Elon Musk’s Tesla Inc (NASDAQ:TSLA) will officially join the United States’ S&P 500 Index tonight. Here’s how that works and what that means.
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On the ASX this week, much is being made of S&P Global Inc’s quarterly index rebalancing that takes place today. Indexes work by constantly updating their inclusions and weightings to reflect the status of the broader market of the time. Take the S&P/ASX 200 Index (ASX: XJO) for instance.
This index’s purpose is to measure the performance of the 200 largest companies in the ASX. These 200 companies obviously change over time, so the index needs to be on top of that for it to work effectively. Hence why it is adjusted and rebalanced every quarter. Growing companies might join the index, replacing those that might be out of favour or stagnating.
As an example, this week sees Afterpay Ltd (ASX: APT) join both the ASX 20 and the ASX 50 indexes in place of Insurance Australia Group Ltd (ASX: IAG) for the former and Oil Search Ltd (ASX: OSH) for the latter.
But as our ASX indexes are being adjusted, so are those around the world. Most dramatically this week is the US S&P 500 Index (SP: .INX).
The S&P 500 is perhaps the most popular and widely tracked index in the world. It houses 500 of the USA’s largest companies, including Apple Inc (NASDAQ: AAPL), Alphabet Inc (NASDAQ: GOOG) (NASDAQ: GOOGL) and Berkshire Hathaway Inc (NYSE: BRK.A) (NYSE: BRK.B). Now the S&P 500 is a little more strict than other indexes. Not only does a company’s market capitalisation have to be among the top 500 in America, but it also needs to satisfy other requirements, such as consistent profitability and ample liquidity.
Tesla to make blockbuster index debut
Those conditions have prevented one of the US’s now-largest companies – Elon Musk’s electric car and battery manufacturer Telsa Inc (NASDAQ: TSLA) – from being a part of the S&P 500 Index. Until now that is. Back in September, we learnt that Tesla had finally received the green light for S&P 500 inclusion. And tonight (our time), Tesla will officially join the S&P 500 for the first time.
But this is a rather special inclusion. Normally, a company tends to join the S&P 500 at the ‘bottom of the table’ and grow into the index over time if it is successful. But Tesla’s meteoric rise over the past year or so has meant that it is now the largest company to ever join the index.
Recent reporting from CNBC tells us that Tesla, with a current market cap of US$659 billion, will carry an approximate weighting of 1.69% when it joins tonight. That would make it the fifth-largest stock in the index (or sixth if you include Alphabet’s two share classes as one). This inclusion means that the scores of fund managers and exchange-traded funds (ETFs) that track the S&P 500 all have to buy shares of Tesla to meet the new weightings. That’s likely a factor in the recent Tesla share price performance: Tesla shares are up more than 33% over the past month alone.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Sebastian Bowen owns shares of Alphabet (A shares) and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (A shares), Apple, Berkshire Hathaway (B shares), and Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Avita Medical Limited and Kogan.com ltd and recommends the following options: short January 2021 $200 puts on Berkshire Hathaway (B shares) and long January 2021 $200 calls on Berkshire Hathaway (B shares). The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Alphabet (A shares), Apple, Avita Medical Limited, Berkshire Hathaway (B shares), and Kogan.com ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.