Tesla will enter the S&P 500 next month in one swoop, reflecting confidence that Wall Street traders will be able to handle a record-sized new arrival in an index followed by trillions of dollars of passive investment funds.

S&P Dow Jones Indices announced the decision late on Monday, after having previously considered staggering the electric carmaker’s inclusion in America’s blue-chip stock index.

The inclusion of Tesla ranks as the biggest on record and the company will have one of the largest weightings in the S&P 500, prompting the index provider to ask market participants this month whether it should occur in two stages.

In a statement on Monday, it said “it will add Tesla to the S&P 500 at its full float-adjusted market capitalisation weight” before trading opens on Monday, December 21.

“In its decision, S&P DJI considered the wide range of responses it received, as well as, among other factors, the expected liquidity of Tesla and the market’s ability to accommodate significant trading volumes on this date.”

Wall Street estimates suggest up to $100bn of demand for Tesla shares from exchange trade funds and money managers that track and use the S&P 500 as a performance benchmark. In total, $11.2tn of investment fund assets are linked to the S&P 500.

Howard Silverblatt, senior index analyst at S&P DJI, said the carmaker’s “current market value (adjusted for float), of $437bn, would produce $72.7bn in required trades, in addition to the normal rebalancing trades” on the day of its inclusion.

That would dwarf the normal activity required when the S&P 500 is reshuffled. The last 20 rebalancing days had an average of $27.1bn in trades, Mr Silverblatt calculated, with a record of $50.8bn set in September 2018.

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Passive investment vehicles such as exchange traded funds are focused on securing their slice of Tesla at the closing price on December 18, so as to minimise a metric known as tracking error. When companies are added or removed from a benchmark, exchange traded funds adjust their holdings in tandem, seeking to mirror the index as closely as possible at the lowest cost possible.

A number of market makers believe there is sufficient liquidity to facilitate an orderly rebalancing of the S&P 500 next month in spite of Tesla’s hefty market weighting.

The company’s shares have surged 40 per cent in the two weeks since S&P DJI announced their inclusion in the S&P 500, and they set an intraday record of $607.80 early on Monday before easing to close at $565.74.

This year, Tesla has gained 600 per cent, giving it a market capitalisation of $535bn, after solidifying founder Elon Musk’s effort to bring electric vehicles into the mainstream and dramatically improving its underlying financial performance.

After the market closes on December 11, S&P DJI will announce the name of the company being replaced by Tesla.

Via Financial Times

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