Tesla Added To S&P 500: What’s Next?

It was recently announced that Tesla (TSLA) would be added to the S&P 500 index before the open on December 21, 2020, ending years of speculation by Tesla fans and critics about the S&P index committee’s hesitation to include the controversial automaker. 

The inclusion would make Tesla, sitting at a $594 billion market cap, one of the index’s ten largest components, sitting between Berkshire Hathaway (BRK-B) and Facebook (FB).

Why Not Earlier?

Fans of Tesla are excited about this development, but most of them are left asking why it took Standard & Poor’s so long to include the company in their index.

After all, the average market cap of an S&P 500 component is roughly $69 billion. Tesla reached that point back in early 2017, now standing at $594 billion. 

Beyond market cap, the S&P 500 requires four consecutively profitable quarterly earnings reports before the committee considers a company for inclusion, which the company only achieved following its earnings report ending June 30, 2020.

When viewed in this context, the decision actually doesn’t seem too delayed.

When accounting for the fact that the S&P index committee also has some discretion in their inclusion of a company, one could even argue that the committee was reasonably early in making the decision.

After all, at the time of the earnings report, which made them eligible for index inclusion, the stock was going absolutely parabolic.

Seeing as trillions of dollars are placed in S&P 500 index funds, it’s hard to blame the committee for exercising restraint regarding a volatile stock like Tesla.

Potential Trades Around the Inclusion Event

According to Bloomberg, the rebalance required to include Tesla in the index will result in roughly $70 billion of flows, including the sale of non-Tesla shares and the purchase of Tesla shares.

That’s not including all of the quants playing the rebalance arbitrage game and momentum traders capitalizing on the increased activity. 

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