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Tesla added to S&P500

Today is the last day that Tesla will not be part of the S&P. S&P Dow Jones Indices has announced Tesla’s addition Friday after the market close. Tesla will officially trade as a member of the S&P 500 by the time the market opens on Dec. 21. Today’s buy of Tesla at the market close will likely be the biggest buy order ever.

This means Tesla joins the S&P at today’s closing price, the volatility is already high because it is also the quadruple witching quarterly options expiration.

Some highlights you should know about TSLA’s inclusion:

  1. The addition of Tesla will cause the largest rebalancing ever of the S&P 500 ever – Tesla is the 9th largest company by market capitalization. Because most of the investments that track the SP500 are weighted by market cap, they will be adding more TSLA than anything else. It will represent about 1.5% of the index going forward. 
  2. The liquidity for Tesla will increase, as these passive funds enter the space, the access to TSLA will increase. Both to borrow and trade the access to TSLA should see some much needed liquidity.
  3. This will stabilize the historically volatile stock. The swings both directions on Tesla have been pretty epic over its lifespan. Expect that to temper somewhat. This won’t change Elon’s flagrant tweeting, or the inherently volatile relationship this company has with investors, but over time, such a large holding from passive tools like SPY will bring the range down on its intraday swings. Inversely, TSLA will start to bring its price instability to bear on the SP500 adding to its aggregate volatility.
  4. If you own exposure to U.S. Large Cap ETF’s and mutual funds, you will own more TSLA going forward. There is nothing you need to do to get the exposure. If you already own the TSLA stock outright, it is adding to the exposure. It’s likely time to rebalance.
  5. The SP500 will get a shot in the arm on the P/E ratio – expect this to jump suddenly, there is nothing wrong with the readout, TSLA’s PE (today) is close to 1300. Meaning you have to pay $1,300 for every dollar TSLA earns. Before today the PE on the broader SP500 was 37 (already high) and expect the bellwether that is Tesla to cause that further distortion. This inclusion may permanently impair any comparisons you or your broker has made to the PE of the SP500.
  6. Inclusion of TSLA, will cause some forced selling of other names of make room. Fund will have to make room for Tesla, and will push out 1.5% from the other names to make room.

The closest similarity we can draw is when Yahoo was added. It too was not a member of an S&P small or midcap index prior to its inclusion and had a similar rush to buy when it was included in 1999. As a reminder, this was considered the beginning of the “tech bubble” by many. Yahoo stock rose 50% between the announcement and its entry into the index at the time. 

Some funds have been adding to the TSLA position, in anticipation of this inclusion, but many passive funds are not allowed to until today, as close to the close as possible.

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