Electric vehicle (EV) manufacturer Tesla (TSLA) will enter the S&P 500 on Monday, set to be the most dramatic entry in the index’s nearly 64-year history.
According to CNBC, the trading volume shift at Friday’s close is expected to be so great, due to Tesla’s upcoming S&P entry on Monday, that $85 billion in the S&P 500 will need to be sold to make room for Tesla – and that’s at the low end of the spectrum.
If roughly 129.9 million Tesla shares need to be purchased, then index investors would need to buy $85.2 billion in shares at a rough market price of $655. This is in addition to unofficial index followers who would mirror the action, estimated to be between 50% and 100% of the original $85.2 billion number.
Thus, Tesla’s entry will mark the biggest rebalancing in the S&P’s history at a minimum of $85 billion, while the previous record of entry was $50.8 billion in September 2018.
On day 1, Tesla will be the 7th largest stock in the S&P 500. https://t.co/Ml7IuUJHVr
— Peter Mallouk (@PeterMallouk) December 18, 2020
While the feat is not to be underscored, some analysts are also concerned that it will add to the overall market’s volatility.
Steve Sosnick, chief options strategist at Interactive Brokers, wrote, “Two unprecedented phenomena will be converging. The index has never added such an immensely large stock at the same time that options volumes and open interest are at record highs.”
Later in the note, he continued, “Because this is such an event, we could be in for a much more volatile market on close than people are used to, particularly with so many retail traders involved in stock options that could swing in or out of the money.”
Whatever the rest of Friday and Monday each spell out for Tesla, the overall index, and the market as a whole, I think it’s safe to say we are watching history unravel before our eyes.
As of writing, Tesla is trading at $674.90 (up 2.9%), after touching an all-time high of $684.75 this morning. The company’s market cap now stands at $639 billion.