By: Montana Timpson
S&P Dow Jones Indices has announced that Tesla will be added to the S&P 500 at market close on Friday, December 18, set to coincide with the S&P’s last quarterly rebalance of the 2020 calendar year.
In addition to the S&P rebalancing, several major ETFs will also rebalance on Friday, including the Invesco QQQ Trust (QQQ), which is indexed to the NASDAQ 100, and the Renaissance Capital IPO ETF (IPO), which has been on a tear with the rush of recent IPOs, recently hitting $700 million in assets under management.
Even with Friday’s litany of high-profile rebalancings, Tesla’s addition to the S&P 500 during the scheduled quarterly rebalance is prompting higher-than-usual attention — here’s everything you need to know about index rebalancings and Tesla’s historic day in the spotlight.
Index “rebalancing” refers to changes in the weighting of a portfolio of assets. While rebalancing often involves companies listed within indexes, it can also refer to additions or deletions to the indexes (known as “reconstitution”).
Deciding what goes into an index is far from a simple task, and methods vary from index to index. Some use technical algorithms that automatically add stocks to specific indexes if they meet specific criteria — the Russell 1000, for example, automatically includes the thousand largest stocks in the United States. The S&P 500, on the other hand, is chosen by a committee that seeks to include the largest companies in the United States. The companies that are included are weighted by market capitalization.
Weighting and rebalancing involve periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk. When indexes rebalance, mutual funds and ETFs designed to track those indexes must then buy and sell stocks to rebalance their own portfolios.
Rebalancing is often semiannual, quarterly, or monthly. Some indexes rebalance all in one day, while some spread the trading out over several days.
In the case of the S&P 500, rebalancing is completed quarterly, and Friday, December 18 marks its last rebalance of the calendar year.
Tesla and the S&P 500
Tesla’s addition to the S&P 500 on Friday will prompt the largest rebalancing of the S&P 500 in history.
Although Tesla’s current market cap is US$546 billion, given Elon Musk’s 20% ownership, $437 billion of market cap will be utilized in determining Tesla’s weight in the S&P 500. With approximately 17% of the total value of the S&P tied to passive investments, US$72 billion in Tesla will need to be bought to reflect the rebalance. That, of course, means that US$72 billion worth of other stocks in the S&P will need to be sold.
S&P originally contemplated adding Tesla to the index in multiple tranches, but given the projected spike in trading volume, they ultimately elected to incorporate Tesla in one single day.
The author holds no positions in any of the stocks mentioned.
Active Trading with Lightspeed
Lightspeed provides professional traders with all the tools required to help them find success in stock trading, and we have been developing and honing our active trader platform to offer an optimal user experience. With the intuitive interface layouts and institutional quality stock and options scanners, we aim to help traders reach their goals, no matter what their strategy is. We also offer our clients some of the lowest trading fees in the industry.
Data, information, and material (“content”) are provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities or contracts. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance.
Copyright © 2001-2021, Lightspeed, LLC. All Rights Reserved.