[froogle]

Fees come from the transaction costs of having to buy/sell shares (churn is low but non-zero), operate websites, paying salaries, running customer support, doing tax paperwork, etc. Not much magic there.

You're correct about what happens at the boundary, yes.

There's a well-known arbitrage opportunity for stocks that are known to be about to be brought into the S&P 500 (their prices DO tend to increase, I believe), if you want to research that. Like all publicly known arbitrages, I doubt you can make any money off it personally anymore though.

This is part of why the recommendation is not to use an S&P 500 fund, but something more like Vanguard's Total Stock Market fund, which includes medium/small-cap companies. Not that it's a huge deal, though - mutual fund companies are usually pretty clever about spreading large orders out over time.