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What Tesla's entry to the S&P 500 means for index investors

Ethan Wolff-Mann
·Senior Writer
·4 min read
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Red-hot Tesla (TSLA) will be entering the S&P 500 (^GSPC) on Monday, Dec. 21, a move that might make some index-friendly investors a little nervous — or excited.

“At this point in time, Tesla will be the largest issue we've ever put into the index,” Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, told Yahoo Finance Live on Friday.

The $620 billion market-cap company will be the index’s sixth-largest company. This year, the stock is up around 657%, more than the S&P 500’s 16% gain.

A huge amount of money is invested in funds that track the S&P 500: Four of the top five largest mutual funds track the index for Vanguard, State Street, Fidelity and BlackRock, for a combined $1.2 trillion, making a fairly prosaic topic — index composition — a big headline.

Silverblatt said adding Tesla will require fund managers to spend $85.2 billion on Tesla shares — though they’ve been planning for this event since S&P announced the changes last month.

[Read more: Why Tesla took so long to get into the S&P 500 — and what that means for other companies]

With those numbers, Silverblatt said they expect some volatility around Tesla’s inclusion — for other companies in the index.

NOVEMBER 17th 2020: Tesla, Inc. will join the S&P 500 stock market index effective prior to trading on Monday, December 21, 2020. - File Photo by: zz/STRF/STAR MAX/IPx 2020 8/14/20 The Tesla Automobile dealership in Downtown Manhattan, New York City. (NYC)
Tesla will join the S&P 500 stock market index effective prior to trading on December 21, 2020. The Tesla Automobile dealership in Downtown Manhattan. (File Photo by: zz/STRF/STAR MAX/IPx 2020)

“In order to buy something for $85 billion,” said Silverblatt, “you need to sell something for $85 billion."

Silverblatt expects “big action” at the end of Friday, because Tesla’s closing price will be used to calculate the weighting the company will have in the index on Monday.

“Everyone wants to get in right at the close, which will make a lot of commotion,” he said.

Long term changes

To put the impact of Tesla’s inclusion into perspective, a recent note from Goldman Sachs calculated exactly what would’ve happened to the S&P 500 this year had Tesla been a constituent: That 657% would have lifted the index’s return from 16% to 18%.

Whether this is a lot or a little depends on who’s interpreting those numbers, but they underscore the kind of single-stock gain required to move the index a few percentage points.

One reason, Credit Suisse’s Jonathan Golub pointed out, is because only 81% of the company’s market capitalization is actually going to be included in the index, because the S&P 500 is created based on “free float” market cap, which includes only shares available to the public,” he wrote. The remaining 20% of Tesla shares are held by insiders.

SpaceX owner and Tesla CEO, Elon Musk arrives on the red carpet for the Axel Springer media award, in Berlin, Germany, Tuesday, Dec. 1, 2020. (Britta Pedersen/Pool via AP)
SpaceX owner and Tesla CEO, Elon Musk arrives on the red carpet for the Axel Springer media award, in Berlin, Dec. 1, 2020. (Britta Pedersen/Pool via AP)

The inclusion will have other effects that investors may care about as certain categories become more important. The automaker component of the index will rise considerably, jumping from 3.8% to 15.8% of the index’s weight. The index’s consumer discretionary category will also rise slightly, from 11.1% to 12.6%.

[Read more: Tesla’s valuation has gotten ‘out of control’: strategist]

Goldman notes that Tesla's high market cap but low earnings won't change the index's price-to-earnings multiple as much as one might think at first. Tesla, which trades at 170 times its consensus 2021 earnings, will only raise the P/E multiple by 0.4, bringing it to 22.4x from 22.0x.

“Although Tesla will hold a 1.5% market cap weight in the index, based on consensus 2021 estimates its earnings will represent just 0.2% of the S&P 500 total,” Goldman wrote.

Similarly, the volatile stock will have a “small mechanical impact” on the VIX, an index that measures volatility.

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Ethan Wolff-Mann is a writer at Yahoo Finance focusing on consumer issues, personal finance, retail, airlines, and more. Follow him on Twitter @ewolffmann.

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