Tesla’s shares will likely be added to the S&P 500 in a single step previous to opening on December 21

Elon Musk, CEO of Tesla, gesticulates when he visits the construction site of the future US electric car giant Tesla in Gruenheide near Berlin on September 3, 2020.

Odd Andersen | AFP | Getty Images

Tesla will be included in the S&P 500 in a single move despite its market cap of more than $ 500 billion, S&P told Dow Jones Indices on Monday, dispensing with a possible phased approach that would counter the effects of adding such a large one Company should decrease to the US stock benchmark.

The stock will be added to its full float-adjusted market capitalization prior to the start of trading on December 21, the index provider announced. Float-adjusted means that only publicly available stocks are taken into account when evaluating the weighting of a company. The company that will replace Tesla will be named, according to a press release on December 11th.

The decision is based on feedback from the investment community that S&P Dow Jones Indices received from the difficulty of adding a company the size of Tesla. The electric vehicle maker will be the largest company ever to join the S&P 500.

S&P Dow Jones Indices announced that Tesla would join the S&P 500 in early November. At this point, consideration was given to adding Tesla before the market opened on December 21 or in two tranches on December 21 at once. December 14th and 21st.

“In making its decision, S&P DJI took into account the wide range of responses received, including the expected liquidity of Tesla and the market’s ability to absorb significant trading volumes that day,” said the index provider. The inclusion of Tesla in the S&P 500 coincides, among other things, with the expiration of stock options and stock futures, which should facilitate the inclusion due to the high trading volume on that day.

According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, Tesla’s $ 437 billion float-adjusted market value becomes $ 72.7 billion in required trades on December 21, in addition to normal trading activities Lead managers of index funds that track the benchmark.

“The fact that S&P sought feedback from the investment community on how to handle the addition when it originally announced it tells you everything you need to know to demonstrate how unique this situation is,” noted Paul Hickey. Founder of the Bespoke Investment Group.

Tesla stock has risen nearly 40% since it announced it would be included in the index, and has increased its earnings to nearly 580% since the start of the year.

Hickey attributed the recent rally in stocks to expectations that money managers would have to buy the stock.

There are currently over $ 11.2 trillion in net worth compared to the S&P 500, with around $ 4.6 trillion in indexed funds according to the S&P Dow Jones Indices.

“There has to be a lot of shifting to make room for something as big as Tesla’s involvement. So there will be a lot of moving parts to digest,” said Stephanie Hill, index director at Mellon. Hill, who oversees around $ 350 billion, said of the two options offered by S&P Dow Jones Indices that adding Tesla in one tranche made more sense given the additional market activity on Dec. 21.

Goldman Sachs recently estimated that Tesla’s addition could lead to $ 8 billion in demand from active U.S. large-cap mutual funds. When index funds are added to the mix, that number is much higher.

The company’s inclusion in the S&P 500 was seen as a foregone conclusion after Tesla reported its fourth consecutive quarter of earnings in July – the final hurdle the company stood in its way. But it was passed over during the S&P 500’s quarterly realignment in September, which caused stocks to fall temporarily.

The composition of the S & P 500 is determined by the so-called “Index Committee” at S & P Dow Jones Indices, which analyzes both quantitative and qualitative factors. Ultimately, the index is intended to be representative of the entire US market.

Tesla shares rose more than 4% in expanded trading after the announcement.

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FIX: Updated a heading on this story to indicate that Tesla will be added in a tranche.

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