Tesla's inclusion in S&P 500 to spark $51bn index fund trade

The electric car maker is set to join the benchmark in December

Tesla's shares jumped 14 per cent on Monday in anticipation of its inclusion in the S&P 500 index in December. AP

Tesla is set to join the S&P 500 in December, a major win for chief executive Elon Musk that boosted the electric car maker's shares 14 per cent on Monday in anticipation of a $51 billion trade by index funds adjusting their holdings.

S&P Dow Jones Indices announced that the company would join the S&P 500 index prior to the opening of trading on December 21, potentially in two tranches making it easier for investment funds to digest.

"[Tesla] will be one of the largest weight additions to the S&P 500 in the last decade, and consequently will generate one of the largest funding trades in S&P 500 history," S&P Dow Jones Indices said.

With a stock market value over $400bn, Tesla will be among the most valuable companies ever added to the widely followed stock market index, larger than 95 per cent of the S&P 500's existing components.

Its inclusion means investment funds indexed to the S&P 500 will have to sell about $51bn worth of shares of companies already in the S&P 500 and use that money to buy shares of Tesla, so that their portfolios correctly reflect the index, according to S&P Dow Jones Indices.

Tesla will account for about 1 per cent of the index.

Additionally, actively managed investment funds that try to beat the S&P 500 will be forced to decide whether to buy Tesla shares. Such funds manage trillions of dollars in additional assets.

Up about 450 per cent in 2020, the California car maker has become the most valuable automotive company in the world, by far, despite production that is a fraction of rivals such as Toyota, Volkswagen and General Motors.

Many investors believe Tesla's stock is in a bubble, and some have warned against adding it to the S&P 500 at current levels.

"[Monday's] price jump means the retirees and other individual investors who put their money into index funds will see some of their money go into Tesla stock at a price even higher than its controversially high pre-S&P price. It's a downside of index investing for conservative investors," Erik Gordon, a professor at the University of Michigan's Ross School of Business, said.

A blockbuster quarterly report in July cleared a major hurdle for Tesla's potential inclusion in the S&P 500, leading to speculation that it might be added to the index and spark a surge in demand for its shares.

In 1999, Yahoo surged 64 per cent in five trading days between the announcement that it would be added to the index on November 30 and its inclusion after the close of trading on December 7. Yahoo's market capitalisation at the time was about $56bn, around a fraction of Tesla's current value.

In a separate press release, S&P Dow Jones Indices asked investors for feedback about whether to include Tesla all at once on December 21, or in two tranches, with the first added a week earlier, due to Tesla's unusually large market capitalisation.

Tesla short sellers point to looming competition from longer-established rivals. They are also sceptical of Tesla's corporate governance under Mr Musk, who in 2018 agreed to pay $20 million and step down as chairman to settle fraud charges.