What Will Happen If Tesla Joins S&P 500?

At a $277 billion market cap, it may give birth to the “widest passive trade ever,” according to Bloomberg.

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Gustavo Henrique Ruffo

By: Gustavo Henrique Ruffo

Jul 31, 2020 at 11:21am ET

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When most companies join the S&P 500 index, they normally do it by occupying the last positions in the ranking, replacing the ones that do not have enough market cap to stay there or that became part of other companies. Tesla now ticks all the boxes to get there as well, but it is currently worth $277 billion. If it joined the index right now, it would rank in the 17th place. That may imply the "widest passive trade ever" in S&P 500's history.

That's the conclusion Bloomberg came to after analyzing Tesla's situation. Adding Tesla to the S&P 500 index is not automatic: it depends on the decisions of a committee. Anyway, it would be hard for that group to argue against Tesla's inclusion when it has such a high market cap.

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Among the eligibility requirements for S&P 500 index are that the company is worth more than $8.2 billion and that it has been profitable for the past year, as well as profitable in the quarter prior to its inclusion in the index. Could this be one of the reasons why Tesla was so worried about reopening? And for its recent cost-cutting measures?

Tesla's addition to the S&P 500 index would cause the "widest passive trade ever" because all index funds based on tracking it have to purchase stocks of the company. Could some of these funds be already doing it to prevent large operations all of a sudden? That could be one of the explanations for Tesla shares recent valuation.

More Financial News About Tesla:

Tesla Q2 2020 Earnings Report: Profitable Yet Again

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If Tesla becomes part of the list of companies in the index, passive funds would have to sell around $35 billion to $40 billion in other companies' shares to get Tesla's, according to Gerry O'Reilly, a portfolio manager at Vanguard Group Inc.

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Apart from what such a decision would represent to the index itself, that would also have massive implications for Tesla. For a company that has often been accused of being a financial fraud, being listed among the 500 biggest ones in the US is a way to silently end such accusations.

Source: Bloomberg

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