Tesla joined the S&P 500 on 21 December 2020, as announced on 16 November: it is the largest company ever to enter. What it means for index funds and for those who hold them.
On Monday 21 December 2020, before Wall Street opened, Tesla became part of the S&P 500, the index of the 500 large listed companies in the United States. S&P Dow Jones Indices had announced it on 16 November and on 30 November decided to add it all at once, at its full weight, rather than in two tranches. It replaced Apartment Investment and Management Co., which was spinning off part of its business.
Why it is a milestone
No company so large had entered the index before. Tesla was worth more than $625 billion in market value when it joined, which placed it among the six or seven largest. The S&P 500 is the benchmark for about $11.2 trillion of investments, of which about $4.6 trillion is in funds that replicate the index, according to S&P Dow Jones Indices.
To enter, a company must meet the index’s criteria, among them reporting profits under US accounting rules, and the final decision rests with the index committee. Tesla was more than big enough but had been left out in September; after its third-quarter results, which strung together several consecutive profitable quarters, the committee added it.
What it means for index funds
An index fund buys the companies in the index in proportion to their market value, excluding shares that are not freely traded. When a company enters, every fund that replicates the index has to buy it and sell a little of the others to make room. Howard Silverblatt, an analyst at S&P Dow Jones Indices, estimated on 30 November that index fund managers had to trade $72.7 billion, and Goldman Sachs calculated a further $8 billion of demand from actively managed US large-cap funds.
The trade was concentrated on Friday 18 December, the day of the index’s quarterly rebalancing and of the expiry of options and futures. According to Bloomberg, more than $150 billion of Tesla shares changed hands that day and nearly $60 billion at $695, mostly in a single trade in the last seconds of the session.
The shares had risen by about 70% since the announcement of 16 November and by around 700% so far in 2020. On Monday 21, its first session inside the index, they fell by more than 6%, on a day of widespread falls on the stock market. Analysts recalled that other companies, such as Yahoo in 1999 or Facebook in 2013, also retreated after joining, but what happened in the past does not allow the future to be foretold.
What to know if you hold index funds
Anyone with a fund, a pension plan or an ETF that replicates the S&P 500 is, from 21 December, an indirect shareholder in Tesla, with a weight of between 1.6% and 1.7% of that investment. Nothing needs to be done: the fund adjusts its portfolio by itself. What is worth knowing is how much Tesla weighs across your whole wealth, adding what you may hold directly or through other funds.
It is also worth remembering that a market-capitalisation-weighted index gives more weight to the companies that have risen most: Apple, Microsoft, Amazon, Alphabet, Facebook and Tesla made up almost a quarter of the index. That is neither good nor bad in itself, but it means the fund’s result depends more and more on a few companies. Ask your adviser how it fits your case.
An index is not a neutral basket: it reflects the size of those that make it up.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
