Not a finance expert, but I don't think the transaction costs would factor would they? You would own "units" in the fund, rather than the underlying security itself. The makeup of the unit however, would be dynamic
A fully realized s&p 500 ex-FOO fund for every company (or every combination of two or three companies) would probably not have sufficient demand to make it efficient.
You would need to have some sort of clever accounting to make it work, although, while retail commissions are at zero, and fractional shares may become available, assembling your own index fund may be possible with only a significant time cost.
Maybe they could implement it with S&P 500 and tqking a short position to cancel out ownership of stock XYZ. This way they don't have the demand problem you alluded to. Then they can charge customers an additional fee for this customization, which would cover the cost of the short. I imagine some would pay this additional customization fee since it's a small price to feel morally consistent.
You would need to have some sort of clever accounting to make it work, although, while retail commissions are at zero, and fractional shares may become available, assembling your own index fund may be possible with only a significant time cost.