By Mark DeCambre
How quickly can the S&P 500 index go from 0 to volatile?
Wall Street will soon find out, as investors strap in for what could be a frenetic ride in equities thanks to electric-vehicle maker Tesla.
On Dec. 21, Tesla’s planned inclusion in the granddaddy of the benchmark U.S. stock indexes is set to create what Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, described to MarketWatch as “the mother of all” stock market rebalancing events. An event that will alter the topography of the S&P 500 at a pivotal time in an already tumultuous period in financial markets.
On Friday, S&P Dow Jones Indices said that real estate investment trust Apartment Investment Management Co. /zigman2/quotes/209177534/composite AIV -2.37% , would be removed from the 500-stock index as a part of the effort to make way for the $578 billion electric automobile pioneer. With CEO Elon Musk owning some 20% of the company’s shares though, the value will be closer to $460 billion.
Part of the trepidation on Wall Street is that Tesla, the largest-ever such company by market value to join the S&P 500, will immediately see a weighting in the 500-company index of between 1.5% and 1.6%.
To put that addition into perspective, every $11 move in the Palo Alto, Calif.-based company would commensurately swing the entire S&P 500 by nearly a point.
“We’ve never put anything that large into the index before,” Silverblatt said.
Last quarter’s S&P 500 rebalancing saw a sizable $32.4 billion change hands, above the average of about $27 billion and under the record $50.8 rebalancing of the third-quarter of 2018.
Next Friday’s rebalancing could see well over $100 billion in trading, with much of that to the sell side, as passive investors and index trackers, which must hold the same securities as the index, and in the same proportion, make room to add Tesla.
There are some $5.3 trillion in funds benchmarked to the S&P 500, including those from behemoths Vanguard, which oversees the Vanguard S&P 500 ETF /zigman2/quotes/201209218/composite VOO +0.66% , and State Street, which looks after the SPDR S&P 500 Trust /zigman2/quotes/209901640/composite SPY +0.67% , commonly referred to on Wall Street as the SPY.
“I think Tesla is a highly liquid stock on a normal trading day, but there will be forced buying occurring as SPY, IVV, VOO and the various S&P 500 index mutual funds add approximately 1.5% of assets into the stock and trim more moderately sized companies to make room, Todd Rosenbluth, head of ETF and mutual fund research at CFRA, told MarketWatch, referencing the ticker symbols of some of the large exchange-traded funds that include Tesla.
“While there are more than a dozen companies added to the S&P 500 index each year they are typically among the smallest companies representing less than 0.1% of the index. Tesla is considerably larger and requires more planning on the part of the asset managers who want to refrain from incurring too much index tracking risk,” the CFRA researcher said.
“It’s definitely large,” Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, told MarketWatch on Wednesday.
The State Street complex has four other major funds, besides the SPY, that will be adjusted to account for Tesla: The SPDR Portfolio S&P 500 Growth ETF /zigman2/quotes/205259648/composite SPYG +0.64% , the SPDR Portfolio S&P 1500 Composite Stock /zigman2/quotes/205259648/composite SPYG +0.64% , the Consumer Discretionary Select SPDR Fund /zigman2/quotes/200844504/composite XLY +0.64% and State Street’s lower-cost version of SPY, the SPDR Portfolio S&P 500 ETF /zigman2/quotes/205259648/composite SPYG +0.64% .
All totaled, Bartolini estimates that the State Street will have to trade some $6 billion to adjust for Tesla in those funds, with the most of that coming from SPY.
“It’s SPYs largest ever, rebalancing,” the State Street official said, noting that the fund manager feels it’s well equipped to handle.
And it isn’t just passive funds that will be compelled to buy Tesla. Goldman Sachs in a research note last month estimated that actively managed funds benchmarked to the S&P 500 will purchase around $8 billion of the company’s shares.