The Inclusion of Tesla in the S&P 500

Tesla and the S&P 500 in Context

The S&P 500 is a market-capitalization-weighted index of the United State’s 500 largest publicly traded companies. This index often encompasses how the stock market is doing and is typically used as a benchmark of the overall market. Recently, the electric car company Tesla, led by celebrity billionaire Elon Musk, has been included in the index as of December 21, 2020. In order to be included in the index, a stock must have a market capitalization of $8.2 billion or more, have a public float of at least 50%, and have positive earnings for the four most recent quarters. When looking at the market value of Tesla, it is the sixth largest publicly listed firm in the U.S., and second biggest stock in the consumer discretionary group. Its market capitalization is $668.9B with a float percent of around 80.1%.

Key Debate

Due to Tesla’s massive market size, a common point of discussion was whether to add the shares all at once or in two separate “tranches”. This would have occurred in December and in March. In the end, S&P Dow Jones indices decided to add Tesla at full weight. This conclusion was decided as a result of surveys and the stock’s significant liquidity.

Influence of Tesla on the S&P

Tesla’s market value is $558 billion, accounting for more than a 1% (between 1.5% and 1.6%) weighting on the S&P. It falls ahead of Berkshire Hathaway and behind Facebook. Due to Tesla’s massive size, significant rebalancing will occur in the S&P 500 as portfolio and index managers will be forced to make room due to Tesla’s influence. When looking at the long-term effects, the P/E ratio of the S&P has been estimated to move by approximately 1.6%.

Influence on Tesla’s Shares

Since the announcement of its inclusion in the index on November 16, the stock increased 39%, and 622% on the year. The predictions regarding Tesla’s future have been bullish, allowing rooms for lots of speculation as to whether this trend will continue. Critics have labeled the stock as overvalued, leading many traders to utilize options. Historically, after an announcement of inclusion into the S&P and before its initial inclusion, positive returns are common. However, post-inclusion, returns tend to slow. There is a lot of uncertainty regarding the trajectory of this stock due to its significant size.