What to do with significant index changes, e.g., S&P 500 adding Tesla

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harikaried
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

For us total index fund holders, looks like Tesla has reached a new milestone today: VTI top 10 holding inclusion!
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by seymore92 »

harikaried wrote: Fri Aug 21, 2020 3:15 pm For us total index fund holders, looks like Tesla has reached a new milestone today: VTI top 10 holding inclusion!
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What’s the URL for that page?
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Nate79 »

Tesla passes Walmart in market cap where Walmart has about 20x the revenue. Amazing. :shock:
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt »

Nate79 wrote: Fri Aug 21, 2020 3:46 pm Tesla passes Walmart in market cap where Walmart has about 20x the revenue. Amazing. :shock:
Dude you are using the wrong yardstick. P/e similar to other large growth large caps.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Actin »

Just short Tesla. It's easy money
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt »

harikaried wrote: Fri Aug 21, 2020 3:15 pm For us total index fund holders, looks like Tesla has reached a new milestone today: VTI top 10 holding inclusion!
Image
1) ceo saying he won’t sell. 2) these shares held in taxable by 1M Tesla owners. 3) taxes 4) herd mentality of sell at 20000
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Nate79 »

Prettyfrtnt wrote: Fri Aug 21, 2020 4:55 pm
Nate79 wrote: Fri Aug 21, 2020 3:46 pm Tesla passes Walmart in market cap where Walmart has about 20x the revenue. Amazing. :shock:
Dude you are using the wrong yardstick. P/e similar to other large growth large caps.
What is the P/E ratio of Tesla and what similar large cap growth stocks have similar P/E?
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt »

“I am amazed that normally smart people argue $TSLA sells at an absurd P/E multiple (65x 2022 EPS), when other megacap growth stocks $AMZN (53x), $LULU (58x), $NOW (63x), $CRM (58x) all sell at similar 2022 P/E, with far less future growth potential. TSLA’s EV runway is unique.”

Listen also price based on summation of future earnings. You don’t understand the business if you’re asking this and scratching your head. Ask a friend who owns one of these. Ask a knowledgeable retail investor. Tesla has nvidia beat at chips. Petroleum beat at efficient energy. Has all utilities beat. Will be it’s own gas station. Will win full level 5 autonomy. Will disrupt 9/10 top revenue companies. Will disrupt Amazon. Will disrupt Uber and Lyft. Will disrupt ups. Will disrupt auto insurance. This is Apple vs Nokia and RIM. Get out your pickaxe for Ford and GM. We will be driving Tesla RVs, planes, rickshaws. They will win the 21st century’s war for the ultimate golden goose: robots building robots. This is a money tree. Look how few workers make 3k cars a week in China. Buckle up for another China plant. They are mercilessly, ruthlessly, Trojan-horse stealthily ahead.

I’m not saying this doesn’t require execution and can’t fail. But these things have legit percentile level chances of each happening at different time points.

This is the opposite of vapor ware. This company has been sandbagging. Watch sandy monro tear down. Or just drive one and comp it to your pals jaguar or Porsche.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by wwtraveler »

Looks like $372B in change Market Cap as of close today on revenues (12/31 to 6/30) of $12B and change and EBITDA of $1.7B and change for the year.

Let's assume sales/profit are flat (they won't be) from what they are to date so $24B in Rev / 3.5B in EBITDA annualized. Bump 10% and you get 26.5B / scratching at $4B annualized.

If one sees it as "wow they haven't really done much yet" then I think one could counter with: $24B is a real number in terms of Revenue and likely durable and so if you think it hasn't done anything yet then one should reasonably conclude with a stable platform that they have (the $24B) they really have a ton of profit growth ahead of them even if sales growth at times is erratic.

If one sees it as "wow they accomplished so much in such short of a time" that also seems to be accurate as far as car companies go anyhow. Compare with say Ferrari let's say - disruptive for its time when it broke in and considered luxuriously desirable - that's about at a market cap of $30B today (70ish years later) (not sure if that includes an estimate of the private portion though). They too have won the public & media's attention -- yet Tesla is 12.4x that in public market cap already in what is it about 17 years?

Yes this will be interesting for the S&P folks for sure. The 4 quarter positive earnings hurdle has been cleared albeit barely for the end of March which I think if it had produced a 100M+ # then it would be in now.

If it has the resilience to have positive earnings (without the barely oopsies of March kinda number -- that $16M positive could literally be some fancy accounting adjustments to get it positive vs. negative) for the next quarter or two I think it'll be brought in by the committee.

After all how could you possibly argue against a disruptive company with real revenue (cough Nikola) that's strung together positive earnings (albeit one very gingerly) during a world wide pandemic that has wiped out people, economies, businesses, and for the rest of us our patience all in one fell swoop!

Lastly I always wonder with tech co's: "Will it get wiped out? Could it crash out? What about this big event or that" I like looking at stuff that's unrelated for comparisons to get me out of the inside of deep analysis to see if something passes the sniff test: I'll draw some inspiration of a post earlier that mentioned Twitter... What's more durable from a developed product stand point?
A) the most successful electric car designs that as far as basic performance goes (in warm weather) wipes the floor with just about every competitor at a time where there seems to be a continued strong demand and legislative push for less emissions
or
B) a website with a bird logo.

I know which one I'd find easier to compete with from scratch if I had to!

Gosh look at me singing praises here -- and I haven't ever even been in a Tesla nor do I have any fan boy desires to want one! Elon, how about a test drive some time?
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by physixfan »

Actin wrote: Fri Aug 21, 2020 4:56 pm Just short Tesla. It's easy money
Shorting TSLA is probably the second fastest way to get bankrupt... The first one is shorting Bitcoin.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

seymore92 wrote: Fri Aug 21, 2020 3:45 pmWhat’s the URL for that page?
https://snapshot.fidelity.com/fidresear ... symbol=VTI is the page with the top 10 with images and https://research2.fidelity.com/fidelity ... w=Holdings is a full table, but both require Fidelity login.

https://etfdb.com/etf/VTI/#holdings and https://www.etfchannel.com/lists/?a=sto ... symbol=VTI show pretty similar percentages, so perhaps various places are doing their own calculations?

https://investor.vanguard.com/etf/profi ... d-holdings probably is most accurate but seems to only be updated at the end of each month.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt »

The longer the s and p waits...

Standard and Poors: I order everyone in the world with an index fund (S&P500 or 100) to buy Tesla shares...

Blackrock/vanguard/fidelity: “Yes master!”

No one seems to see this is going to get interesting. Every day it passes it gets more interesting. It is very, very, very unprecedented.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

Prettyfrtnt wrote: Wed Aug 26, 2020 5:39 pmThe longer the s and p waits...
The higher it'll go from the anticipation? :wink:

With Tesla as the #10 holding of VTI behind Procter & Gamble and each's weighting yesterday were 0.95% and 1.00% respectively, this would suggest VOO with 1.19% weighting for PG would have a TSLA weighting of 1.13%. If the old articles of Berkshire Hathaway getting added at 1.1% weighting were correct, looks like this could be a new addition record both for weighting as well as dollar amount.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Anon9001 »

physixfan wrote: Fri Aug 21, 2020 8:37 pm
Actin wrote: Fri Aug 21, 2020 4:56 pm Just short Tesla. It's easy money
Shorting TSLA is probably the second fastest way to get bankrupt... The first one is shorting Bitcoin.
Yes Momentum is quite powerful phenomenon. I seen it myself selling some shares of company I owned (CDSL) for risk management and seeing the price keep going up after I sold it.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt »

harikaried wrote: Thu Aug 27, 2020 12:10 pm
Prettyfrtnt wrote: Wed Aug 26, 2020 5:39 pmThe longer the s and p waits...
The higher it'll go from the anticipation? :wink:

With Tesla as the #10 holding of VTI behind Procter & Gamble and each's weighting yesterday were 0.95% and 1.00% respectively, this would suggest VOO with 1.19% weighting for PG would have a TSLA weighting of 1.13%. If the old articles of Berkshire Hathaway getting added at 1.1% weighting were correct, looks like this could be a new addition record both for weighting as well as dollar amount.
It’s hard to even consider a Berkshire. With the brk-b being added for inclusion. I thinK the Buffet value investing is different than a 50%y/y growth tech mega cap with fanboys and ceos who own the float that won’t sell at 10000. So many people adding to positions now.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

Prettyfrtnt wrote: Thu Aug 20, 2020 4:56 pmtweet 5/1 8:11 “the stock is too high” 5 to 1 split on 8/11 announced due to stock price being too high for Dow and retail traders.
And on day of the split, TSLA reaches SP$500 intraday high. :wink:

For those curious, here's the top 10 US the day before split and day ending of the split. It does indeed seem to show higher than average trading volume for both AAPL and TSLA both before and after:

Friday August 28th:
Image

Monday August 31st:
Image
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt »

We have a ZM and TSLA inclusion for Standard and Poors looming. With TSLA such a large part. >1% it’s not even about getting the 20%+ of the float they need. It’s a question of the hundreds of billions actually now leaving the other mega caps... it could lower the other stonks in the s and p when vanguard Blackrock and fidelity have to sell to buy into Tesla. Wonder if this is the first time indexers truly get mad that they got played by Standard & Poors.

Lotta indexers going to buy some pricey Tesla. Also other question is if VTI and VOO meaningfully split on Morningstar returns. For the first time in history.

Could ZM and Tesla break indexing? Like just a little. Also huge question if Elon will allow the indexes to get off easy by diluting the float. Why should he? I doubt we are capital constrained...

Hi BHs! This is happening.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

Prettyfrtnt wrote: Mon Aug 31, 2020 7:03 pm Lotta indexers going to buy some pricey Tesla. Also other question is if VTI and VOO meaningfully split on Morningstar returns.
This indexer isn't going to be one of them. It's relatively rare to see a specific recommendation for an S&P 500 index fund in this forum, the usual recommendation is Total Stock. So I think most Bogleheads use Total Stock.

This indexer bought his Tesla a long time ago, I have no idea exactly when. I already own it. Probably have owned it for years.

And I'm not alone. Total Stock has nearly twice the assets of the Vanguard 500 Index Fund.

Equating indexing with the S&P 500 index is a straw man. It's not the recommended way to index, and it's not the way most Bogleheads index.
Last edited by nisiprius on Tue Sep 01, 2020 5:33 am, edited 4 times in total.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by alex_686 »

nisiprius wrote: Mon Aug 31, 2020 10:34 pm
Prettyfrtnt wrote: Wed Aug 26, 2020 5:39 pm The longer the s and p waits...

Standard and Poors: I order everyone in the world with an index fund (S&P500 or 100) to buy Tesla shares...

Blackrock/vanguard/fidelity: “Yes master!”
That is not the way it works. I wonder if you know that and are just trolling. Index funds are not required to buy a stock on the exact day that it is added to the index, are not required to use replication, and the funds whose policy is to use replication have weasel-wording in the language like "normally."
It is close enough to be true. SEC marketing regulations say that if you call yourself a index fund you had better run yourself as a index fund. The portfolio manager can’t make a active decision.

For the prospects weasel words, that is to protect the fund if they hire a incompetent portfolio manager. Having to drop the index is a mark of shame, but far better then being sued by shareholders.

And why would a portfolio manager not add Tesla on the date? Index funds are judged on tracking error, not performance. Not adding Tesla, even a a ridiculous price, will add to your tracking error.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

Accidental dupe.
Last edited by nisiprius on Tue Sep 01, 2020 5:34 am, edited 1 time in total.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

Prettyfrtnt wrote: Mon Aug 31, 2020 7:03 pm Lotta indexers going to buy some pricey Tesla. Also other question is if VTI and VOO meaningfully split on Morningstar returns.
This indexer isn't going to be one of them. It's relatively rare to see a specific recommendation for an S&P 500 index fund in this forum, the usual recommendation is Total Stock. So I think most Bogleheads use Total Stock.

This indexer bought his Tesla a long time ago, I have no idea exactly when. I already own it. Probably have owned it for years.

And I'm not alone. Total Stock has nearly twice the assets of the Vanguard 500 Index Fund.

Equating indexing with the S&P 500 index is a straw man. It's not the recommended way to index, and it's not the way most Bogleheads index.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by JoMoney »

There have been other mega-cap stocks not in the S&P 500 index, sometimes added later, often with lousy timing.
JDS Uniphase got added to the S&P 500 with close to the worst possible timing at the peak of the dot-com boom in 2000.
Warren Buffett's Berkshire Hathaway didn't get added until 2010 when they bought BNSF Railway, while not the bubbly pop JDSU had, BRK's glory days were all well before its addition.
There are lots of notable others...
... and still the S&P 500 manages to be a good proxy of the U.S. market, with little return difference relative to more inclusive 'Total Market' indices, and still best the performance of actively managed funds.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt »

nisiprius wrote: Mon Aug 31, 2020 10:34 pm
Prettyfrtnt wrote: Wed Aug 26, 2020 5:39 pm The longer the s and p waits...

Standard and Poors: I order everyone in the world with an index fund (S&P500 or 100) to buy Tesla shares...

Blackrock/vanguard/fidelity: “Yes master!”
That is not the way it works. I wonder if you know that and are just trolling. Index funds are not required to buy a stock on the exact day that it is added to the index, are not required to use replication, and the funds whose policy is to use replication have weasel-wording in the language like "normally." They can depart from replication if they think it is in the best interests of the fund. They are judged on how well they track the index, not on how precisely they replicate the composition of the index in real time.
Prettyfrtnt wrote: Mon Aug 31, 2020 7:03 pm Lotta indexers going to buy some pricey Tesla. Also other question is if VTI and VOO meaningfully split on Morningstar returns.
This indexer isn't going to be one of them. It's relatively rare to see a specific recommendation for an S&P 500 index fund in this forum, the usual recommendation is Total Stock. So I think most Bogleheads use Total Stock.

This indexer bought his Tesla a long time ago, I have no idea exactly when. I already own it. Probably have owned it for years.

And I'm not alone. Total Stock has nearly twice the assets of the Vanguard 500 Index Fund.

Equating indexing with the S&P 500 index is a straw man. It's not the recommended way to index, and it's not the way most Bogleheads index.
Thank you nisiprius for your response. I actually think you confirmed my contentions. You seem very glad to own VTI at a time such as now. Also you seem to confirm how unprecedented it is. Thank you for all your contributions to me and all the other BH’s. Great respect. Please to all maximal diversification is the hedge.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

alex_686 wrote: Mon Aug 31, 2020 10:44 pm
nisiprius wrote: Mon Aug 31, 2020 10:34 pm
Prettyfrtnt wrote: Wed Aug 26, 2020 5:39 pmStandard and Poors: I order everyone in the world with an index fund (S&P500 or 100) to buy Tesla shares...
Blackrock/vanguard/fidelity: “Yes master!”
That is not the way it works...
It is close enough to be true. SEC marketing regulations say that if you call yourself a index fund you had better run yourself as a index fund. The portfolio manager can’t make a active decision.

For the prospects weasel words, that is to protect the fund if they hire a incompetent portfolio manager. Having to drop the index is a mark of shame, but far better then being sued by shareholders.

And why would a portfolio manager not add Tesla on the date? Index funds are judged on tracking error, not performance. Not adding Tesla, even a a ridiculous price, will add to your tracking error.
Alex, the prospectus says this:
Temporary Investment Measures

The Fund may temporarily depart from its normal investment policies and strategies when the advisor believes that doing so is in the Fund’s best interest, so long as the strategy or policy employed is consistent with the Fund’s investment objective. For instance, the Fund may invest beyond its normal limits in derivatives or exchange-traded funds that are consistent with the Fund’s investment objective when those instruments are more favorably priced or provide needed liquidity, as might be the case when the Fund receives large cash flows that it cannot prudently invest immediately.
The language seems pretty plain. I understand you to be saying that the language is dishonest--funds never intentionally depart from rigorous, slavish, real-time replication of the index composition, and the language is only used to cover incompetent management, never legitimately.

However, I also take your point that the fund is supposed to track the index--if the index contains glitches, the fund should reproduce them.

Surely "active moves" are involved in funds that sample, rather than replicate an index, and Vanguard apparently did just this in the Vanguard Total Bond Market Index Fund in 2002, and FIdelity in the Fidelity US Bond Index Fund in 2007-2008--in both cases we know about it because the result was visible tracking error.
Last edited by nisiprius on Tue Sep 01, 2020 6:01 am, edited 1 time in total.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

Prettyfrtnt wrote: Mon Aug 31, 2020 11:27 pmThank you nisiprius for your response. I actually think you confirmed my contentions. You seem very glad to own VTI at a time such as now. Also you seem to confirm how unprecedented it is. Thank you for all your contributions to me and all the other BH’s. Great respect. Please to all maximal diversification is the hedge.
Thank you for the kind words but please do read alex_686's comments. I kept the place where I said that total stock market indexers shouldn't have problems. But I removed a place where alex_686 said I had said something incorrect.
Last edited by nisiprius on Tue Sep 01, 2020 10:38 am, edited 1 time in total.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by alex_686 »

nisiprius wrote: Tue Sep 01, 2020 5:44 am The language seems pretty plain. I understand you to be saying that the language is dishonest--funds never intentionally depart from rigorous, slavish, real-time replication of the index composition, and the language is only used to cover incompetent management, never legitimately.
It is not that they are being dishonest, but that you are misreading the situation. Back in the day when I was writing prospectuses, our lawyers insisted on inserting the most permissive language possible. And why not? Why not give the fund maximum legal coverage to minimize lawsuits.

While I am not a lawyer, I think this lays in a separate legal dimensions. The lawyers did not care if it was a index fund or not. They never talked about the SEC marketing rules.
nisiprius wrote: Tue Sep 01, 2020 5:44 am However, I also take your point that the fund is supposed to track the index--if the index contains glitches, the fund should reproduce them.

Surely "active moves" are involved in funds that sample, rather than replicate an index, and Vanguard apparently did just this in the Vanguard Total Bond Market Index Fund in 2002, and FIdelity in the Fidelity US Bond Index Fund in 2007-2008--in both cases we know about it because the result was visible tracking error.
Funds that sample are not be actively managed. The manager gets to pick the sampling methodology but not the actual stocks or bonds.

The fund would have is a thick document on how they are going to 'replicate' the index. For example, one could do it by sector. i.e., the fund will hold the same percentage of automotive stocks. Normally this extends to much deeper along multiple dimensions such as correlations, liquidity, P/E, etc. However, the selection of of the actual stocks is mechanical and should be blind to the specific names and portfolio manager's expectations. If the manager's model spits out they should be buying Tesla then they need to be buying Tesla.

And if the manager does not like that? Well, they can rewrite the model, submit it the board, and then filed away for audit purposes. This is a fairly big deal. And the point of this should be to increase the model's fidelity to the index.

Now, there are some inputs which are subjective - like liquidity - that gives managers some discretion. But not much. And it is not supposed to be for increasing performance. All of the incentives are to reduce tracking error.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Whakamole »

I thought Tesla was going to go private ("funding secured.") Surely this won't be an issue.

:beer
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

alex_686 wrote: Tue Sep 01, 2020 8:08 amNow, there are some inputs which are subjective - like liquidity - that gives managers some discretion. But not much. And it is not supposed to be for increasing performance. All of the incentives are to reduce tracking error.
Thanks for your insights. Could these managers have suggested to Tesla to improve liquidity by doing the 5:1 split as well as the upcoming $5 billion at-the-market stock offering, which could increase float by a couple percentage? https://www.cnbc.com/2020/09/01/tesla-t ... rally.html

One would think these institutions have direct contact with companies like Tesla for shareholder meetings and related discussions. Just Vanguard alone probably has over 5% of TSLA's shares.
Last edited by harikaried on Tue Sep 01, 2020 1:47 pm, edited 1 time in total.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by alex_686 »

harikaried wrote: Tue Sep 01, 2020 12:59 pm
alex_686 wrote: Tue Sep 01, 2020 8:08 amNow, there are some inputs which are subjective - like liquidity - that gives managers some discretion. But not much. And it is not supposed to be for increasing performance. All of the incentives are to reduce tracking error.
Thanks for your insights. Could these managers have suggested to Tesla to improve liquidity by doing the 5:1 split as well as the upcoming $5 billion capital raise, which could increase float by a couple percentage? https://www.cnbc.com/2020/09/01/tesla-t ... rally.html

One would think these institutions have direct contact with companies like Tesla for shareholder meetings and related discussions. Just Vanguard alone probably has over 5% of TSLA's shares.
So there are 3 types of liquidity.

First, there is the bid/ask spread, or 'I want to buy a couple of 100 shares right now'. Stock split would help this.

Second, there is 'reconstitute the index' liquidity. On a typical day we can expect X amount of turnover. Can a fund go into the market and get the shares that they need without causing too much price distortion. Index providers think about that. Stock splits won't help much here. The last time his was a problem was 20ish years ago with Berkshire Hathaway where the daily trading amount was in the 10s for A shares to 100s for the B shares.

Third, there is 'new fund added to the index, everybody piles onboard'. A one off liquidity event. This was a minor exploitable issue 20 years ago. One could see the distortions. Now, not so much. That being said, Tesla's size makes it a outlier. Honestly, I don't know the exact thinking on the index providers. I can think of one recent example where prices did shift due to the reconstitution. Small index with relatively illiquid holdings for the amount of trading that was necessary. There was a heartbeat trade, so the index funds got all of their trades done at the closing price. Of course, this caused a spike in prices - but the funds did not care because the new stock was added to the index at the distorted price. So no tracking error.

On the new share side...

Issuing more shares won't directly affect the float. Most index providers work off of free float. See the reconstituted part of my above post. Index providers do not have much of a incentive to ask a company to free float more shares. Index funds don't have much of a incentive to lobby index providers to lobby the company for more shares. It just doesn't make much of a difference.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

First, even if it does move the price of Tesla stock, it won't necessarily be up.

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.
How about that. That should at least raise doubts that it's all as cut-and-dried as some people are making it out to be.

Second, Tesla currently accounts for 0.65% of the holdings of Total Stock. If Tesla were to double instantly on inclusion in the S&P 500, Total Stock would get a +0.65% boost. If Tesla were to go to zero instantly on inclusion in the S&P 500, Total Stock would suffer a -0.65% drop.

Since inception of Vanguard Stock Market Index ETF, VTI, from 5/24/2001 through 9/1/2020
--the price moved by more than 0.65% in a day 2,076 times
--the price moved by more than 1% in a day 1,333 times
--the price moved by more than 2% in a day 391 times
--the price moved by more than 3% in a day 154 times.
--the standard deviation, σ, was 1.04%

This year, 1/1/2020 through 9/1/2020 there have already been 105 days when the price moved by more than 0.65%.

I don't see how this can be all that big a deal.

Even if anticipating inclusion of Tesla in the S&P 500 enables you to predict something about the price of Tesla, Tesla is only something like 0.65% of the stock market (and, presumably soon, something like 0.8% of the S&P 500). What happens to it can't have a major effect on someone who owns the whole market or the whole S&P (unless adding Tesla to the S&P 500 triggers another global financial crisis or something).

If there is some financial engineer who has created a structure that leverages the difference between the S&P 500 and the totla market, or some speculator who is making a short-term bet that they know what the price movement in Tesla will be, they could make or lose money. If they make money, for all I know they might be making it off of dumb indexers like me.

But as an indexer invested 0.65% in Tesla already, even if the sophisticates are right and the smart guys are eating my lunch, how much of my lunch will they be eating? 0.0065%? 0.065% I can live with that. Won't need to change my retirement plans.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

nisiprius wrote: Wed Sep 02, 2020 8:15 amI don't see how this can be all that big a deal.
Yup, the impact for VTI due to TSLA behavior should be relatively limited. Here's a screenshot from the Fidelity app that doesn't require an account showing VTI holdings with TSLA at 1.09% weighting ahead of V 1.02%:
Image

Vanguard hasn't updated its month-end holdings for VTI yet for August, but it should be updated within 10 days. https://investor.vanguard.com/etf/profi ... d-holdings

I created this thread because we have Extended VXF-like funds, which I believe have gone over 7% weighting in TSLA, and that will see more movement than VTI. Ideally we would just have VTI-like funds, but my 401k has it split between S&P500 and Extended. Earlier this week, we did finish saving cash for a Model Y, so I put the extra cash into our brokerage account to buy more VTI.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

alex_686 wrote: Tue Sep 01, 2020 1:47 pmOn the new share side... Issuing more shares won't directly affect the float. Most index providers work off of free float. … It just doesn't make much of a difference.
I was trying to highlight the at-the-market offering aspect of the new shares, but overall you're probably right it doesn't make much of a difference especially that it's a relatively small portion of what index funds would need to buy. Theoretically this type of follow-on offering allows Tesla to decide when to sell the newly created shares (or not), and potentially this could be just-in-time when fund managers get the signal to add TSLA to S&P500 index funds to provide on-demand liquidity.

But then again why would Tesla or fund managers want to go through this vs letting things happen "normally." I suppose maybe it's something S&P committee had suggested and this approach was a compromise?
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nalor511 »

harikaried wrote: Wed Sep 02, 2020 12:33 pm Yup, the impact for VTI due to TSLA behavior should be relatively limited...
...
I created this thread because we have Extended VXF-like funds, which I believe have gone over 7% weighting in TSLA, and that will see more movement than VTI. Ideally we would just have VTI-like funds, but my 401k has it split between S&P500 and Extended. Earlier this week, we did finish saving cash for a Model Y, so I put the extra cash into our brokerage account to buy more VTI.
But if you are keeping market weight allocations, then your portion of "VXF-like funds with over 7% weighting in TSLA" should be at most around 18% of your US portfolio, which means 18% * 7% = 1.26% , which is pretty darn close to the 1.09% weighting of TSLA in your Fido screenshot.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by alex_686 »

harikaried wrote: Wed Sep 02, 2020 12:58 pm
alex_686 wrote: Tue Sep 01, 2020 1:47 pmOn the new share side... Issuing more shares won't directly affect the float. Most index providers work off of free float. … It just doesn't make much of a difference.
I was trying to highlight the at-the-market offering aspect of the new shares, but overall you're probably right it doesn't make much of a difference especially that it's a relatively small portion of what index funds would need to buy. Theoretically this type of follow-on offering allows Tesla to decide when to sell the newly created shares (or not), and potentially this could be just-in-time when fund managers get the signal to add TSLA to S&P500 index funds to provide on-demand liquidity.


I am not exactly sure what you are arguing. What point are you trying to make?

The point of "investable indexes" is that they represent the market basket of securities that one can invest in. This does included secondary concerns about liquidity. After all, index portfolios are supposed to passively mirror the market. They are referees. They are not supposed to favor one side or another. That is, they are not supposed to favor the index funds over those who purchase their services for performance tracking. They make the call and it is the fund's responsibility to deal with how the chips fall.
harikaried wrote: Wed Sep 02, 2020 12:58 pm But then again why would Tesla or fund managers want to go through this vs letting things happen "normally." I suppose maybe it's something S&P committee had suggested and this approach was a compromise?


I am not exactly sure what you are suggesting. Are you suggesting that Tesla offer a special stock offering just for index funds?
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

alex_686 wrote: Wed Sep 02, 2020 2:13 pmAre you suggesting that Tesla offer a special stock offering just for index funds?
I'm just trying to reason about the market behavior of the TSLA movement with its potential upcoming S&P 500 inclusion. The at-the-market offering wouldn't be exclusively for index funds, but it could show that Tesla is willing to help avoid price spikes that could be caused by index funds trying to mirror the index but effecting change in the process of mirroring.

TSLA has been down the last few days since announcing their ability and choice to sell new shares, which would allow Tesla to capture some of the high prices that others might have been speculating to get from selling after inclusion. So with this new context, some who have purchased ahead of inclusion might have decided to cash out before S&P 500 announcement, which theoretically will have less or no price spike now.

Compared to when I started this thread in July asking, TSLA has doubled. So even with the drops, these frontrunners have been able to make some money.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

S&P 500 index announced changes that did not include Tesla or Zoom maybe for similar reasons for only just reporting latest quarterly profit. Or maybe the committee wanted to limit this set of shuffling to basic market cap increase / decreases. I'm not sure if it prevents additional index changes before September 21st, but it seems like additional index changes could be announced before regular quarterly updates as usual.

+ Etsy Inc. ETSY $14.2 billion
+ Catalent Inc. CTLT $13.8 billion
+ Teradyne Inc. TER $13.1 billion
- Kohl’s Corp. KSS $3.5 billion
- Coty Inc. COTY $3.0 billion
- H&R Block Inc. HRB $2.9 billion

Looks like on the news of non-inclusion, TSLA has dropped around 7% after hours. That would lower the market cap from today's close of $390 billion (#10 US).
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Stef »

That's why SP500 is kind of garbage. VTI >>> VOO.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by RayKeynes »

What is the reason for the non-inclusion? Anyone familiar with the causes?

Just curious.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by guyinlaw »

RayKeynes wrote: Sat Sep 05, 2020 3:31 am What is the reason for the non-inclusion? Anyone familiar with the causes?

Just curious.
Tesla is not being added to SP500 likely because
1. Likely stock manipulation including SoftBank
2. Financial gymnastics done to get to 4 quarters of profitability. (Pooling of ZEV credits, not paying rent & ac payables, profitability depends on ZEV credits which is temporary)

viewtopic.php?f=10&t=324717
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by RayKeynes »

guyinlaw wrote: Sat Sep 05, 2020 3:57 am
RayKeynes wrote: Sat Sep 05, 2020 3:31 am What is the reason for the non-inclusion? Anyone familiar with the causes?

Just curious.
Tesla is not being added to SP500 likely because
1. Likely stock manipulation including SoftBank
2. Financial gymnastics done to get to 4 quarters of profitability. (Pooling of ZEV credits, not paying rent & ac payables, profitability depends on ZEV credits which is temporary)

viewtopic.php?f=10&t=324717
Does not sound very optimistic for Tesla with 400 bn market value and literally 0 profit
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

1) One obvious possibility is that S&P is perfectly aware that people are betting on the addition of Tesla and have intentionally incorporated a random element into their selection process and timing in order to foil them. With regard to timing,
Changes to the S&P 500 are generally made in response to corporate actions and market developments, and may be made at any time.
2) Is Tesla really a "leading" carmaker?

With regard to the selection process, the well-known criteria are described as "eligibility" criteria. The methodology document actually seems oddly vague about the rules for the S&P 500--plenty of detail on just about every S&P index but the S&P 500. However, their propaganda piece, S&P 500®: The Gauge of the Market Economy, reiterates:
The S&P 500 does not simply contain the 500 largest stocks; rather, it covers leading companies from leading industries.
To reiterate, the S&P 500 seeks to represent the leading companies in leading industries.... To be eligible for S&P 500 index inclusion, a company should be a U.S. company, have a market capitalization of at least USD 8.2 billion, be highly liquid, have a public float of at least 50% of its shares outstanding, and its most recent quarter’s earnings and the sum of its trailing four consecutive quarters’ earnings must be positive,
but it does not say that "eligibility" = inclusion.

So I would ask this. Certainly car manufacture counts as a "leading industry," but honestly, even if you are a fan, is Tesla a "leading" car company? One can argue for many reasons that Tesla is more important than raw sales figures show and is a "leader" e.g. in technology. But I haven't very many Teslas on the road. This chart is "by brand" which actually gives Tesla a boost, since Tesla only makes one brand.

Just in terms of cars built and on the road, Tesla has grown to be a lot more than a roundoff error or a niche product, but has it reached the status of "leading carmaker" yet?

Image
Last edited by nisiprius on Sat Sep 05, 2020 7:15 am, edited 1 time in total.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by columbia »

Stef wrote: Sat Sep 05, 2020 3:16 am That's why SP500 is kind of garbage. VTI >>> VOO.
Garbage?
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Stef »

columbia wrote: Sat Sep 05, 2020 7:14 am
Stef wrote: Sat Sep 05, 2020 3:16 am That's why SP500 is kind of garbage. VTI >>> VOO.
Garbage?
Why not just include the 500 largest companies?

It's totally against the idea of passively investing.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Whakamole »

Stef wrote: Sat Sep 05, 2020 7:25 am
columbia wrote: Sat Sep 05, 2020 7:14 am
Stef wrote: Sat Sep 05, 2020 3:16 am That's why SP500 is kind of garbage. VTI >>> VOO.
Garbage?
Why not just include the 500 largest companies?

It's totally against the idea of passively investing.
And how much of those 500 largest companies? If you go purely by market cap, and market cap only, then float becomes an issue. Low float stocks will cause problems compared to high float stocks since you have more dollars chasing fewer shares available on the market. Even CRSP excludes low float stocks: http://www.crsp.org/files/Equity-Indexe ... uide_0.pdf
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by tibbitts »

Stef wrote: Sat Sep 05, 2020 7:25 am
columbia wrote: Sat Sep 05, 2020 7:14 am
Stef wrote: Sat Sep 05, 2020 3:16 am That's why SP500 is kind of garbage. VTI >>> VOO.
Garbage?
Why not just include the 500 largest companies?

It's totally against the idea of passively investing.
Why do people find it so hard to understand that only the S&P500 fund is passive, not the index it's based on. It doesn't claim to be. While I'm not necessarily an advocate of an S&P500 fund vs. Total Stock Market, the fact is that some investors - including some Bogleheads - probably prefer the approach the committee lends to the S&P500. There are plenty of other index funds that are based purely on market cap, although it might be hard to find one that specifically chooses 500 as its magic number for inclusion. Whatever an index or index or index fund does (bands vs. no bands, annual reconstitution vs. more frequent, etc.) somebody won't like it.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Normchad »

tibbitts wrote: Sat Sep 05, 2020 9:32 am
Stef wrote: Sat Sep 05, 2020 7:25 am
columbia wrote: Sat Sep 05, 2020 7:14 am
Stef wrote: Sat Sep 05, 2020 3:16 am That's why SP500 is kind of garbage. VTI >>> VOO.
Garbage?
Why not just include the 500 largest companies?

It's totally against the idea of passively investing.
Why do people find it so hard to understand that only the S&P500 fund is passive, not the index it's based on. It doesn't claim to be. While I'm not necessarily an advocate of an S&P500 fund vs. Total Stock Market, the fact is that some investors - including some Bogleheads - probably prefer the approach the committee lends to the S&P500. There are plenty of other index funds that are based purely on market cap, although it might be hard to find one that specifically chooses 500 as its magic number for inclusion. Whatever an index or index or index fund does (bands vs. no bands, annual reconstitution vs. more frequent, etc.) somebody won't like it.
+1. Exactly.

I am a passive investor, in index funds. I don’t necessarily know how those indexes are created.

Also, the fact that it is “500” is a choice made be people. Who says that’s the right number? Maybe it should be 30 like the DOW. I also like my Wellington fund, which is even more based on choices by humans.

I don’t think I will ever completely understand the bond indexes and funds I own.

But really, what does it matter? @Nisprius has provided a lot of fantastic information here.

I just don’t care. I’m a passive investor. I buy these things and hold them for decades. I don’t spend much time at all trying to'pick stock winners and losers. And this has worked out well. FB and Amazon didn’t exist when I started investing. But I’ve passively benefitted from them, thanks to the mechanisms of the indexes, and that my core holdings mimic those closely enough.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

nisiprius wrote: Sat Sep 05, 2020 7:08 amOne obvious possibility is that S&P is perfectly aware that people are betting on the addition of Tesla and have intentionally incorporated a random element into their selection process and timing in order to foil them.
Looks like so far this style of active management of the index to throw off speculating front runners has worked at least a little bit. I suppose this is actually a good thing for those who own funds that track S&P500 as otherwise the passive investors in aggregate are the ones who lose out from the expected drop after inclusion.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

nalor511 wrote: Wed Sep 02, 2020 1:25 pmBut if you are keeping market weight allocations, then your portion of "VXF-like funds with over 7% weighting in TSLA" should be at most around 18% of your US portfolio, which means 18% * 7% = 1.26% , which is pretty darn close to the 1.09% weighting of TSLA in your Fido screenshot.
Indeed. The wiki page says "16% Vanguard Extended Market Index Fund (VEXAX)" which brings the number even closer. https://www.bogleheads.org/wiki/Approxi ... t#Examples

Un/fortunately(??) for us, we decided to keep the 401k simple with just 3 funds: extended US, international, US bonds as we use it as the one place to rebalance across our entire portfolio. Our spreadsheet provides the percentage that I copy to the rebalance form. I suppose it wouldn't be /that/ much additional to copy over 4 numbers instead of 3... :wink:
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius »

Stef wrote: Sat Sep 05, 2020 7:25 am
columbia wrote: Sat Sep 05, 2020 7:14 am
Stef wrote: Sat Sep 05, 2020 3:16 am That's why SP500 is kind of garbage. VTI >>> VOO.
Garbage?
Why not just include the 500 largest companies? It's totally against the idea of passively investing.
1) Because the S&P 500 index, launched in 1957, was not designed to support passive investing, which wasn't even an idea back then.

2) If you simply want the largest stocks, there are at least ten or more mutual funds and ETFs from "name-brand" providers that track indexes based simply on market capitalization. The Vanguard Large-Cap Index Fund, VLCAX, tracks an index that include the largest companies down to whatever number it takes to make up 85% of the market. The iShares Russell 1000 ETF, IWB, tracks an index that includes, approximately, the 1000 largest companies.

3) Please don't believe or suggest that advocates of passive indexing specifically recommend the S&P 500 as the index to use. The most-favored fund in the Bogleheads' forum is the Vanguard Total Stock Market Index Fund or one of the near-equivalents from Fidelity, Schwab, Blackrock (iShares), etc. And in fact the Vanguard Total Stock Market Index Fund is twice as large as the Vanguard 500 Index Fund, so it is more favored among other investors, too.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried »

harikaried wrote: Thu Sep 03, 2020 9:58 amThe at-the-market offering wouldn't be exclusively for index funds, but it could show that Tesla is willing to help avoid price spikes that could be caused by index funds trying to mirror the index but effecting change in the process of mirroring.
Looks like it wasn't for helping index funds after all. Tesla just wanted to raise $5 billion with slightly over 1% dilution. They completed the at-the-market offering basically as soon as possible within a week of announcing it. I suppose having cash on hand to build out factories and batteries will be useful.
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