‘Ripple effect’ for market as Tesla set to join S&P 500

Tesla will be added to the S&P 500 Index in one shot on December 21st, a move that will ripple through the entire market as money managers adjust their portfolios to make room for shares of the $538 billion (€448bn) company.

Given Tesla's massive market size, S&P had sought a consultation with investors earlier in November, asking for feedback on whether the stock should be folded into the index all at once or in two parts, which would have been unprecedented. The electric-vehicle maker will be the seventh-biggest company in the S&P 500 at its current market value, falling between Berkshire Hathaway and Visa.

With about $11 trillion in funds tied to the S&P 500, money managers have been looking toward a few busy weeks ahead no matter how Tesla was included in the index. Whether it was one fell swoop or two separate tranches, managers of index-tracking funds would still have had to offload stocks of several other companies to make room for the mammoth newcomer in their portfolios.

"It looks like they're ripping the band-aid off," said Steve Sosnick, chief strategist at Interactive Brokers. "It's ultimately less disruptive than trying something new with the largest index addition ever."

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Tesla shares rose more than 4 per cent in post-market trading after S&P Dow Jones Indices announced the plan in a brief statement on Monday.The stock slipped 3.1 per cent in Monday’s regular session from a record high on November 27th. Tesla shares are up about 580 per cent this year.

Adding the company in the traditional way is "simple and easy to understand" said Gary Black, a private investor who was chief executive of Aegon Asset Management from mid-2016 through September.

S&P Dow Jones said it will announce which company Tesla will be replacing in the index on December 11th.

After the initial buying of Tesla into the December 21st inclusion, the stock may pull back, if history is any guide, according to Black. The shares may fall about 10 per cent to 20 per cent, a pattern that would be consistent with what happened to Facebook after its entry into the S&P 500 seven years ago.

Tesla’s market capitalisation is larger than any other company had at its debut in the S&P 500. Berkshire Hathaway previously held that record. It was worth about $127 billion when it was included in the index in 2010. – Bloomberg