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Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 10:29 am
by bluquark
While I'm mostly comfortable with purist indexing, one quirk of my investing mindset is that I'm occasionally reminded that there exist stocks in there I really dislike, and it's a bit like a hard pea under my mattress I'd like to remove. So, the somewhat non-Boglehead idea of "index fund minus a few stocks I'm convinced are bad apples" appeals to me. I've considered it in the past in the context of getting rid of fossil fuel stocks (basically making my own custom ESG fund) and canceling out my exposure to my own company's stock (since I'm overexposed to it already). If there exists a cheap and easy way to do it, I might be interested.

With TSLA's meteoric rise this month I understand it briefly cracked the top 10 holdings, reaching about 1% of the fund, and personally I see that stock as one of those "bad apples", so it gives me another reason to return to the idea. From a certain POV 1% is still too insignificant to bother because the fund moves more than that most days, but I thought it would be interesting to start a thread as I suspect many others are wondering the same thing.

In terms of strategy, I see that I could move to an S&P 500 fund, buy puts or short the stock.

- Switching to an S&P500 fund plus a small-cap fund (not a S&P500 completion fund) would exit TSLA as it hasn't met the S&P500 index inclusion criteria. I tax-loss-harvested into VTSAX in March so this would mean realizing a lot of capital gains, so I'm ruling this out. I also understand it is starting to meet the S&P500 criteria and could be added anytime unexpectedly.

- People usually recommend puts to beginners because shorts have "unlimited downside". However, puts force me to choose a strike price and expiration date, and I have no particular opinion on exactly when or by how much it might crash. Furthermore I am not sure how to tell as a beginner whether an option is fairly priced.

- Whereas with a short -- correct me if I'm wrong -- I would just be paying a fixed interest rate to a broker that is the same for any stock regardless of the market on TSLA specifically. And I could hold the short position indefinitely, as I understand it. The "unlimited downside" would be precisely matched by the "unlimited upside" of the TSLA I'm holding in my VTSAX. Holding a short to cancel out my long position is equivalent to replacing my TSLA with negative-interest-rate cash, an objectively bad asset to be sure.

In terms of implementation, I have taxable accounts in Merrill Edge and Vanguard and a tax-advantaged account with TD Ameritrade. Right now, I'm thinking the cleanest setup is to file the paperwork to activate margin trading on Merrill Edge and set up a TSLA short there equally sized to the current market cap inside my VTSAX.

My current idea is I would hold this short for years potentially, the only exit strategy is to cease bothering if and when my bearish fears come true and VTSAX has <0.2% TSLA again. So any continual hassle I would face to maintain a short indefinitely is also something I would like to know about.

Thoughts, anything I am missing?

(Edited for concision and context)

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 10:33 am
by tibbitts
bluquark wrote: Fri Sep 04, 2020 10:29 am I thought it would be interesting to start a thread as I suspect many others are wondering the same thing.
...
Thoughts, anything I am missing?
My thought is that almost nobody here is thinking the same thing.

But seriously, index funds aren't for everyone. You should just buy individual stocks and avoid index funds.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 10:41 am
by aristotelian
TSLA market cap puts it about the same size as Procter & Gamble, which is 1% of VTSAX. If TLSA is the only stock in the entire market that worries you, I would not give it another thought. It could go to zero and you wouldn't notice it. If tech in general bothers you, there are ex-tech ETF's or you could overweight Value.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 10:44 am
by pasadena
bluquark wrote: Fri Sep 04, 2020 10:29 am - Switching to an S&P500 fund plus a small-cap fund (not a S&P500 completion fund) would exit TSLA as it hasn't met the S&P500 index inclusion criteria. I tax-loss-harvested into VTSAX in March so this would mean realizing a lot of capital gains, so I'm ruling this out. I also understand it is starting to meet the S&P500 criteria and could be added anytime unexpectedly.
Tesla met the criteria for inclusion in July. That doesn't mean it will be included any time soon, as the S&P500 folks do what they want. But the criteria have been met.

The whole point of indexing is to hold the market. Everything, including those companies that one is bearish on. You're trying to twist your brain ilke a pretzel to justify doing both at the same time.

All of your strategies are adding risk (concentration) and market timing.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 10:48 am
by 000
Being long and short the same stock seems pretty inefficient to me. If it's small enough that the inefficiency doesn't matter, then the neutralization probably doesn't matter either.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 10:50 am
by tdmp
bluquark wrote: Fri Sep 04, 2020 10:29 am I'm bearish about TSLA. I've been bearish for years (and I have been proven wrong, or at least premature in the past, I suppose), so I've never been totally comfortable with having exposure to it in my VTSAX. But then I would do the math and it was an insignificant percentage of the fund anyway, so whatever.

With the meteoric rise this month I understand it briefly cracked the top 10 holdings, reaching about 1% of the fund. From a certain POV this is still insignificant because the fund moves more than that most days, but still it's starting to feel worthwhile to come up with a plan to neutralize my exposure to it. I might still not bother, but I thought it would be interesting to start a thread as I suspect many others are wondering the same thing.

This breaks down into strategy and implementation. I can see 3 strategies and there are three brokerages I have accounts at to implement it.

In terms of strategy, I see that I could move to an S&P 500 fund, buy puts or short the stock. For puts or shorts, I haven't done either before and would also need to file paperwork to get approval for one of my accounts.

- Switching to an S&P500 fund plus a small-cap fund (not a S&P500 completion fund) would exit TSLA as it hasn't met the S&P500 index inclusion criteria. I tax-loss-harvested into VTSAX in March so this would mean realizing a lot of capital gains, so I'm ruling this out. I also understand it is starting to meet the S&P500 criteria and could be added anytime unexpectedly.

- People usually recommend puts to beginners because shorts have "unlimited downside". However, for this purpose, puts seem unappealing. Puts force me to choose a strike price and expiration date, and I have no particular opinion on exactly when or by how much it might crash. Furthermore I understand many people want to buy TSLA puts and I am not sure how to tell as a beginner whether I getting ripped off by an overpriced option.

- Whereas with a short -- correct me if I'm wrong -- I would just be paying a fixed interest rate to a broker that is the same for any stock regardless of the market on TSLA specifically. And I could hold the short position indefinitely, as I understand it. The "unlimited downside" would be precisely matched by the "unlimited upside" of the TSLA I'm holding in my VTSAX, so that famous problem with shorting doesn't seem like a problem at least strategically. Holding a short to cancel out my long position is equivalent to replacing my TSLA with negative-interest-rate cash, an objectively bad asset but one I still prefer to TSLA.

In terms of implementation, I have taxable accounts in Merrill Edge and Vanguard and a tax-advantaged account with TD Ameritrade.

- TD Ameritrade seems to have excellent support for fancy trading like this, so my first thought is to put the short in that account. All my VTSAX is in taxable, my TD Ameritrade account is filled with LEMB (emerging market bonds) and the TSLA short would be less than 10% of the account value. But, anything can happen especially with this stock, so maybe I still need to worry about a margin call and being unable to move more money into tax-advantaged to cover.

- Obviously, to avoid this the Vanguard account where I hold my VTSAX could never run into this. However, I think I would prefer to keep my Vanguard account "clean" of margin trading rights because I actually had tried turning it on before, and that displayed all kinds of bizarre indicators on every fund, and reinvested dividends came up as phantom second funds. All this was distracting and a bit unnerving, so I asked them to turn it off again.

- So finally I'm inclined to use Merrill Edge where I hold $100K of muni bonds for the BoA rewards plan. The TSLA short would still be a fraction of this at its current valuation. I understand if I get a margin call, I should be given some time to transfer money from my other taxable account to cover (but I'd be interested on details on how this works -- how long do I have, does it need to be a wire transfer, etc?).


So, right now, I'm thinking the best plan for me is to file the paperwork to activate margin trading on Merrill Edge and set up a TSLA short there equivalent to the current market cap inside my VTSAX.

Since as I said, I just don't want anything to do with TSLA, never have probably never will, my current idea is I would hold this short for years potentially, the only exit strategy is to cease bothering if and when my bearish fears come true and VTSAX has <0.2% TSLA again. So any continual hassle I would face to maintain a short indefinitely is also something I would like to know about.

Thoughts, anything I am missing?
1) I did a quick search on TSLA on morningstar it is 0.66% of VTSAX; the market will figure it out which direction it would go. So even if it goes bankrupt, it doesn't have much effect on portfolio.
2) Why are you so bearish on TSLA? Do you think it is just overvalued for now and by how much? ie. What do you think the market cap of TSLA should be?

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 12:24 pm
by 000
bluquark wrote: Fri Sep 04, 2020 10:29 am People usually recommend puts to beginners because shorts have "unlimited downside". However, puts force me to choose a strike price and expiration date, and I have no particular opinion on exactly when or by how much it might crash. Furthermore I am not sure how to tell as a beginner whether an option is fairly priced.
Couldn't you just keep buying puts as they expire? Just like other insurance, most insurers don't want to write forever policies.

As far as strike price, why not pick the strike that gives you as much neutralization as you feel is adequate?

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 4:26 pm
by SnowBog
tibbitts wrote: Fri Sep 04, 2020 10:33 am
bluquark wrote: Fri Sep 04, 2020 10:29 am I thought it would be interesting to start a thread as I suspect many others are wondering the same thing.
...
Thoughts, anything I am missing?
My thought is that almost nobody here is thinking the same thing.
Guess I'm the nobody... I can see merit to this idea, especially for employer stock (for those of us that have a larger exposure than we probably should have).

But I have no clue how to do something like this (without more cost & complexity than it's probably worth).

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 4:56 pm
by JoMoney
I own S&P 500 index fund(s) at least in-part because I prefer there methodology that excludes IPO's and some other stocks (like TSLA) for not meeting some criteria like earnings history, liquidity, seasoning period, etc...

However, I would caution that the methodology really hasn't made that big of a difference over time, and you're going to have to learn to not be a big stickler for things like that else you'll just find yourself upset if TSLA or some other stock you don't like happens to get added. If you can't learn to let it go, I would think you'd be better off building a conservative well-diversified individual stock portfolio (heresy)... and avoid temptations to "trade" and or over-active 'rebalancing' of the stocks.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 5:02 pm
by Cheez-It Guy
You dislike fossil fuel stocks AND you dislike Tesla stock.

Interesting.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 5:09 pm
by klondike
I thought of shorting equal amount of AMZN and NFLX 12 years ago for the exact same reason. It won't end well.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 5:59 pm
by 92irish
This post reminds me of the grief I had went Facebook went public. I was absolutely aghast that any of my money would be invested in such a scam company which was obviously going to zero in a matter of few months - a year tops! Yes, it does seem Tesla is totally priced in fantasy land, but best to just go along for the ride. Hopefully VTSAX is not your only holding and you also have international stocks and other assets so it really works out to be so small not to worry about.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 6:05 pm
by nisiprius
Tune out the noise.

People who are trying to decide whether or not to buy Tesla, Inc. (TSLA) as an individual stock, hold it, sell it, short it, etc. are naturally interested in it because it has been making large movements, and might make a large movement in either direction--or not--if and when it gets added to the S&P 500, which nobody can guess. So even though this is still noise--as John C. Bogle liked to say, quoting Macbeth, "a tale told by an idiot, full of sound and fury, signifying nothing," it is at least understandable because the sound is loud, the fury is furious, and it is hard to tune it out.

There is no reason at all for someone who is holding VTSAX to do anything about this. It's less than 1% of VTSAX. Over the last twenty years VTSAX has moved more than 1% in a day an average of 74 trading days per year. It's easy to tune it out.

And you don't actually know whether it is going to help or hurt, anyway.
Bennett, Benjamin and Stulz, Rene M. and Wang, Zexi, Does Joining the S&P 500 Index Hurt Firms? (July 20, 2020). NBER Working Paper No. 690/2020. (No-cost registration required to download full paper).
We investigate the impact on firms of joining the S&P 500 index from 1997 to 2017. We find that the positive announcement effect on the stock price of index inclusion has disappeared and the long-run impact of index inclusion has become negative.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 6:22 pm
by RonSwanson
Do you dislike these companies financially- worried that they will drag down your returns? Or do you disagree with them fundamentally in that you just can't in good conscience hold shares of them?

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 6:43 pm
by MotoTrojan
I would say you could just become a value investor and avoid Tesla, but you may not like the tilt to energy...

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 8:52 pm
by Nate79
This sure is a lot of work for a stock that is a tiny percentage of your overall portfolio. Waste of time in my book.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 9:07 pm
by Actin
That is way too much thought and effort to go through. I have no doubt that Tesla will be an after thought thirty years from now when all the Musk hype is long gone, but I'm not going to walk away from the free money that this hype train is creating

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 9:16 pm
by arcticpineapplecorp.
you either believe you don't know more than the market or you do.

if you do, then do whatever it is you think you should do that the market isn't.

if you don't, then stick to indexing.

best of luck.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 9:31 pm
by XacTactX
OP, for your retirement accounts you could buy SPTM, it holds the S&P 500, 400, and 600. If you like the S&P committee and how they choose companies it may be suitable for you. Its performance should be broadly similar to VTSAX

For your taxable accounts do you have any contributions with an unrealized loss? If you do, you could sell those and move them to SPTM. If your taxable income is going to be less than $39,475 this year and you held investments for more than one year you can sell the funds that have an unrealized gain and you will pay 0% in long term capital gains.

Sorry I can’t be of more help, shorting and options are outside of my skill set.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 11:04 pm
by Buy_N_Hold
tibbitts wrote: Fri Sep 04, 2020 10:33 am
bluquark wrote: Fri Sep 04, 2020 10:29 am I thought it would be interesting to start a thread as I suspect many others are wondering the same thing.
...
Thoughts, anything I am missing?
My thought is that almost nobody here is thinking the same thing.

But seriously, index funds aren't for everyone. You should just buy individual stocks and avoid index funds.
In the OP’s defense, Tesla’s rise has made me think about this exact issue, and I’m a die-hard indexer. A P/E of 1,200+ comprising over 1% of my fund is not appealing at all. If there was an easy way to exclude it, I would be all in.

Re: Neutralizing TSLA in VTSAX?

Posted: Fri Sep 04, 2020 11:43 pm
by VaR
If you believe that Tesla's price is in a bubble now, but you've owned the VTSAX for long enough to not want to realize gains by switching to an S&P 500 index fund, then perhaps you can find solace in the fact that when you bought in, Tesla was probably less than 0.1% of your investment at the time you bought in. It has "crazily" popped up to 1% of your investment and you are "worried" that it's too big of an exposure.

One strategy would be to not worry about it. If your hypothesis is true, then in time it will go back to being 0.1% of your exposure and your problem will have been solved without you doing anything.