Tesla joins S&P 500: Five Things to Watch

Tesla Inc.

TSLA 5.32%

The S&P 500 will officially join from Monday, with the possibility that a frenzied event may occur in the markets on Friday afternoon.

The electric-car manufacturer will be the largest firm by market value ever to join the largest track stock index S&P. The inclusion of Tesla would benefit dozens of index funds, which prepare S&P to buy tens of billions of dollars of shares at Friday’s closing price, so that the index can be closely tracked. Traders said that due to the size of the firm and the volatility of its shares, in addition to Tesla, the market could grow in unexpected ways.

A spokesman for S&P Dow Jones Indis, which oversees the S&P 500, said the company consulted with market participants and “telecommunications in advance of specific index changes” in addition to the market.

Here are five things to look for:

1. Quadruple Witch

Tesla’s association with the S&P 500 coincides with the quadruple witch, which occurs four times a year and refers to the day that options and futures on both the index and stocks end simultaneously. These huge amounts will boost liquidity and help add Tesla to S&P.

Tesla will be the sixth largest company in the $ 622 billion index, after climbing nearly 700% this year. RBC Capital Markets estimates that about 3% of the approximately $ 4.7 trillion in assets tracking S&P will trade on Friday. This is more than three times the last S&P rebalancing in September.

Traders say that heavy activity could lead to big moves in the market, as shares of companies in the entire index would have to be bought and sold to accommodate Tesla’s roughly 1% index weight. Real Estate Investment Trust Apartment Investment and Management Co.

, For example, will be removed from the index. RBC estimates shares of companies like Xerox Holdings Corp.

, Berkshire Hathaway Inc.

And intel Corp.

The index may face selling pressure, reflecting considerations such as weighting and other factors.

Tesla’s ascent will also impact the S&P Compliance Index, which tracks all US stocks except the S&P 500. Other indices such as the S&P 400 and S&P 600, which track midside and small-cap companies, and the Nasdaq-100 will also be easy to read. Their holdings.

2. Tracking Errors

There is a small window on Friday to buy a lot of Tesla stock in the S&P 500 tracking index funds. If they end with too much or too little, or cannot achieve the closing price, the difference will be recorded as a so-called tracking error, reflecting the difference between the fund’s purchase and the index. Fund managers do not like this because they make it difficult for them to match their benchmarks.

Index funds plan to do the most, if not all, of Tesla’s purchases on Friday to match the price of S&P, many traders and investors said. But it can be difficult to anticipate the huge demand, traders said. In recent weeks, some investors have questioned whether, given Tesla’s famously passionate fan base, a substantial number of sellers will arrive and passive investors need a sheer amount of money to buy.

All this could prevent big swings in Tesla’s shares. Exchange operator nasdaq Inc.

A person familiar with the matter said Tesla’s shares had been listed, and regulators discussed increasing price limits on the stock, which currently allows it to move more than a maximum of 10% before a halt in trading . The boundaries have not been changed.

Alien Musk’s claims of optimism and affinity for the antagonism that once might have undermined his credibility probably helped him become the world’s second richest man. The WSJ keeps an eye on how he succeeds amid the epidemic. Photo: Britta Pedersen / Zuma Press

3. Last 30 minutes of trading

The addition of Tesla stands to add to the importance of closing that sets day prices for thousands of shares. Nasdaq will accept so-called market-closed orders throughout the day. At 3:50 pm EST the exchange operator will start disseminating information about market imbalances, or increase demand to buy or sell Tesla. At that point, traders will step in, possibly taking an already crazy day to new heights.

Shishir Gupta, Global Index Strategist at RBC Capital Markets, said, “When a situation of imbalance comes up just a few minutes before, a ton of imbalances will start to offset the imbalance or position their trades.”

4. Derivatives Market

Traders are also looking at how huge manipulation will occur through the derivatives market. Tesla shares are nearly three times as volatile as the S&P this year, averaging 4.1% daily moves vs. 1.4% of the index. Traders and analysts said volatility is an important input to option pricing, which means that derivatives measures other than Tesla, traders and analysts said the prices of options contracts associated with the S&P 500 could be affected. Traders said the exact effect is not clear, and will depend on how correlated it is to the rest of the index, with Tesla being volatile.

“You have a much more volatile member – on a significant scale – joining an index and there is no real evidence or historical precedent for this,” Tesla Trading Aegea Capital Management LLC, a volatility hedge fund Azea Capital Management LLC Said a senior managing partner. the option. “They have to impress each other.”

5. Small Stock

Traders said that in addition to Tesla, small capitalization stocks could also do tricks, which could be sold. A bout of sales can lead to liquidity shortages, potentially driving the rapid price of some stocks.

Tesla’s road to the S&P 500

share your thoughts

What are you looking for to join the Tesla S&P 500 Index? Join the conversation below.

Write Gunjan Banerjee on Gunjan. [email protected] at [email protected] and Michael Wursthorn

Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8


Leave a Reply

Your email address will not be published.