Patrick Nichols, a partner at trading firm Old Mission Holdings, comments on the expected market effects of Tesla’s full weight S&P addition.
S&P Dow Jones Indices said it will add Tesla Inc.’s full weight to the S&P 500 all at once in December, shedding more light on a mammoth addition that has captivated investors across Wall Street.
The index company said Tesla will be added to the broad stock-market gauge before the start of trading Dec. 21, meaning most index-tracking funds that follow the S&P 500 will engage in a flurry of trading the Friday before.
Tesla’s market value has ballooned to about $538 billion, making it the sixth largest company in the U.S. stock market and it would have more than a 1% weighting in the S&P 500. That puts it ahead of Berkshire Hathaway Inc. but behind Facebook Inc.
More than $100 billion will be put into motion in coming weeks as passive fund managers and some actively traded mutual funds all benchmarked to the S&P 500 adjust their portfolios to make room for it, traders and fund managers say.
Weaving Tesla into the S&P 500 means shifting weightings of many other stocks to include the electric-vehicle maker. The addition also comes near the end of a year already marked by huge price swings during the coronavirus pandemic.
S&P still hasn’t announced what stock Tesla will be replacing, saying it will release that decision after the market closes Dec. 11.
Given Tesla’s size, there have been concerns that adding it to the benchmark would stoke volatility in the shares—already notoriously turbulent—as well as the broader market, several investors said.
The index giant had taken the unprecedented step of polling investors on how to proceed with the addition, and the decision comes after asset managers and trading desks across Wall Street deliberated how best to manage an inclusion of Tesla’s size.
Ultimately, S&P opted to put Tesla into the S&P 500 all at once. The company said the decision was based partly on the responses it received from its survey, as well as expectations of ample liquidity on the day most index funds plan to add Tesla shares.
That Friday coincides with a once-quarterly event where options and futures on both indexes and stocks expire simultaneously. Volume is usually heavy on those days and would help boost liquidity on the day of Tesla’s inclusion, several investors said.
“We’re expecting to see a day where volume is much higher,” said Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors.
Still, several traders and investors had said that adding Tesla on two separate dates rather than at once would have made for a smoother transition. Some even advocated for adding Tesla in two separate tranches, one in December and one in March.
In what appears to be an acknowledgment of that proposal, S&P said some of the suggestions it received from investors were beyond those it had initially proposed.
“There will be less aggregate market impact if it’s broken down into tranches by S&P,” said Patrick Nichols, a partner at trading firm Old Mission Holdings, ahead of the decision.
That problem is compounded by the fact that index funds typically buy and sell shares near the close of the trading session, ensuring they get the last price of the day and to avoid deviations from their indexes, added Greg Sutton, head of portfolio trading at Citadel Securities LLC.
“This name is substantial. Tracking error is a significant concern,” Mr. Sutton said.
Some of the most popular options bets tied to Tesla recently have been bullish calls tied to the shares advancing to $650 or $700, according to data provider Trade Alert, at least a 15% jump from the close of $567.60 Monday.
“It’s kind of the perfect storm for speculators,” said Steve Sosnick, chief strategist at Interactive Brokers.
Tesla’s unusual addition has also highlighted some oddities surrounding the S&P 500 index itself, and how induction into the S&P 500 club isn’t strictly formulaic. Rules govern which companies are eligible for the S&P 500, such as around profitability and the fact that stocks need to trade on a U.S. exchange. But a secretive committee makes the final call on what goes in and what doesn’t.
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