Tesla Inc.
TSLA 5.32%
will officially join the S&P 500 on Monday, likely precipitating a frantic Friday afternoon in the markets.
The electric car manufacturer will be, by far, the largest company by market value that has joined S&P, the most closely monitored stock market index. The inclusion of Tesla will cause dozens of S&P-tracking index funds to try to buy tens of billions of dollars worth of shares at Friday’s closing price, in an attempt to track the index as closely as possible. Due to the size of the company and the volatility of its shares, the addition of Tesla may affect the market in additional and unpredictable ways, traders said.
A spokesman for S&P Dow Jones Indices, which oversees the S&P 500, said the company consulted with market participants and communicated the addition to the market “well in advance of typical index changes.”
Here are five things to look for:
1. Quadruple witch
Tesla’s addition to the S&P 500 coincides with the quadruple witch, which occurs four times a year and refers to the day that index and stock options and futures expire simultaneously. These large volumes will increase liquidity and likely help soften Tesla’s addition to the S&P, according to retailers.
Tesla will be the sixth largest company in the index, worth $ 622 billion, after soaring nearly 700% this year. RBC Capital Markets estimates that approximately 3% of the approximately $ 4.7 trillion of assets that passively follow the S&P will be traded on Friday. This is more than triple the figure for the last S&P rebalancing in September.
Traders say strong activity could cause large movements across the market, as shares of index companies will have to be bought and sold to fit the 1% index weighting. of Tesla. Confidence in real estate investments Apartment Investment & Management Co.
, for example, will be removed from the index. RBC values shares of companies like Xerox Holdings Corp.
, Berkshire Hathaway Inc.
and Intel Corp.
it could face selling pressure, reflecting considerations such as index weights and other factors.
Tesla’s rise will also affect the S&P completion index, which tracks all U.S. equities except the S&P 500. its holdings.
2. Error tracking
Index funds following the S&P 500 have a small window on Friday to buy many Tesla shares. If they end up with too much or too little, or fail to reach the closing price, the difference will be recorded as the so-called tracking error, which reflects the price gap between purchases of a fund and those of the index that makes the Tracking. Fund managers don’t like it because it makes it harder for them to match their benchmark.
Index funds plan to make most, if not all, of Tesla’s purchase at the close on Friday to match the price of S&P, according to several traders and investors. But high-demand expectations may make it difficult, traders added. In recent weeks, some investors have questioned whether there will be enough sellers at the table, given Tesla’s famous passionate fan base and the large amount of purchases that passive investors have to make.
All this could cause major fluctuations in Tesla shares. Nasdaq exchange operator Inc.,
a person familiar with the matter, where Tesla shares are listed, and regulators discussed raising the share price limits to allow him to move more than the currently allowed maximum of 10% before a break in the trade. Boundaries have not changed.
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3. Last 30 minutes of negotiation
The addition of Tesla will add to the importance of the closing auction that determines end-of-day prices for thousands of shares. Nasdaq will accept so-called market closing orders throughout the day. At 15:50 EST, the exchange operator will begin disseminating information about market imbalances or exceeding the demand to buy or sell Tesla. At this point, traders will step in, probably jumping a crazy new day to new heights.
“A few minutes before closing, when the imbalance comes out, a lot of algae will start to pair imbalances or position their businesses,” said Shishir Gupta, global index strategist at RBC Capital Markets.
4. Derivatives market
Traders are also seeing how the giant addition will spread through the derivatives market. Tesla shares are nearly three times more volatile than this year’s S&Ps, with a daily average of 4.1% over the 1.4% index. Volatility is a key element for the price of options, meaning the addition of Tesla may influence the prices of option contracts linked to the S&P 500 along with other derivative measures, traders and analysts said. The exact impact is unclear and will depend on Tesla’s volatility, as well as its correlation with the other components of the index, according to traders.
“You have a much more volatile member, on a significant scale, that binds to an index and there is no real evidence or historical precedent,” said Cem Karsan, managing partner of the volatility hedging fund Aegea Capital Management LLC, which has been trading Tesla options. “They must affect each other.”
5. Smaller actions
The addition of Tesla could also drive movements in smaller-cap stocks that will be sold to make way for them, traders said. Successful sales could lead to a reduction in liquidity, which could cause some stock prices to fall sharply.
Tesla’s path to the S&P 500
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Write to Gunjan Banerji at [email protected] and Michael Wursthorn at [email protected]
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