The Investment Selection Committee for the Standard and Poors 500 has decided to add Tesla, Incorporated to their Index.
Next to the Dow Jones Industrial Average, the Standard, and Poors 500 Index is perhaps the most widely followed measure of the Stock Market.
Created in 1957, the Index measures the 500 most influential publicly traded companies in the nation.
And this addition of Tesla is bound to have a significant effect on the investing community, and perhaps on your retirement account.
You see, the S&P 500 is one of the primary benchmarks for a whole host of passive investment vehicles. Passive investing simply means an investment style that follows a set benchmark.
As opposed to an Actively Managed Investment Style which would have an investment manager makes buy and sell decisions.
Passive investing has become over the last couple of decades the most popular investment type for retirement and other long-term investment programs. Passive investment vehicles included Index Funds, Mutual Funds, and Exchange Traded Funds, which would include in their prospectus, the indication that they are designed to follow, for instance, the S&P 500.
There are other investments that follow the S&P 500 index, including options and futures.
But if we step back for a moment and examine the likely thinking behind this move by the Selection Committee, you can see that this is a dramatic move to increase the future performance of the S&P 500.
First of all this move included the removal of Apartment Investing and Management Company, symbol AIV, a Real Estate Investment Trust. Now REIT's are not known for having dramatic price movement. But Apartment Investing and Management, has taken that to an extreme this year. Beginning 2020 with a price of $4 dollars and a fraction, it looks like they will probably end the year at virtually the same price. In other words no price action here.
Tesla represents the other extreme. In the universe of 7500 publicly traded companies, Tesla ranks #30 for this year's performance. Ranking very close to the number 1 performing stock on the New York Stock Exchange.
Bringing a new dimension for performance to the S&P Index. In actual numbers, Tesla began the year at just $86 dollars per share. While closing yesterday at $655 per share. That's a 6 fold increase in less than a year. And about as good a price appreciation as you're going to see.
In fact, Tesla has been on an absolute tear, since Standard and Poors made their announcement, gaining another 20%.
However, price appreciation is only half of the story, about how Tesla will change this Index. The S&P 500 is a Capitalization Weighted Index. Simply put, this means that the larger a company is, the more influence it will have over the Index.
And Tesla is the largest company ever added to the Index. With a market cap of nearly 640 billion, Tesla will edge out the venerable Berkshire Hathaway to become #5 on the S&P Index. And thereby assured to have a huge impact on its future price performance.
Finally, let's go back and make one more comment, on the importance of this selection on Tesla itself. It's the support that comes from being part of one of the most widely followed Indexes.
Each mutual fund, Exchange Trade Fund, and other Index Fund, will now need a proportional investment in Tesla, to keep those funds tracking the S&P 500. In the parlance of Wall Street is called institutional sponsorship. And Tesla just gained that in bushel basket full.
In fact, you can bet that much of the rise in Tesla stock in this past few days have been those funds and investment Advisers pre-positioning themselves. Buying shares of Tesla ahead of time, knowing that on Monday it will need to be in their portfolio.
So when the bell rings on Monday morning, it will mark the first day that Tesla Incorporated is a member of one of the most important Indexes of all, the Standard and Poors 500.