We find that index funds incur adverse selection costs from changes in the composition of the stock market. This is because indices rebalance in response to composition changes, both on the extensive margin (IPOS/delistings or additions/deletions) and intensive margin (issuance/buybacks). This rebalancing approach successfully captures the market as it evolves, but effectively buys high and sells low. A long-short portfolio capturing only intensive margin rebalancing has an average alpha of nearly -4% per year. Despite being less than 10% of AUM, this rebalancing portfolio does poorly enough to drag down overall index fund returns. We estimate that a “sleepy” strategy that rebalances once a year improves fund returns by 50bps per year by avoiding the short- and medium-term adverse selection associated with a firm’s own primary and secondary market activity.