LOS ANGELES – Adding a company to the benchmark S&P 500 stock index is typically a mundane exercise — except when it comes to a company like Tesla.
The market value of the electric car maker, led by Elon Musk, has soared to around $600 billion, making it the largest company ever to be added to the S&P 500. It's inclusion on Dec. 21 is expected to trigger a torrent of trading by institutional investors and a spike in volatility.
Index funds designed to mirror the holdings of the S&P 500, which is at the heart of many 401(k) accounts, are expected to snap up more than $80 billion worth of Tesla’s shares before the start of trading Monday as funds move to rebalance their holdings for the quarter.
That's projected to push the amount spent on trading to rebalance portfolios in the fourth quarter to a record high, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
“Historically, the $21 billion trading for fourth-quarter rebalancing is minor league, but when you add in heavy-hitter Tesla, $82 billion, you end up doubling the historical high, surpassing the $100 billion mark,” he said.
Because the S&P 500 is weighted by market capitalization, Tesla will be one of the 10 most valuable companies in the index, along with Apple, Microsoft, Amazon, Facebook and Google parent Alphabet. That increases the likelihood that a few big stocks will heavily influence the index’s performance, something that’s been happening in recent years.
Tesla’s sky high valuation means a move in its stock price will have more of an impact on the S&P 500 than most companies. The median weighting of the index is 0.08%, while Tesla's weighting is projected to be around 1.5% to 1.6%. By comparison, General Motors' is 0.17%, Ford’s is 0.12%. Apple has the largest weighting at 6.5%.
“So, the weighting itself is not as large as the Big Tech firms that tend to move the market,” said Pauline Bell, equity research analyst at CFRA Research. “On the other hand, it’s not a small fish. It’s still a large chunk of the S&P 500 index.”