Tesla’s S&P 500 Entry Puts $70 Billion of Passive Trades in Play

Tesla Inc. climbed on Tuesday as investors braced for the company’s addition to the S&P 500 in one shot on Dec. 21, a move that’s expected to spur as much as $70 billion worth of passive-fund flows.

At $550 billion, Tesla’s market capitalization is more than any other company had at its debut in the benchmark gauge. Given that size, the index provider had considered adding Tesla in two tranches to limit the potential for disruption as money managers adjust their portfolios to make room for stock.

Estimates on what the demand for Tesla shares will be among S&P 500 index fund managers from Vanguard Group Inc. to State Street Global Advisors range from 99 million to 120 million. The average total share volume of U.S. equities this year has been about 11 billion. The stock closed at $584.76 on Tuesday, potentially putting as much as $70 billion of trades in play, according to Bloomberg calculations.

“The notional amount is a lot on a headline basis, but in this sort of market environment, not sure it matters,” said Andrew Ross, managing member of Confluence Global Capital, an event-driven hedge fund. “You obviously see an impact on the stock being added, but beyond that, impact tends to be very limited.”

Tesla’s S&P 500 Entry Puts $70 Billion of Passive Trades in Play

Tesla would be among the 10 biggest companies in the S&P 500 at its current market value. Berkshire Hathaway held the record of being the biggest company at S&P debut, and was worth about $127 billion when it was included in the index in 2010.

“There’s always going to be front-running by the non-index funds who are going to buy Tesla in anticipation of the index funds having to buy the stock on the rebalance,” said Dan Russo, chief market strategist at Chaikin Analytics. “After it’s added and all the index funds have bought their allocation, it probably becomes a sell-the-news event. I’m more interested in seeing which stocks get displaced to the downside as managers make room for Tesla.”

Highly Volatile

Tesla has been among the most volatile U.S. stocks in recent years. If that pattern continues after its inclusion in the S&P 500, it could trickle over into investment products tied to the Cboe Volatility Index.

“Mathematically, it’s got to increase volatility,” said Steve Sosnick, chief strategist at Interactive Brokers. Using simple algebra, the addition would push the S&P 500’s volatility about half to three-quarters of a point higher, which would then feed into the VIX, he said.

Tesla’s S&P 500 Entry Puts $70 Billion of Passive Trades in Play

While demand from fund managers will almost certainly continue to drive up Tesla shares in the coming weeks, the shares are likely to pull back shortly after its inclusion in the S&P 500, according to Sosnick.

“It’s reasonable to expect that when it goes into the index, it will be at the end of a spike, and it’s reasonable to expect that it gives back some of that spike,” he said.

S&P Dow Jones Indices, in announcing the plan in a brief statement Monday, said it will make public on Dec. 11 which company Tesla will replace in the index.

©2020 Bloomberg L.P.

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