By Michael Wursthorn
Apartment Investment & Management Co. will exit the S&P
500 to make room for Tesla Inc., setting the stage for the
biggest-ever single-stock addition to the index.
The swap is due to take effect before the start of trading Dec.
21, according to S&P Dow Jones Indices, which outlined the
final details of its plans for Tesla's induction late Friday.
Wall Street has been buzzing about Tesla's possible inclusion in
the S&P 500 over the past six months. Excitement revved up over
the summer and fizzled, only to start again last month when S&P
initially unveiled its plan to add the electric-car maker to the
index. The final piece of the puzzle was which stock would be
removed.
Tesla shares have skyrocketed this year, up more than 600%, with
much of those gains coming in the past month. Individual investors
and fund managers who actively buy stocks pounced on the news that
the stock would join the index, anticipating a surge in demand that
would push Tesla shares even higher. Goldman Sachs Group Inc.
analysts initially said such activity would push Tesla shares up to
$600 by the inclusion date. But shares have already blown past that
estimate, closing Friday at nearly $610.
Changes to the index are usually a mundane affair. But in the
case of Tesla, the switch isn't as simple as buying one stock and
selling another for the fund managers who track the index.
With a market value of about $578 billion, Tesla will be the
sixth-biggest company in the S&P 500 and the largest stock ever
added to the index. Fund managers and analysts anticipate more than
$100 billion in stock will change hands Dec. 18 to account for the
swap. More than $4 trillion is linked to the S&P 500 through
index-tracking mutual funds and exchange-traded funds.
By the end of that process, the millions of Americans who own
shares of index funds will suddenly have a claim on a piece of the
most valuable car company in the world. Tesla's market cap is more
than double the combined values of Toyota Motor Corp., General
Motors Co., Ford Motor Co. and Fiat Chrysler Automobiles NV.
S&P's decision to remove Apartment Investment &
Management, or Aimco, coincides with the company's decision to spin
off a significant chunk of its assets into a new real-estate
investment trust, Apartment Income REIT. That process is expected
to be completed Monday. Aimco's shares are down 37% this year,
putting its market value at $6.5 billion.
The real-estate investment trust, which owns apartment complexes
across the U.S., wasn't among the likely candidates analysts had
identified for removal. Many had speculated that S&P would cut
from among the smallest companies in the index. Possible candidates
were seen as Xerox Holdings Corp., Hanesbrands Inc. and SL Green
Realty Corp. -- all of which have market values below $5 billion. A
stock in the energy sector was viewed as another possibility due to
the group's struggles this year.
Tesla's addition to the S&P 500 has turned the usually banal
process of rebalancing the index on its head. Typically, S&P
announces what is going into the index and what is coming out,
giving fund managers a couple of weeks of lead time to prepare for
the changes. This time, S&P has broken up and lengthened the
process to account for the massive sum of money that will be put in
motion.
S&P's initial announcement about Tesla's inclusion didn't
include any mention of how it would work or what company it would
replace. The company opted to poll investors on whether to add
Tesla's full weighting to the index at once or over two trading
days, before settling on a single tranche.
"In a normal situation, we wouldn't do that," said Howard
Silverblatt, a senior index analyst who says he has seen plenty of
rebalancings over his 44 years at S&P Dow Jones Indices. "But
there will be an enormous amount of trading."
Based on where Tesla shares have been trading, Mr. Silverblatt
estimates index funds will have to buy more than $80 billion of
Tesla stock -- a number backed up by several fund managers and
traders. IndexFfunds will have to sell that same amount of stock,
including shares of Aimco, along with trimming their positions in
most of the other stocks in the S&P 500. Tesla is expected to
enter the index with a weighing of more than 1%.
"There will be a lot of moving parts around that funding trade,"
said Greg Sutton, head of portfolio trading at Citadel Securities
LLC. "You'll likely see dislocation among the bottom tier of
S&P 500 stocks, which are a little less liquid."
S&P is timing Tesla's inclusion to coincide with its
quarterly rebalancing of the index, an event that readjusts the
sizes of all the stocks in the S&P 500. That typically adds
billions of dollars in additional liquidity to the market, Mr.
Silverblatt said. An event known as quadruple witching takes place
the same day, when options and futures on both indexes and stocks
expire simultaneously, putting more cash in play.
But even with the additional liquidity, Mr. Silverblatt says
there will be a historic level of trading that will leave a
powerful mark on the S&P 500. The last rebalance of the index
in September amounted to some $35 billion in trading, he added. The
most ever was in 2018, with more than $50 billion.
More important, Tesla will have an immediate noticeable impact
on the market-cap-weighted S&P 500. The company doesn't pay a
dividend, so it will bring the S&P 500's payout ratio down to
1.54% from 1.56%, Mr. Silverblatt said based on recent figures. The
index's forward-looking price/earnings ratio will climb to 22.4
from 22.1.
For every $11 Tesla moves, the S&P 500 will gain or lose a
point, he added, potentially making the index itself more
volatile.
"Tesla was volatile before we put it in. And it's volatile now,"
Mr. Silverblatt said. "For better or worse, it's going to have an
impact."
Write to Michael Wursthorn at Michael.Wursthorn@wsj.com
(END) Dow Jones Newswires
December 11, 2020 18:53 ET (23:53 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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