What Tesla’s inclusion in the S&P 500 means for the stock and the index

Electric automaker Tesla, Inc. (NASDAQ: TSLA) will see its stock included in the S&P 500 index in the coming weeks and the impact on the stock is unclear given the vast size of the company.

Index member on Dec. 21

Tesla will officially be included in the S&P 500 index on Dec. 21 and the index operator isn’t sure how to proceed. Typically, the inclusion of new stocks within the crowded index is an event that few care about. After all, the 509th largest company replacing the 497th largest company in the index doesn’t make for eye-catching media headlines.

But Tesla will rank as the sixth-largest company in the index, according to The Wall Street Journal. The stock has a “cult-like” following and is up seven-fold in 2020.

A complicated adjustment

Tesla’s inclusion in the index will prompt around $100 billion to change hands among index funds and managers. Index funds will need to sell smaller stocks and use the proceeds to accumulate shares of Tesla to adjust for the stock’s inclusion.

This could be a complicated trade but could be manageable in one trading session prior to the official inclusion on Dec. 18. Tesla’s daily volume was north of $60 billion in mid-July so enough sellers may be tempted to get rid of their shares and lock in a profit.

But to complicate matters, Dec. 18 also happens to be a “quadruple witching” day, according to WSJ. This happens just four times a year when options and futures and indexes and stocks both expire at the same time.

These days are usually full of volatility and the uncertain environment could give investors and managers a big headache. 2020 has seen more single-day moves of at least 3% than in any year since 2008.

Investors get a say

In an unusual move, the S&P index operator is asking major investors for advice on how to proceed. A widely held opinion is for everyone to break up trades over two different quarters. This would help asset managers adapt to any sudden moves in both Tesla’s stock and the broader market.

This wouldn’t be the first time the investment community proceeded with major changes over two quarters. MSCI’s inclusion of China-A shares to its emerging market index in 2018 was done in two phases.
“A stepped approach over multiple quarters helps with the liquidity challenges,” Chris Johnson, head of ETF capital markets at Charles Schwab told WSJ.