Driving into the S&P – What Can We Observe from Tesla’s Addition?

December 23, 2020

Before the market opened up Monday, there was a splash.  Tesla, a company worth more than $600B, was officially added as a behemoth to the famous index.  And, behemoth is not overexaggerating.  Keep in mind, the next largest car company by market cap is Toyota, with a market cap of a little over $210B.  Ford, on the other hand, has a market cap of $35B.  Of the top ten automakers, you can add up their market capitalizations and basically be at the value of Tesla on its own.

 

Source: YCharts. Data 12/21/2020 and reflects the share of total market capitalization of the above company stocks.

 

That’s interesting data, but what does this mean for investors? Let’s look back. On November 16th of this year, Standard and Poor’s, the company behind the S&P 500, announced that Tesla would finally be included in the index. What has happened to Tesla shares since the day of the first index inclusion announcement?

Source: YCharts. Data from 11/16/2020-12/18/2020.

 

Quite the ride up! None of this was captured within the S&P 500 because Tesla wasn’t included in the index over this period. Yet now, the index does include Tesla, albeit at a price that is 70% higher than a month ago and every S&P 500 index fund has now bought it. Why? Because the job of an index fund manager is not to get a good price. It’s to match the performance of the index as closely as possible. To do that, trades needed to happen.

Leading up to the reconstitution date, articles were estimating $80 billion-$100 billion of trades to be done to rebalance this index alone. From the below chart on the volume of Tesla stock trading, you can see a clear spike in activity.

Source: YCharts. Data from 11/16/2020-12/21/2020.

 

There’s always a chance some of Tesla’s best performance may be in the rearview mirror. Time will tell. However, its first day being in the index on 12/21 was a nasty day for Tesla indeed, dropping -6%. Welcome to the S&P!

Source: YCharts. Data for the day of 12/21/2020.

 

While funds that invest in the S&P 500 can be great (and we do use some of them for tax reasons), they are not perfect. This is one reason you see different moving parts in your portfolios. Each of them with different indexes or no off the shelf index at all. The low-cost, diversified approach of an index is still there in what we use, but the implementation can be more flexible to allow for less costly implementation over time in examples such as Tesla. How? If Tesla is really a great long-term holding, do you care five years from now if you first bought it on 12/18/20 or 12/22/20? Probably not. In the case of Tesla, simply having waited one trading day moved the price down by 6%.

The year of 2020 is one that can be looked at as a year of many lessons, much of which were unexpected. As for portfolios, it was a reminder of taking care of all the little things to get to the right outcome. Portfolios are ending this year higher than they did to start the year. They are even better due to small moves like being mindful of how index funds work, along with portfolio rebalancing and tax trading, which we have done more of this year than any time in our history.

We have enjoyed keeping you updated on market happenings throughout this unexpected year of 2020. Thank you for your comments, questions, and insights, and we look forward to a wonderful 2021 together.

Disclosures:

Past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk.  Future performance of any investment or wealth management strategy, including those recommended by Balasa Dinverno Foltz LLC (BDF), may not be profitable, suitable for you, prove successful or equal historical indices.  Historical indices do not reflect the deduction of transaction, custodial, investment management fees or fund fees which would diminish results.  Any historical index performance figures are for comparison purposes only and client account holdings will not directly correspond to any such data.  BDF clients must, in writing, advise BDF of personal, financial or investment objective changes and any restrictions desired on BDF’s services so that BDF may re-evaluate its previous recommendations and adjust its investment advisory services.  BDF’s current written disclosure statement discussing advisory services and fees is available for review at www.BDFLLC.com or upon request.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from BDF.

The S&P 500 Index includes a representative sample of the largest 500 companies in the U.S.

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