Tesla stock's S&P 500 entry to drive tsunami of trading volume

Tesla Inc.’s entry into the S&P 500 will make for a wild trading session Friday as money pours into the electric vehicle maker’s stock and out of shares of the index’s other members.

Shares of the Palo Alto, Calif.-based electric vehicle maker will be added to the S&P 500 all at once, which is atypical for a large addition. The company had a market capitalization of $606 billion at Monday’s closing bell, meaning it would be the eighth-largest member upon entry into the benchmark index.

Ticker	Security	Last	Change	Change %
TSLA	TESLA INC.	150.38	-5.07	-3.26%

In order to emulate Telsa’s approximate 1.58% weighting, indexers including Fidelity and Vanguard will need to shift $83.1 billion into Tesla shares on Friday in addition to conducting a rebalancing of a little more than $20 billion. The rebalancing will dwarf the previous record of $50.8 billion set in September 2018.

“It is going to be an enormous trading day,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, noting that triple-witching day – or the expiration of stock options, stock index futures and stock index option contracts – will add to volatility and produce record trading volume.

Aside from producing record volume, the rebalancing will have additional implications for the index.

The other 504 members are expected to face “downward pressure” as indexers sell those shares to account for Tesla, Silverblatt said.

Tesla’s inclusion will lower the index’s dividend yield to 1.54% from 1.57% while causing the 2021 forward price-to-earnings ratio for 2021 to increase to 22.3 times from a little under 22 times.

As for Tesla itself, the stock should “remain well bid into the rebalance” although the majority of the gains have likely already occurred, according to a team led by Morgan Stanley strategist Boris Lerner. Tesla shares have rallied 57% since the closing bell on Nov. 16, when S&P Dow Jones Indices announced the electric-vehicle maker’s inclusion in the S&P 500.

Typically large additions like Tesla “underperform on the day immediately following the rebalance,” they added, while also stating it wouldn’t be surprising to see the stock trade lower following its inclusion into the S&P 500 due to the large rally that has taken place.

Being added to the index is a “clear validation of the company's profitability trajectory looking ahead,” said Dan Ives, an analyst at Wedbush Securities. “Clearly this is a key positive for shares and ultimately removes another question mark around the Tesla story going forward.”