Tesla., Elon Musk’s 17-year-old upstart carmaker, took a giant step toward blue-chip respectability on Monday, getting named to one of the world’s most famous stock indexes in an action that will greatly broaden its investor base.
The announcement that Tesla will enter the S&P 500 on December 21 follows months of speculation, and one temporary setback, after the stock failed to make the cut during the index’s quarterly rebalancing in early September. The anticipation has helped drive a nearly fivefold rally in the stock this year to almost $390 billion, making the electric vehicle pioneer the biggest company ever to be added to the gauge. It will also be one of the index’s most influential constituents with a weighting that falls around those of Berkshire Hathaway, Johnson & Johnson, and Procter & Gamble.
It’s so big that S&P Dow Jones Indices said it is seeking feedback from the investment community to determine if Tesla should be added all at once or in two separate pieces. The company that Tesla is to replace in the index will be named later, the index provider said.
Shares of Tesla rose as much as 12 per cent on Tuesday, adding more than $40 billion to the value of the electric carmaker and giving another boost to the fortune of billionaire Chief Executive Officer Elon Musk.
“This was a little unexpected happy day for me,” said Ross Gerber, chief executive officer at Gerber Kawasaki. Tesla is the top holding for the Santa Monica, California-based wealth management firm, with approximately 130,000 shares worth about $55 million as of Monday’s close.
After analysing the index just last week, “it was just kind of mind blowing that Tesla still wasn’t in the S&P,” Gerber said in a telephone interview. “So sure enough, here it is.”
While entry into the benchmark is a rite of maturity that may dim some of Tesla’s cult stock appeal, membership comes with benefits, including forced purchases by index-tracking investors and mutual funds. The inclusion and the rapid rally over the past few months mean money managers overseeing passive funds will have to sell tens of billions of dollars worth of shares in their existing S&P holdings to make room for Palo Alto, California-based Tesla. On the other hand, longtime investors looking to exit their positions may now try to get out, knowing that index funds have to buy.
These crosscurrents may mean more trading volatility, though that is not new for Tesla. Ever since going public in 2010, the company’s popularity with Musk acolytes and legions of day traders has made it one of the more volatile stocks of its size in America. A steadier, more institutional ownership base could help to eventually ease those swings.