Finally! It’s happened. Tesla has been permitted to join the S&P 500 in December. This is a momentous occasion as not only is it the biggest company to join in the past decade, but many people still see it as a highly speculative investment. These factors combine to make its admission to the S&P 500 a moment sure to go down in financial history books. Speculation abounds that this move is going to create epic chaos in the financial markets, as this unprecedented event causes major funds to rebalance their portfolios in response.
Image Taken from FT website
Overnight Tesla received permission from the S&P Dow Jones Indices, and its share price has rallied 14% so far. No stranger to runaway share price momentum these next few weeks will be very interesting to watch. Tesla’s market cap is currently over $400 billion, making it larger than 95% of the S&P’s existing constituents. And thereby setting Tesla up there with the most valuable companies ever admitted to the US’s prominent stock market index.
Sparking a $51 billion index fund trade to adjust holdings in line with the new S&P 500 line-up.
Once admitted, Tesla will account for approximately 1% of the index. However, in order for funds that track the index to be adequately balanced, fund managers must sell parts of their other holdings in order to buy shares in Tesla. This is expected to result in a $51 billion index fund trade.
News of Covid-19 vaccines has boosted stock market sentiment over the past week, and November has witnessed stock market rallies around the world. Adding to this, the excitement of Tesla’s admittance to the S&P 500 is again expected to push its price up further. This means many fund managers will pay a premium for the stock that has been controversially priced throughout most of 2020. Most tracker fund owners tend to prefer a conservative approach to investing, which means that Tesla is not a stock they’d actively choose to own.
As well as those tracker funds that attempt to match the S&P 500, there are actively managed funds that strive to beat it. Those funds are now facing the dilemma of whether to add Tesla to their holdings. Many people believe Tesla is in a bubble and its momentum can’t possibly be maintained, whereas others are as bullish as ever. Cathie Wood’s ARK invest runs three of the 10 best-performing ETFs so far in 2020. She called the Tesla bull run long before many others, and it will be interesting to see how ARK responds to this news.
A momentous addition to the S&P 500
The last significant addition to the S&P 500 was Yahoo in 1999. Its share price surged 64% in the five trading days between its announcement and its inclusion. At the time Yahoo was worth around $56 billion, Tesla is worth over seven times this.
Tesla’s Chief Executive, Elon Musk, is currently self-isolating after testing positive for Covid-19. He’s said he’s got a moderate case of the virus and doesn’t seem overly concerned for his health. This news is sure to make him feel better in any case.
The date is set for December 21, making this a fantastic Christmas present for Musk. The S&P Dow Jones Indices has indicated it may be admitted in two tranches to ease the burden on investment funds trying to balance their holdings. It’s asked investors for feedback on this issue, so it can make its decision. If it does split the admission, then the first half will occur on December 14.
Those sceptical of Tesla’s continued share price rally are wary of its founder, concerned that Musk is irresponsible and reckless. They also believe rising competition will be its downfall. One such competitor is Chinese electric car maker Nio, which has also been enjoying a share price rise in recent weeks, surging on the back of Tesla’s incredible success.
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— Tesla (@Tesla) November 11, 2020
Meanwhile Tesla bulls are adamant it’s got further to go thanks to its additional income streams from its energy business and advancements in battery technology. Time will tell, but for now it looks as if Tesla’s momentum will continue to fuel the markets and fill the headlines, at least until 2020 is out.