Tesla is expected to enter the S&P 500 on Monday, representing largest stock ever to join the index both by rank and by absolute market capitalization. And the ripple effects are going to be almost unbelievably huge.
The electric car maker will replace Apartment Investment and Management Co., according to a statement from S&P. “Tesla’s inclusion will prompt the dozens of index funds that track the S&P to seek to buy tens of billions of dollars worth of stocks at Friday’s closing price, in an effort to track the index as closely as possible,” says the press release.
Index rebalancing – the change in the weighting of companies in the index – is a significant event because a lot of money is tied up in passive investing – investments that replicate indices – through mutual funds or ETFs.
“Two unprecedented phenomena will converge,” Steve Sosnick, chief options strategist at Interactive Brokers, wrote in a recent note, according to CNBC. “The index has never added such an immensely large stock at the same time as option volumes and open interest are at record highs.”
The addition of Tesla could lead to very high imbalances in demand for stocks that could cause price shocks and create a more volatile market, Sosnick said in the note. “There is massive market potential on near imbalances as this is the biggest stock entry ever. There is a huge amount of money that will be lying around at this time,” he said. declared.
A report from Research Affiliates notes that between the start of 2020 and the date of the announcement (November 16, 2020), Tesla’s stock price rose 400% from $83.67 to $408.09. $. “Most of this acceleration occurred after media began speculating in March about Tesla’s likely addition to the index. From the announcement date to December 7, the stock price of Tesla was up another 49% to $608.32. That’s an eightfold increase from its March low,” according to the report.
The research report, however, also notes that Tesla’s continued 2020 share price performance is vulnerable on several fronts, including that as one of the top 10 stocks by market capitalization, there is little chance that it remains a leading entry in the index: The company has long been accused of being overvalued.
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This article originally appeared on GOBankingRates.com: Tesla joins the S&P 500 on Monday and “a huge amount of money” will be at stake