By Gunjan Banerji and Michael Wursthorn
S&P Dow Jones Indices said it will add Tesla Inc.'s full
weight to the S&P 500 all at once in December, shedding more
light on a mammoth addition that has captivated investors across
Wall Street.
The index company said Tesla will be added to the broad
stock-market gauge before the start of trading Dec. 21, meaning
most index-tracking funds that follow the S&P 500 will engage
in a flurry of trading the Friday before.
Tesla's market value has ballooned to about $538 billion, making
it the sixth largest company in the U.S. stock market and it would
have more than a 1% weighting in the S&P 500. That puts it
ahead of Berkshire Hathaway Inc. but behind Facebook Inc.
More than $100 billion will be put into motion in coming weeks
as passive fund managers and some actively traded mutual funds all
benchmarked to the S&P 500 adjust their portfolios to make room
for it, traders and fund managers say.
Weaving Tesla into the S&P 500 means shifting weightings of
many other stocks to include the electric-vehicle maker. The
addition also comes near the end of a year already marked by huge
price swings during the coronavirus pandemic.
S&P still hasn't announced what stock Tesla will be
replacing, saying it will release that decision after the market
closes Dec. 11.
Given Tesla's size, there have been concerns that adding it to
the benchmark would stoke volatility in the shares -- already
notoriously turbulent -- as well as the broader market, several
investors said.
The index giant had taken the unprecedented step of polling
investors on how to proceed with the addition, and the decision
comes after asset managers and trading desks across Wall Street
deliberated how best to manage an inclusion of Tesla's size.
Ultimately, S&P opted to put Tesla into the S&P 500 all
at once. The company said the decision was based partly on the
responses it received from its survey, as well as expectations of
ample liquidity on the day most index funds plan to add Tesla
shares.
That Friday coincides with a once-quarterly event where options
and futures on both indexes and stocks expire simultaneously.
Volume is usually heavy on those days and would help boost
liquidity on the day of Tesla's inclusion, several investors
said.
"We're expecting to see a day where volume is much higher," said
Matthew Bartolini, head of SPDR Americas Research at State Street
Global Advisors.
Still, several traders and investors had said that adding Tesla
on two separate dates rather than at once would have made for a
smoother transition. Some even advocated for adding Tesla in two
separate tranches, one in December and one in March.
In what appears to be an acknowledgment of that proposal,
S&P said some of the suggestions it received from investors
were beyond those it had initially proposed.
"There will be less aggregate market impact if it's broken down
into tranches by S&P," said Patrick Nichols, a partner at
trading firm Old Mission Holdings, ahead of the decision.
That problem is compounded by the fact that index funds
typically buy and sell shares near the close of the trading
session, ensuring they get the last price of the day and to avoid
deviations from their indexes, added Greg Sutton, head of portfolio
trading at Citadel Securities LLC.
"This name is substantial. Tracking error is a significant
concern," Mr. Sutton said.
Tesla's size and the billions of dollars put to work around its
inclusion have led investors to position for greater gains in its
shares, some even anticipating a flurry of demand from index
giants. The stock has jumped 39% since its inclusion was announced
on Nov. 16 and there has been a frenzy of options trading tied to
the shares jumping higher.
Some of the most popular options bets tied to Tesla recently
have been bullish calls tied to the shares advancing to $650 or
$700, according to data provider Trade Alert, at least a 15% jump
from the close of $567.60 Monday.
"It's kind of the perfect storm for speculators," said Steve
Sosnick, chief strategist at Interactive Brokers.
Tesla's unusual addition has also highlighted some oddities
surrounding the S&P 500 index itself, and how induction into
the S&P 500 club isn't strictly formulaic. Rules govern which
companies are eligible for the S&P 500, such as around
profitability and the fact that stocks need to trade on a U.S.
exchange. But a secretive committee makes the final call on what
goes in and what doesn't.
Tesla was first eligible for inclusion during the September
rebalance after the car maker finally met certain criteria over the
summer. Instead, the committee added online marketplace Etsy Inc.
and two other stocks that together represented a tenth of Tesla's
market cap. The committee also initially passed on other companies,
such as Google Inc. (now known as Alphabet Inc.), before adding
them later.
"It's a super great case study of what goes on behind the
curtain and why the benchmark methodology matters so much," said
Stephanie Hill, head of index at Mellon. "There's little
transparency on what drives the qualitative criteria."
The S&P 500 isn't the only index affected. Several other
benchmarks will be rejiggered to accommodate the car maker, as well
as any deletions from the S&P 500.
Tesla, for example, is the largest weighted stock in S&P's
completion index, a benchmark tracking all U.S. stocks except those
in S&P 500, and will have to be removed. Any stock taken out of
the S&P 500 will trigger its addition back into the completion
index, as well as step downs into S&P's mid and small-cap
benchmarks.
State Street's Mr. Bartolini said at least five of its
exchange-traded funds will have to be rebalanced as a result of
Tesla's addition, including the biggest ETF in the world, the SPDR
S&P 500 Trust ETF, and its growth-focused ETF, the SPDR
Portfolio S&P 500 Growth ETF.
Tesla's inclusion "will require a fairly numerous amount of
trades," said Mr. Bartolini. But he said the biggest managers of
index funds are well prepared considering the additional lead time
given by the index giant ahead of inclusion. He added that fund
managers have handled other complex rebalancings before, such as
the addition of Facebook in 2013 and the creation of the S&P
500's communications sector in 2018. Still, Tesla's size is hard to
ignore.
"It's a glamorous issue," Mr. Bartolini said. "From our
perspective, that's where the glitz and glamour end."
(END) Dow Jones Newswires
November 30, 2020 19:16 ET (00:16 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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