Written by Norman Isaac Mwambazi

Volatility expected after news that Tesla stock will be added to S&P 500 all at once

Two weeks ago on November 16, 2020, the S&P Dow Jones Indices announced that automaker Tesla (ticker: TSLA) will be …

Two weeks ago on November 16, 2020, the S&P Dow Jones Indices announced that automaker Tesla (ticker: TSLA) will be included on the S&P 500 before the opening of trading on December 21.

The announcement from S&P 500 read:

“NEW YORK, November 16, 2020: Tesla Inc. (NASD: TSLA) will be added to the S&P 500 effective before the open of trading on Monday, December 21 to coincide with the December quarterly rebalance. Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through consultation to the investment community to determine if Tesla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date. Tesla will replace an S&P 500 company to be named in a separate press release closer to the rebalance effective date.”

As per the announcement, the benchmark consulted the investment community whether Tesla should be added all at once or in two parts, due to its huge stock. The company currently has a market capitalisation of $538 billion, and it is the most valuable company to ever be added to the benchmark S&P 500.  

Yesterday, Monday, November 30, 2020, the automaker got another piece of good news from S&P 500, who said that the company’s stock would be added all at once, at its full weighting on the proposed date of December 21, 2020.

This news has since pushed Tesla’s stock further up in after-hours of trading and market analysts say that investors should expect volatility for the company’s stock in the coming days.

Tesla’s addition creates a unique problem for the S&P 500 index funds who will now have an extraordinarily large amount of stock to buy and this is why S&P had considered the option of adding the automaker giant in two phases, first at a smaller weight, and later at its full weighting.

The indexing committee has chosen to add the company all at once, which is the least complicated. That is the most bullish outcome for aggressive traders hoping to bid up shares in anticipation of index fund buying.

Currently, funds indexed to the S&P 500 range between from $5 trillion to $6 trillion and there is more in funds that use the S&P 500 as a performance benchmark. The benchmark funds do not have any timing restrictions on when, or if, to add Tesla stock to their portfolios.

Tesla will make up 1% of S&P 500’s value when it is added on December 21, so investors and traders alike should brace themselves for tens of millions of shares for index funds that will be available to buy.

Since S&Ps announcement of the addition of Tesla to the index on November 16, the company’s stock has risen to 39%, and its shares are up another 4.3%, to about $592 a share, in after-hours trading on Monday.

Index funds that track the S&P aren’t buying Tesla stock just yet as these are known to be active just a few days to the official additions and deletions of companies from the index. However, during this period leading to the addition, index fund to track the S&P 500 as closely as it can.

As soon as index funds finish buying, stocks added to the index oftentimes fall more than the broader market but this might not be the case with Tesla, since its addition to the S&P is different from any other kind of stock.

Options markets imply that Tesla stock will move about 25%, up or down, between now and mid-January.

Since the announcement of Tesla to the S&P 500, the company’s CEO and largest shareholder Elon Musk has had his wealth surge so high, that he is now the second richest person in the world with an estimated $132.1 billion, behind Amazon’s Jeff Bezos.