My second question is regarding how index fund managers buy stocks of the index.
Each index has a defined allocation strategy. Passive index fund managers that want to track the index must follow the allocation strategy of the index or risk incurring tracking error. They cannot arbitrarily weight one stock more than another based on their view of the market, otherwise they would become active fund managers.
Most indexes are market-cap weighted because it weights larger companies higher and automatically re-balances, since as a company's stock price goes up, its market cap goes up proportionally (modulo splits) and its weight in the index goes up, so no "rebalancing" is needed.
The Dow Jones Industrial Average is not market-cap weighted but price weighted, which also rebalances automatically but gives weight based on stock price, not overall company value, so over the years companies that did not do a share split (like Berkshire Hathaway) and had very high per-share prices would have a much higher impact on the average. When the average was created, companies were incentivized to keep share prices low so that more investors could afford the standard lot of 100 shares. Now, with index investing and partial lots available to most investors, keeping share price low is less of a concern.
I could simply buy all those 30 stocks of Dow on my own
Sure - at present it would cost you about $570k to buy 100 shares of each constituent of the DJIA. On top of that you'd have to pay broker fees and implicit transaction costs (bid/ask spread, etc.) and adjust the weight as companies split, pay dividends, or move in and out of the index.
So you're paying a relatively small amount (0.2% for one ETF I found) for someone to do that work for you.
And that's for a simple index - the S&P 500 and others are market cap weighted, so you can't just buy 100 shares, otherwise you'd be overweight in stocks with larger prices. You have to buy a more precise number of shares of each constituent, which is much harder to do in small amounts - it's no problem at all for an ETF that owns billions of dollars of shares and can allocate more precisely. Once that's done, the maintenance is much easier than for a price-weighted index.
