To the surprise of many, the S&P 500 just announced this week that it would introduce Tesla in its components. The long-overdue announcement led to a surge in Tesla’s price (and Elon Musk’s fortune) due to the sudden demand from the passive investing sector.
As a clarification, two types of investors exist – active and passive. Active investors are always in search of new stocks to add to the portfolio, and they change the portfolio’s structure very often. The aim is to speculate on the market’s volatility. On the other hand, passive investors simply use the composition of an index and replicate it. Therefore, when the composition changes, they change their portfolios too.
The passive investing industry is quite big. There is always a “competition” regarding what passive or active investing returns are. Sometimes passive investing outperforms, some other times, the opposite happens.
Tesla in the S&P 500 Starting with December
Tesla was mocked and continues to be mocked by many of the investment community. Analysts look at inventories, account receivable, the fact that the company manufactured cars in a tent at some point – and negative news appeals to people.
However, regardless of what it did, Tesla minds its own business and continues to expand continuously. It opened up new production facilities in China and Germany, expanded its product line, and continues to innovate. It is always a step ahead of the competition, and it can only do so by investing at a faster pace than competitors.
Therefore, every milestone reached is rewarded by investors. It is no wonder that the company outperformed in 2020. In fact, it is one of the companies that posted one of the best performances of the year – up +481.65 YTD.
Tesla will join the S&P 500 index in December. In doing so, it will be the largest-ever new member to be added to the index. In fact, it is so large that the Dow Jones Indices, the company that administers the index, is looking for consultancy to see if it is wise to introduce all of the Tesla shares at once or in two distinct tranches.
A win-win situation for both Tesla and the S&P 500, the inclusion increases Tesla’s exposure in the investment community’s portfolios. At the same time, the S&P 500 gains exposure to one of the most wanted stocks in the world, whose CEO owns a lot of stock.