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Tesla's shares might be added to the S&P 500 in a single step previous to opening on December 21st

Elon Musk, CEO of Tesla, gesticulates when he visits the construction site of the future US electric car giant Tesla in Gruenheide near Berlin on September 3, 2020.

Odd Andersen | AFP | Getty Images

Tesla will be included in the S&P 500 in a single move despite its market cap of more than $ 500 billion, S&P told Dow Jones Indices on Monday, dispensing with a possible phased approach that would offset the implications of adding such a large one Company should decrease to the US stock benchmark.

The stock will be added to its full float-adjusted market capitalization prior to the start of trading on December 21, the index provider announced. Float-adjusted means that only publicly available stocks are taken into account when evaluating the weighting of a company. The company that will replace Tesla will be named on December 11, according to a press release.

The decision is based on feedback from the investment community that S&P Dow Jones Indices received from the difficulty of adding a company the size of Tesla. The electric vehicle maker will be the largest company ever to join the S&P 500.

S&P Dow Jones Indices announced that Tesla would join the S&P 500 in early November. At this point, consideration was given to whether Tesla should be added before the market opens on December 21, or in two tranches on December 21 at once. December 14th and 21st.

"In making its decision, S&P DJI took into account the wide range of responses received, including the expected liquidity of Tesla and the market's ability to absorb significant trading volumes that day," said the index provider. The inclusion of Tesla in the S&P 500 coincides, among other things, with the expiration of stock options and stock futures, which should facilitate the inclusion due to the high trading volume on that day.

According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, Tesla's $ 437 billion float-adjusted market value becomes $ 72.7 billion in required trades on December 21, on top of normal trading activities Lead managers of index funds that track the benchmark.

"The fact that S&P sought feedback from the investment community on how to handle the addition when it originally announced it tells you everything you need to know to demonstrate how unique this situation is," noted Paul Hickey. Founder of the Bespoke Investment Group.

Tesla stock has risen nearly 40% since it announced it would be included in the index, and has increased its earnings to nearly 580% since the start of the year.

Hickey attributed the recent rally in stocks to expectations that money managers would have to buy the stock.

There are currently over $ 11.2 trillion in net worth compared to the S&P 500, with around $ 4.6 trillion in indexed funds according to the S&P Dow Jones Indices. The index provider said Tesla's addition "will generate one of the largest financing deals in S&P 500 history," as portfolio managers sell positions to make way for Tesla.

"Interesting are the other stocks that index funds have to sell to make room for TSLA," added Hickey.

Goldman Sachs recently estimated that Tesla's addition could lead to $ 8 billion in demand from active U.S. large-cap mutual funds. When index funds are added to the mix, that number is much higher.

The company's inclusion in the S&P 500 was seen as a foregone conclusion after Tesla reported its fourth consecutive quarter of earnings in July – the final hurdle the company stood in its way. But it was passed over during the S&P 500's quarterly realignment in September, which caused stocks to temporarily fall.

The composition of the S & P 500 is determined by the so-called "Index Committee" at S & P Dow Jones Indices, which analyzes both quantitative and qualitative factors. Ultimately, the index is intended to be representative of the entire US market.

Tesla shares rose more than 4% in expanded trading after the announcement.

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FIX: Updated a heading on this story to indicate that Tesla will be added in a tranche.

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