Tesla’s Big Drop Is Volatility the S&P 500 Better Get Used To

(Bloomberg) -- It didn’t take long for Tesla Inc.’s price swings to heavily influence the S&P 500 after its addition to the benchmark.

The electric-vehicle maker slumped more than 5% as of 12:12 p.m. in New York Monday, accounting for almost a 10th of the benchmark gauge’s decline at a time. Both the S&P 500 and the tech-heavy Nasdaq 100 -- which has included the company since 2013 -- each dropped about 1%.

Investors have questioned how the addition of Tesla to the most-followed stock benchmark would affect the index as a whole -- mapping out valuation scenarios as well as volatility implications. Tesla joined the S&P 500 Monday as the sixth-largest weighting, making up 1.6% of the index.

Looking at measures of volatility over the last 120 days, the carmaker is the third-most volatile stock in the S&P 500, only behind Carnival Corp. and Norwegian Cruise Line Holdings Ltd., data compiled by Bloomberg show. However, Carnival accounts for just 0.05% of the benchmark, whereas Norwegian holds a 0.03% weighting. That’s roughly 50 times less than Tesla’s index clout.

Inclusion of the vehicle maker could have “a meaningful impact on index performance,” according to Goldman Sachs Group Inc. strategists including David Kostin. In a note last week, the firm estimated the S&P 500’s total return would be 200 basis points higher this year if Tesla was always a constituent.

“Our derivatives research colleagues estimate that Tesla’s addition to the S&P 500 will have a small mechanical impact on index volatility and the VIX,” the strategists added.

To be sure, volatility works both ways, and Tesla is just a single stock in a benchmark with around 500 members. As of Monday morning, a 2.2% decline in Apple Inc. shares shaved more off of the benchmark’s performance than Tesla’s 5% drop.

“Most action on Friday was about Tesla and its addition to the index,” said Michael Antonelli, managing director and market strategist at Baird. “The volume was massive, but I don’t think that affects any price action today. As volatile as Tesla is, it’s just one out of 500 stocks.”

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