ETF is replacing $100 million of GT tomorrow morning. They take that $100 million and buy $100 million of the new index constituent XYZ. That exchange only costs commissions. If the weighting of the index components is now off, they'll also rebalance. So yes, GT may have incurred a loss from purchase date to sale date but the swapping of XYX for GT did not. – Bob Baerker Oct 17 '18 at 20:41
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    Ah, I think you've highlighted the part I didn't think of: the stock prices don't need to be equal - you just sell a dollar amount of the outgoing stock, and buy an equal dollar amount of the incoming one. – Sridhar Sarnobat Oct 17 '18 at 20:43
  • Glad to be of assistance :->) – Bob Baerker Oct 17 '18 at 20:44
  • If you think about it, there can't be a loss. If the index fund held $X worth of stock before the replacement, it still holds $X worth of stock after it. Your shares of the index fund still represent shares of the same underlying value (less commissions and other small costs). – David Schwartz Oct 18 '18 at 22:54

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