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.
"You cannot actually buy an index in the true sense of the word.  An index is created and maintained by a company like Standard and Poor's who licenses the use of the index to firms like Vanguard.  The S&P 500 is an example of an index.  The S&P 500 ""index includes 500 leading companies"", many finical companies sell products which track to this index.  The two most popular products which track to indexes are Mutual Funds (as called Index Funds and Index Mutual Funds) and Exchange Traded Funds (as called ETFs).  Each Index Mutual Fund or ETF has an index which it tracks against, meaning they hold securities which make up a sample of the index (some indexes like bond indexes are very hard to hold everything that makes them up). Looking at the Vanguard S&P 500 Index Mutual Fund (ticker VFINX) we see that it tracks against the S&P 500 index.  Looking at its holdings we see the 500-ish stocks that it holds along with a small amount of bonds and cash to handle cash flow for people buying and sell shares.  If we look at the Vanguard S&P 500 ETF (ticker VOO) we see that it also tracks against the S&P 500 index.  Looking at its holdings we see they are very similar to the similar Index Mutual Fund. Other companies like T. Rowe Price have similar offering.  Look at the T. Rowe Price Equity Index 500 Fund (ticker PREIX) its holdings in stocks are the same as the similar Vanguard fund and like the Vanguard fund it also holds a small amount of bonds and cash to handle cash flow. The only real difference between different products which track against the same index is in the expense ratio (fees for managing the fund) and in the small differences in the execution of the funds.  For the most part execution of the funds do not really matter to most people (it has a very small effect), what matters is the expense (the fees paid to own the fund).  If we just compare the expense ratio of the Vanguard and T. Rowe Price funds we see (as of 27 Feb 2016) Vanguard has an expense ratio of 0.17% for it Index Mutual Fund and 0.05% for its ETF, while T. Rowe Price has an expense ratio of 0.27%.  These are just the fees for the funds themselves, there are also account maintenance fees (which normally go down as the amount of money you have invested at a firm go up) and in the case of ETFs execution cost (cost to trade the shares along with the difference between the bid and ask on the shares). If you are just starting out I would say going with the Index Mutual Fund would easier and most likely would cost less over-all if you are buying a small amount of shares every month.  When choosing a company look at the expense ratio on the funds and the account maintenance fees (along with the account minimals).  Vanguard is well known for having low fees and they in fact were the first to offer Index Mutual Funds. For more info on the S&P 500 index see also this Investopedia entry on the S&P 500 index. Do not worry if this is all a bit confusing it is to most people (myself included) at first." Use a currency ETF.  there are many.  Specific to your question there is WisdomTree Dreyfus Brazilian Real Fund (BZF) I don't happen to find a currency ETF for Thailand, so the closest you could come to a Thai currency fund would be something that's an Index fund ETF that is based on an index in the Thai Market such as:  MSCI Thailand Investable Market Index Fund Because that fund is investing in an index of stocks that trade on the Thai market, you are in effect investing in something denominated in Baht.  This is spelled out in the prospectus where it discusses 'currency risk'.   The problem is that you are however not investing in just the currency, but rather a broad index of stocks denominated in that currency.  Still to the extent the market holds fairly steady, you get much the same effect of investing in just the currency.  to the extent the market is moving, you get the net effect of what the thai market does, plus how the bhat trades relative to the dollar. "From How are indexes weighted?: Market-capitalization weighted indexes (or market cap- or cap-weighted   indexes) weight their securities by market value as measured by   capitalization: that is, current security price * outstanding shares.   The vast majority of equity indexes today are cap-weighted, including   the S&P 500 and the FTSE 100. In a cap-weighted index, changes in the   market value of larger securities move the index’s overall trajectory   more than those of smaller ones. If the fund you are referencing is an ETF then there may be some work to do to figure out what underlying securities to use when handling Creation and Redemption units as an ETF will generally have shares created in 50,000 shares at a time through Authorized Participants. If the fund you are referencing is an open-end fund then there is still cash flows to manage in the fund as the fund has create and redeem shares in on a daily basis. Note in both cases that there can be updates to an index such as quarterly rebalancing of outstanding share counts, changes in members because of mergers, acquisitions or spin-offs and possibly a few other factors. How to Beat the Benchmark has a piece that may also be useful here for those indices with many members from 1998: As you can see, its TE is also persistently positive, but if anything   seems to be declining over time. In fact, the average net TE for the   whole period is +0.155% per month, or an astounding +1.88% pa net   after expenses. The fund expense ratio is 0.61% annually, for a   whopping before expense TE of +2.5% annually. This is once again   highly statistically significant, with p values of 0.015 after   expenses and 0.0022 before expenses. (The SD of the TE is higher for   DFSCX than for NAESX, lowering its degree of statistical   significance.) It is remarkable enough for any fund to beat its   benchmark by 2.5% annually over 17 years, but it is downright eerie to   see this done by an index fund. To complete the picture, since 1992 the Vanguard Extended Index Fund   has beaten its benchmark (the Wilshire 4500) by 0.56% per year after   expenses (0.81% net of expenses), and even the Vanguard Index Trust   500 has beaten its benchmark by a razor thin 0.08% annually before   (but not after) expenses in the same period. So what is going on here? A hint is found in DFA's 1996 Reference   Guide: The 9-10 Portfolio captures the return behavior of U.S. small company stocks as identified by Rolf Banz and other academic   researchers. Dimensional employs a ""patient buyer"" discount block   trading strategy which has resulted in negative total trading costs,   despite the poor liquidity of small company stocks. Beginning in 1982,   Ibbotson Associates of Chicago has used the 9-10 Portfolio results to   calculate the performance of small company stocks for their Stocks,   Bonds, Bills, and Inflation yearbook. A small cap index fund cannot possibly own all of the thousands of   stocks in its benchmark; instead it owns a ""representative sample.""   Further, these stocks are usually thinly traded, with wide bid/ask   spreads. In essence what the folks at DFA learned was that they could   tell the market makers in these stocks, ""Look old chaps, we don't have   to own your stock, and unless you let us inside your spread, we'll   pitch our tents elsewhere. Further, we're prepared to wait until a   motivated seller wishes to unload a large block."" In a sense, this   gives the fund the luxury of picking and choosing stocks at prices   more favorable than generally available. Hence, higher long term   returns. It appears that Vanguard did not tumble onto this until a   decade later, but tumble they did. To complete the picture, this strategy works best in the thinnest   markets, so the excess returns are greatest in the smallest stocks,   which is why the positive TE is greatest for the DFA 9-10 Fund, less   in the Vanguard Small Cap Fund, less still in the Vanguard Index   Extended Fund, and minuscule with the S&P500. There are some who say the biggest joke in the world of finance is the   idea of value added active management. If so, then the punch line   seems to be this: If you really want to beat the indexes, then you   gotta buy an index fund." "Here are a few things that you could try. But note that they are all capable of failing. They will just reduce the chance of you personally having a lost decade. First a quibble: John Bogle advocates a total stock market index (something like Vanguard's VTSMX) instead of an S&P fund, as the latter represents ""only"" 85% or so of the US market's total capitalization. Smaller companies behave slightly differently than members of the S&P, so this might provide a small help. Bogle also advocates holding some bonds in addition to equities. I'll expand on that below. Account for dividends. Just because the value of the index is the same as its value 10 or 20 years ago doesn't necessarily mean that decade was lost. The companies in the S&P are currently paying out an annualized dividend of about 2%. Even if the actual value of the index doesn't change, you're still getting that 2% per year.  Include bonds.  As I mentioned above, Bogle recommends holding some bonds. I have seen two common rules. One is to never have less than 20% of your total holdings in bonds, and never have more than 80% of your total holdings in bonds. The other popular rule is to hold your age in bonds. For example, I'm about 30, so I should keep about 30% of my holdings in bonds. Regardless of the split, rebalance periodically to keep yourself at that split. What effect would holding bonds have on a lost decade? To make the math easy, let's say you split your holdings evenly between an S&P fund and 10 year Treasuries. Coincidentally, 10 year T-notes have the same 2% yield as the S&P dividends. If you're getting that on half your holdings, and nothing on the other half, you're netting 1% per year. Not great, but not totally lost. To illustrate the effect of rebalancing, use my example of a 70/30 stock/bond split. The S&P lost about 50% of its value from its peak to the bottom of the market in early 2008. If you only held stock, you would need the market to increase in value by 100% in order for you to recover that value. If 30% of your holdings are in bonds, and you rebalance at exactly the bottom of the stock market, you only need the stock index to increase in value by about 80% from the bottom in order to make you whole again. I mention those two to emphasize that your investment return is not just a function of the price of a stock index. Dollar cost average. It's rare that you will actually face the situation of putting (say) $100,000 into the market all at once, let it sit for 10-20 years, then take it all out at once. The situation you face is closer to putting about $1000 into the market every month for 100 months. If you do that, then you're getting a different price for each purchase you make. Your actual return will be a weighted average of the return from each of those purchases. But note that this could help or hurt you. Using the chart Victor showed in his answer, if your lost decade is from one peak to the next peak, your average price will be below the price you would have entered and left at. So this helps. But if your lost decade is from trough to trough, then your average price is higher than the start and end price, so this has hurt you. Those are the two extreme cases, and the general case will be somewhere in between. And you can use these regular purchases to help you carry out your regular rebalancing. Foreign equities. Since you mention the S&P500 specifically, I assume that you are in the United States. The US equities is approximately 45% of the world equities market. So even if the S&P500 has a lost decade, it's unlikely that the rest of the world will also have a lost decade at the same time. For comparison, the Tokyo Stock Exchange is the third largest in the world (behind the US's NYSE and NASDAQ); the market cap of the TSE is less than 20% that of the combined market cap of the NYSE and the NASDAQ, which puts it at about 10% of the world's market cap. When the Nikkei had its lost decades, no one else had a lost decade. Note that buying foreign equities is more expensive than buying domestic, and it exposes you to fluctuations in the exchange rate of the currencies. But the benefit of diversification probably outweighs those downsides. And obviously it's easier to diversify away from Japan than it is to diversify away from the United States. But there are people who advocate holding exactly the market weight of every country in the world." Like an S&amp;P 500 ETF?  So you're getting in some cash inflow each day, cash outflows each day.  And you have to buy and sell 500 different stocks, at the same time, in order for your total fund assets to match the S&amp;P 500 index proportions, as much as possible.  At any given time, the prices you get from the purchase/sale of stock is probably going to be somewhat different than the theoretical amounts you are supposed to get to match, so it's quite a tangle.  This is my understanding of things.  Some funds are simpler - a Dow 30 fund only has 30 stocks to balance out.  Maybe that's easier, or maybe it's harder because one wonky trade makes a bigger difference?  I'm not sure this is how it really operates.  The closest I've gotten is a team that has submitted products for indexing, and attempted to develop funds from those indexes.  Turns out finding the $25-50 million of initial investments isn't as easy as anyone would think. If you're interested in slower scale changes, one option is to use indexes that value a common commodity in different currencies such as the Big Mac Index.  If a Big Mac costs more in AUD but stays the same in USD, then AUD have gone up. It would involve manual effort, but there is just a handful of exclusions,  buy the fund you want, plug into a tool like Morningstar Instant X Ray,  find out your $10k position includes $567.89 of defense contractor Lockheed Martin,  and sell short $567.89 of Lockheed Martin.  Check you're in sync periodically (the fund or index balance may change); when you sell the fund close your shorts too. "There's actually a lot of smaller questions in your question, so I'll answer just a few here. The standard bond index for high yield corporates is the Barclays Capital High Yield Corporate index, which is the basis for JNK.  I am not familiar with the index behind HYG, the ""iBoxx $ Liquid High Yield index."" The ETFs are managed quantitatively to try to track the index as closely as possible.  AFAIK these ETFs do not attempt to take active positions. New issues are typically purchased with cash which is constantly coming in from interest and principal payments from other bonds.  There is rarely a need to sell bonds just to buy new issues.  Selling bonds is more common when a fund is experiencing redemptions. These ETFs and the high yield bonds they buy are not derivatives (your question seems to be confused on that point). The US Treasury is not directly involved in any way.  They are indirectly involved, as they are indirectly involved in US equities markets or world markets for that matter, although perhaps they have greater influence in the bond world. Moody's has extensive studies of default rates by ratings."