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

Yahoo Finance’s Ethan Wolff-Mann joins Alexis Christoforous to discuss Tesla’s entry to the S&P 500, and what it could mean for index investors.

Video Transcript

ALEXIS CHRISTOFOROUS: Tesla is in focus today, that stock surging to a record high amid a credit rating upgrade just before it joins the S&P 500 index. The new index with Tesla begins trading on Monday, but all the trading action is actually going to happen at the close today. Yahoo Finance's Ethan Wolff-Mann is here now with what we can expect. And, Ethan, I know some investors are bracing for fireworks here at the close. What can we expect?

ETHAN WOLFF-MANN: Yeah, that's the idea. Everything kind of has to be getting-- get in, you know, at the wire at, you know, when the trading day ends. And so I think this is going to be really interesting. And we had Howard Silverblatt of S&P earlier today talking about how they expect some serious churn and kind of interesting market movements at the end of the day. But, you know, one thing that I've been looking at is, you know, what the company's inclusion into the index is going to mean. So many people love investing via the index, you know, specifically the S&P 500 index.

And, you know, looking at some notes out-- Goldman had an interesting one, I think it's really worth looking at, that, you know, the 600-plus percent that Tesla was up this year would have, if it had been included in the index, raised the S&P's performance from around 16% to 18%. So this the id-- this is kind of the-- an idea of the-- you know, this-- the type of move that will kind of require a significant, you know, change in the S&P 500 from a company like Tesla.

So I-- if you're worried about, you know, this enormous company, the largest ever that's been included, you know-- sorry, that's been added to-- we have six companies that are bigger. I think that's really interesting to see and something that a lot of people are going to be worried about going forward but probably will not be that big of a deal.

ALEXIS CHRISTOFOROUS: I know that initially there was talk about adding Tesla in two tranches, which is usually how a company is added to the index, but they decided to do this in one. Why did they decide to do that and is there concern that perhaps the market won't be able to keep up with the flurry of activity that we're expected to see here on the close?

ETHAN WOLFF-MANN: I mean, I think it just makes more sense to do it in one fell swoop. It's one company. You know, over 80% of its free float is going into the S&P 500 index. You know, that is a lot of churn. Silverblatt today said that was about $85 billion worth of trading, which is a lot. And it's important to remember that when people who are running index funds are buying $85 billion of Tesla, they also have to sell $85 billion of something else. And so that could kind of increase the activity of things being dumped at the same time.

But, you know, I think people have had a month to plan for this. This is not a surprise to anybody. So I think the-- that element from [? these ?] professionals will kind of make things a bit calmer than we otherwise might be. This is something that, you know, S&P has done before and there's protocol to be followed. And I think that we'll see some craziness at the bell, probably, but it'll be fine.

ALEXIS CHRISTOFOROUS: Yeah, good point there. They have had some time to plan for this one. All right, Ethan Wolff-Mann, thanks so much.