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Tesla Inc. (NASD:TSLA) will be added to the S&P 500 effective prior to the open of trading on Monday, December 21 to coincide with the December quarterly rebala

Tesla Inc. (NASD:TSLA) will be added to the S&P 500 effective prior to the open of trading on Monday, December 21 to coincide with the December quarterly rebalance Due to the large size of the addition, S&P Dow Jones Indices is seeking feedback through a consultation to the investment community to determine if T esla should be added all at once on the rebalance effective date or in two separate tranches ending on the rebalance effective date

colechristensen 6y ago
There’s the big question, how does the TSLA addition not trigger a huge selloff? ETFs and other mechanisms tied to the index will be selling a whole lot of stock to buy TSLA.
- thoughtstheseus 6y ago
  Why would they sell stock? You can buy shares with cash and you can source cash many ways.
  - colechristensen 6y ago
    Many ETFs (SPY being the biggest example), funds, other indices, etc. etc. etc. have legal fiduciary obligations to track the S&P 500 index. SPX is market cap weighted, bigger companies get a bigger piece of the pie than smaller ones. TSLA will be entering near the top. Just SPY has ~$320 billion under management. If the rebalance were to happen today (to my best quick calculation), TSLA would make up 1.2% of the S&P 500 index. Just the SPY fund would have to buy just under $4 billion dollars of TSLA stock (more than 1% of the total shares) and sell an equal amount of the rest of their portfolio. Many many other funds would have to do the same. We're talking about tens of billions of dollars of stock sell orders. >Why would they sell stock? You can buy shares with cash and you can source cash many ways. The various funds are obligated to allocate their managed assets to match the index weighting. We're not talking about a small fund, but a significant portion of the entire market reallocating assets.
    - quickthrowman 6y ago
      I know of a guy that owns 20% of TSLA that will use this liquidity event to unload some shares. You can count on it, I’m sure his creditors are!
- pmiller2 6y ago
  Not all ETFs that track an index actually hold every component of the index. They do it by holding representative securities that correlate well with the movements of the index, and supplementing with derivatives when necessary.
  - colechristensen 6y ago
    This is the short version of the SPY prospectus: >The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index. The Trust seeks to achieve its investment objective by holding a portfolio of the common stocks that are included in the index (the “Portfolio”), with the weight of each stock in the Portfolio substantially corresponding to the weight of such stock in the index. Commodity and leveraged ETFs play games with futures and options to achieve goals, I'm not aware of any significant index focused ETFs that don't achieve their tracking goals without mostly holding common stock. Even if they're holding derivatives instead, it's just a layer of indirection and has substantially the same effect as portfolio rebalancing.
- ThrustVectoring 6y ago
  There's a trade hedge funds can make that's the exact opposite of the expected rebalance from the passive funds. The expected size of that trade and the passive funds trade isn't something you can predict in advance. If too many hedge funds try to front-run the rebalance and buy to cover into the expected selloff, it could go the exact opposite way. It's really hard to make money in the stock market from extremely public information.

colechristensen 6y ago

There’s the big question, how does the TSLA addition not trigger a huge selloff? ETFs and other mechanisms tied to the index will be selling a whole lot of stock to buy TSLA.

thoughtstheseus 6y ago
Why would they sell stock? You can buy shares with cash and you can source cash many ways.
- colechristensen 6y ago
  Many ETFs (SPY being the biggest example), funds, other indices, etc. etc. etc. have legal fiduciary obligations to track the S&P 500 index. SPX is market cap weighted, bigger companies get a bigger piece of the pie than smaller ones. TSLA will be entering near the top. Just SPY has ~$320 billion under management. If the rebalance were to happen today (to my best quick calculation), TSLA would make up 1.2% of the S&P 500 index. Just the SPY fund would have to buy just under $4 billion dollars of TSLA stock (more than 1% of the total shares) and sell an equal amount of the rest of their portfolio. Many many other funds would have to do the same. We're talking about tens of billions of dollars of stock sell orders. >Why would they sell stock? You can buy shares with cash and you can source cash many ways. The various funds are obligated to allocate their managed assets to match the index weighting. We're not talking about a small fund, but a significant portion of the entire market reallocating assets.
  - quickthrowman 6y ago
    I know of a guy that owns 20% of TSLA that will use this liquidity event to unload some shares. You can count on it, I’m sure his creditors are!
pmiller2 6y ago
Not all ETFs that track an index actually hold every component of the index. They do it by holding representative securities that correlate well with the movements of the index, and supplementing with derivatives when necessary.
- colechristensen 6y ago
  This is the short version of the SPY prospectus: >The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index. The Trust seeks to achieve its investment objective by holding a portfolio of the common stocks that are included in the index (the “Portfolio”), with the weight of each stock in the Portfolio substantially corresponding to the weight of such stock in the index. Commodity and leveraged ETFs play games with futures and options to achieve goals, I'm not aware of any significant index focused ETFs that don't achieve their tracking goals without mostly holding common stock. Even if they're holding derivatives instead, it's just a layer of indirection and has substantially the same effect as portfolio rebalancing.
ThrustVectoring 6y ago
There's a trade hedge funds can make that's the exact opposite of the expected rebalance from the passive funds. The expected size of that trade and the passive funds trade isn't something you can predict in advance. If too many hedge funds try to front-run the rebalance and buy to cover into the expected selloff, it could go the exact opposite way. It's really hard to make money in the stock market from extremely public information.