Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
I wonder how it will effect an extended market index? Does it have to move out of a mid-cap fund? VXF for instance, is an etf but there are mutual funds affected I am sure.
@MikeM2, ETFs prepare for balancing act as Elon Musk’s Tesla joins S&P 500:
S&P still hasn’t announced what stock Tesla will be replacing, saying it will release that decision after the market closes Dec. 11. The S&P 500 isn’t the only index affected. Several other benchmarks will be rejiggered to accommodate the car maker, as well as any deletions from the S&P 500.
Tesla, for example, is the largest weighted stock in S&P’s completion index, a benchmark tracking all U.S. stocks except those in S&P 500, and will have to be removed. Any stock taken out of the S&P 500 will trigger its addition back into the completion index, as well as step downs into S&P’s mid and small-cap benchmarks.
State Street’s Mr. Bartolini said at least five of its exchange-traded funds will have to be rebalanced as a result of Tesla’s addition, including the biggest ETF in the world, the SPDR S&P 500 Trust ETF, and its growth-focused ETF, the SPDR Portfolio S&P 500 Growth ETF.
Tesla’s inclusion “will require a fairly numerous amount of trades,” said Mr. Bartolini.
Since Tesla's addition to the S&P 500 has no direct effect on its market cap (though an indirect effect by requiring S&P 500 funds to buy it), this should have little impact on its inclusion or exclusion in market-cap based indexes. For example, you won't find Tesla in VO, that tracks the CRSP mid cap index.
In contrast, VXF, FSMAX, etc. are based on some "completion index" defined as "everything" that the S&P 500 is not. So they are affected. But some extended market indexes defined differently are not affected.
They may be market-cap based, e.g. FZIPX is based on a "completion index" that excludes the 500 largest companies, not the 500 selected for the S&P 500. Pure market cap standard. Or they may be based on an index where Tesla isn't even part of the investable universe (see below), such as the S&P 1000. (FWIW, OMECX is an enhanced index fund based on the S&P 1000.)
Tesla is different from a company growing out of one market cap range and into another. Tesla is not being moved from the S&P 400 to the S&P 500. Rather, S&P is only now qualifying it for inclusion in any of its S&P 1500-based indexes (i.e. 1500, 500, 1000, 400, 600). Then based on market cap, Tesla is falling into the 500 index.
At a minimum, to be considered for inclusion in the S&P 1500, "The sum of the most recent four consecutive quarters’ Generally Accepted Accounting Principles (GAAP) earnings (net income excluding discontinued operations) should be positive as should the most recent quarter." S&P U.S. Indices Methodology
AFAIK, S&P is the only major index provider that has this requirement. It's why the 600 index tends to be a bit conservative relative to its peers like the R2K. Something else distinctive about the S&P methodology is that it is not strictly rule-based; a human committee applies its own judgment to the rules.
"Tesla made more than $1 billion from ... regulatory credits over the past four quarters. ... That is more than double its profits over the past four quarters." So Tesla's profitability at this point is due to its cars being "clean" rather than their selling at a profit. The committee has the ability to go beyond the numbers and look at the source of a company's profits. Do they meet the spirit as well as the letter of the rule? WSJ, Why Tesla Was Left Out of the S&P 500 (in September)
It’s no secret that “hedgies” and “sophisticated” investors have been shorting Tesla for several years. You’d think they’d have lost their britches by now.
AFAIK, S&P is the only major index provider that has this requirement. It's why the 600 index tends to be a bit conservative relative to its peers like the R2K. Something else distinctive about the S&P methodology is that it is not strictly rule-based; a human committee applies its own judgment to the rules.
I'm not aware of any other broad-based, market-cap weighted index with this requirement. This screen provides a slight quality tilt for the S&P 600. The primary S&P index funds are not as "passive" as many think.
Comments
4-mutual-funds-hold-tesla-stock
S&P 500 Forecast: How Will the Addition of Tesla Impact the Index?
SP-500-Forecast-How-Will-the-Addition-of-Tesla-Impact-the-Index
@MikeM2,
ETFs prepare for balancing act as Elon Musk’s Tesla joins S&P 500: global-investing/2020/12/01/tesla-sp-500-2
In contrast, VXF, FSMAX, etc. are based on some "completion index" defined as "everything" that the S&P 500 is not. So they are affected. But some extended market indexes defined differently are not affected.
They may be market-cap based, e.g. FZIPX is based on a "completion index" that excludes the 500 largest companies, not the 500 selected for the S&P 500. Pure market cap standard. Or they may be based on an index where Tesla isn't even part of the investable universe (see below), such as the S&P 1000. (FWIW, OMECX is an enhanced index fund based on the S&P 1000.)
Tesla is different from a company growing out of one market cap range and into another. Tesla is not being moved from the S&P 400 to the S&P 500. Rather, S&P is only now qualifying it for inclusion in any of its S&P 1500-based indexes (i.e. 1500, 500, 1000, 400, 600). Then based on market cap, Tesla is falling into the 500 index.
At a minimum, to be considered for inclusion in the S&P 1500, "The sum of the most recent four consecutive quarters’ Generally Accepted Accounting Principles (GAAP) earnings (net income excluding discontinued operations) should be positive as should the most recent quarter."
S&P U.S. Indices Methodology
AFAIK, S&P is the only major index provider that has this requirement. It's why the 600 index tends to be a bit conservative relative to its peers like the R2K. Something else distinctive about the S&P methodology is that it is not strictly rule-based; a human committee applies its own judgment to the rules.
"Tesla made more than $1 billion from ... regulatory credits over the past four quarters. ... That is more than double its profits over the past four quarters." So Tesla's profitability at this point is due to its cars being "clean" rather than their selling at a profit. The committee has the ability to go beyond the numbers and look at the source of a company's profits. Do they meet the spirit as well as the letter of the rule?
WSJ, Why Tesla Was Left Out of the S&P 500 (in September)
It’s no secret that “hedgies” and “sophisticated” investors have been shorting Tesla for several years. You’d think they’d have lost their britches by now.
I'm not aware of any other broad-based, market-cap weighted index with this requirement.
This screen provides a slight quality tilt for the S&P 600.
The primary S&P index funds are not as "passive" as many think.
tesla-equity-sale-comes-at-a-good-time-for-index-fund-trackers