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

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

Post by Angst » Sat Jul 18, 2020 2:41 pm

Northern Flicker wrote:
Fri Jul 17, 2020 1:35 pm
susze wrote:
Tue Jul 14, 2020 1:38 pm
This is one of the best vids/articles Ive seen on S&P inclusion, goes thru the float, possible secondary offering due to this and impact.
https://youtu.be/JN8PNPBkaWc
An inaccuracy in the video is the claim that the index providers managing S&P500 funds need to buy all of the shares that they add to the S&P500 index because they don't currently have them.
Tesla currently is in the S&P Completion Index. The Vanguard fund VEXAX/VXF tracks this index. When Tesla joins the S&P500 it will leave the completion index. VEXAX/VXF will need to sell its shares. Those trades will be settled in-house at Vanguard (without any external trading). (Later in the video, the speaker mentions this and just guesstimates a percentage to be acquired that way).

VEXAX/VXF owns just over 2M shares of Tesla. Using the data from the presenter in the video, the Vanguard S&P500 fund VFIAX/VOO will need to weight Tesla at about 0.91% and will incorporate the stock at about $1600/share. The fund assets are at $533.6B. 533.6B*.0091/1600 is just over 3M shares to be acquired.

Thus, if my calculations are correct, 2/3 of the shares of Tesla added to the Vanguard S&P500 fund will come from the Vanguard S&P Completion Index fund and the trades will settle in house.
Yes exactly, and Vanguard's not the only house with a fund tracking the completion index. As I speculated a couple weeks ago in this thread, a more insightful arbitrage play might be simply buying a few of the largest cap stocks left in the completion index after Tesla is removed, or just buying the index itself, i.e. VXF. Vanguard doesn't have a 3rd fund from which to back-fill the >3% hole that will be left behind by Tesla.

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

Post by Northern Flicker » Sat Jul 18, 2020 7:18 pm

Just hold a CRSP large cap index fund like VV instead of an S&P500 fund if you want a large cap index fund and you will front-run the S&P500 front-runners passively by design.
Risk is not a guarantor of return.

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

Post by pkcrafter » Sat Jul 18, 2020 7:38 pm

harikaried asked:
What to do with significant index changes, e.g., S&P 500 adding Tesla
Wow, three pages of discussion when the answer is so simple: Do NOTHING. :moneybag :sharebeer


Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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

Post by dh » Sun Jul 19, 2020 2:34 pm

pkcrafter wrote:
Sat Jul 18, 2020 7:38 pm
harikaried asked:
What to do with significant index changes, e.g., S&P 500 adding Tesla
Wow, three pages of discussion when the answer is so simple: Do NOTHING. :moneybag :sharebeer


Paul
Words of wisdom! :sharebeer

If Tesla should be in the S&P 500, then it should be in all S&P 500 funds and ETS. It is a passive index - In, In. Out, out. Do nothing and stay the course. Thank you, John Bogle!!!

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

Post by Stef » Sun Jul 19, 2020 3:58 pm

What will happen with Teslas stock price? I mean on the day it get's included, all the funds have to buy it? Wouldn't this affect the stock price?

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

Post by dh » Mon Jul 20, 2020 7:40 am

Stef wrote:
Sun Jul 19, 2020 3:58 pm
What will happen with Teslas stock price? I mean on the day it get's included, all the funds have to buy it? Wouldn't this affect the stock price?
That is a great question, Stef. I did a search this morning and found the following:
NPR piece (by Camila Domonoske, July 20, 2020)
“If Tesla gets added to the index, many, many people would suddenly have Tesla in their investment portfolios. And that buying spree usually pushes a stock price up — slightly, and temporarily.
A few years ago, economists examined the widespread belief that getting added to the S&P 500 provides a permanent boost in stock value. The answer?
"There is no effect on the price of the stock just by virtue of being added to the index," Asani Sarkar of the New York Federal Reserve Bank told NPR last week.”

I am curious what happened to Berkshire Hathaway when it was added. I would imagine that Tesla stock price would not be as whipsawed as it has been. Why? People who index tend to buy and hold. So I would imagine that stocks added have reduced volatility. However, I don't hold individual stocks, so I have never observed what happens when stocks are added to the index.

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

Post by guyinlaw » Mon Jul 20, 2020 8:54 am

Wouldn't SP500 committee think twice before adding TSLA into the index? 1 year ago this was under $200, and today >$1,500. That is ~8 fold increase while there has been no fundamental change with the company.

The committee does has discretion whether to add TSLA to the index, with or without four straight quarters of profitability.
Time is your friend; impulse is your enemy. - John C. Bogle

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

Post by zie » Mon Jul 20, 2020 9:25 am

guyinlaw wrote:
Mon Jul 20, 2020 8:54 am
Wouldn't SP500 committee think twice before adding TSLA into the index? 1 year ago this was under $200, and today >$1,500. That is ~8 fold increase while there has been no fundamental change with the company.

The committee does has discretion whether to add TSLA to the index, with or without four straight quarters of profitability.
The fundamental change is they have actually managed to make a little money, so their balance sheet(s) look a lot better. Also they have made lots of progress on their battery manufacturing(the only car company to in-house this I believe) and lots of progress on their factories outside of Fremont.

I'm not saying they are deserving of their $1,500 price, clearly there is lots and lots of future value in that number.

I think the S&P 500 committee will go slow in adding Tesla, but I think it will end up there eventually. I think it will have no material change in the price once it's in. I think the volatility around Tesla will take a few years more to settle out. Those are my predictions, but they are probably worth about what you paid for it, nothing! :)

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

Post by House Blend » Tue Jul 21, 2020 7:32 am

Stef wrote:
Sun Jul 19, 2020 3:58 pm
What will happen with Teslas stock price? I mean on the day it get's included, all the funds have to buy it? Wouldn't this affect the stock price?
All index funds aim to track their index, but leave plenty of slack. They are not obligated to hold exactly the funds in the index at all times, nor are they obligated to hold them exactly at market weight.

Read the prospectus if you don't believe me. Any prospectus.

So any manager of a 500 index fund has flexibility whenever the latest hot stock comes around the pike. The manager can add the stock *before* it gets added to the index, or months later.

I remember a lot of Bogleheads running around with their hair on fire a couple of years ago when Facebook went public and quickly became a stock included in all of the indexes that cover US large caps. Ultimately it was a non-event for fund shareholders.

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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 » Wed Jul 22, 2020 12:05 pm

zie wrote:
Mon Jul 20, 2020 9:25 am
I think the S&P 500 committee will go slow in adding Tesla, but I think it will end up there eventually.
Are you suggesting they will weight Tesla differently from "actual" market cap as they have some leeway with what to consider "float adjusted?" E.g. Tesla could be weighted at 50% of "normal" float adjusted market cap so half of the shares would be needed to be purchased, so in the case in Vanguard, VXF selling its TSLA shares to VOO would be enough to cover that -- then later adjust the weighting to be more accurate.

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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 » Wed Jul 22, 2020 12:09 pm

House Blend wrote:
Tue Jul 21, 2020 7:32 am
All index funds aim to track their index, but leave plenty of slack.
Yup, it looks like index funds have some flexibility in even purchasing TSLA before index inclusion as well as weeks or months after inclusion, so there's some parallels of individuals' decisions of lump sum vs dollar cost averaging when changing asset allocation. And at a high level, the "asset allocation" change of including Tesla is on the order of 1% vs people changing their equity percentage by 10%+, so index tracking differences will likely be around 20-30 basis points anyway.

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

Post by zie » Wed Jul 22, 2020 2:54 pm

harikaried wrote:
Wed Jul 22, 2020 12:05 pm
zie wrote:
Mon Jul 20, 2020 9:25 am
I think the S&P 500 committee will go slow in adding Tesla, but I think it will end up there eventually.
Are you suggesting they will weight Tesla differently from "actual" market cap as they have some leeway with what to consider "float adjusted?" E.g. Tesla could be weighted at 50% of "normal" float adjusted market cap so half of the shares would be needed to be purchased, so in the case in Vanguard, VXF selling its TSLA shares to VOO would be enough to cover that -- then later adjust the weighting to be more accurate.
I didn't think that hard :) I figured, with Covid running rampant still, and Tesla just barely getting their profits in order, the S&P 500 committee will be in no particular hurry to add them. That said, I agree with you, that might be a more technical reason to delay.

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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 » Wed Jul 22, 2020 3:15 pm

Looks like just before Tesla's Q2 2020 financial results today, Tesla is back to #13 US company by market cap as it was from my previous update about 2 weeks ago although about 3% higher market cap:
Image

Code: Select all

12 	JPMorgan Chase & Co 	JPM 	300.71
13*	Tesla Inc 		TSLA 	295.34
14 	UnitedHealth Group Inc 	UNH 	290.98
And float adjusted weighting if included today in S&P 500 should be around 0.9% to 1%. Interestingly, Yahoo's finance page seems to say 20% of shares are held by insiders while nearly 60% are held by institutions, so the remainder 20% will shrink if institutions need to buy more. I'm curious how these percentages have changed over the last month already https://finance.yahoo.com/quote/tsla/key-statistics/
Our business has shown strong resilience during these unprecedented times. Despite the closure of our main factory in Fremont for nearly half the quarter, we posted our fourth sequential GAAP profit in Q2 2020, while generating positive free cash flow of $418M.
https://ir.tesla.com/static-files/f41f4 ... 23b00475a6

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

Post by likashing » Wed Jul 22, 2020 6:12 pm

I am pleasantly surprised that Tesla is already included TSM. Anyone knows when TSM started owning it?

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

Post by Nate79 » Wed Jul 22, 2020 6:19 pm

likashing wrote:
Wed Jul 22, 2020 6:12 pm
I am pleasantly surprised that Tesla is already included TSM. Anyone knows when TSM started owning it?
The oldest annual report I could find was 2013 and they owned it then. They went public in 2010. I'm sure others can find more definitive data.

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

Post by jarjarM » Wed Jul 22, 2020 6:31 pm

Can't wait to see all the TSLA insiders exercise and sell their shares... Then they can use those profits to pop up the real estates around the bay :moneybag :greedy

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

Post by likashing » Wed Jul 22, 2020 6:57 pm

Nate79 wrote:
Wed Jul 22, 2020 6:19 pm
likashing wrote:
Wed Jul 22, 2020 6:12 pm
I am pleasantly surprised that Tesla is already included TSM. Anyone knows when TSM started owning it?
The oldest annual report I could find was 2013 and they owned it then. They went public in 2010. I'm sure others can find more definitive data.
Thanks!

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

Post by dh » Wed Jul 22, 2020 9:13 pm

Nate79 wrote:
Wed Jul 22, 2020 6:19 pm
likashing wrote:
Wed Jul 22, 2020 6:12 pm
I am pleasantly surprised that Tesla is already included TSM. Anyone knows when TSM started owning it?
The oldest annual report I could find was 2013 and they owned it then. They went public in 2010. I'm sure others can find more definitive data.
That is interesting. I see that it is currently number 35 in Vanguard's Total Stock Market Index.

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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 » Wed Jul 22, 2020 11:36 pm

dh wrote:
Wed Jul 22, 2020 9:13 pm
That is interesting. I see that it is currently number 35 in Vanguard's Total Stock Market Index.
Position 35 in VTI seems to match up from Vanguard's numbers as of 06/30/2020 https://investor.vanguard.com/etf/profi ... o-holdings

If this page is accurate to today, it says VTI is position 18 with 0.71% weight for Tesla worth $6.6B. https://www.etfchannel.com/lists/?a=sto ... symbol=VTI

If VOO needs to weight Tesla 0.9% to 1%, seems like the dollar amount would be $5-5.5B https://www.etfchannel.com/lists/?a=sto ... symbol=VOO while VXF would sell its 4.2% weighting worth $3.2B https://www.etfchannel.com/lists/?a=sto ... symbol=VXF

This page says Vanguard has 8.7 million shares of TSLA worth $13.6B behind Baillie Gifford & Co's $18.9B and Capital World Investors' $16.8B while ahead of Blackrock's $11.3B https://www.nasdaq.com/market-activity/ ... l-holdings

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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 » Thu Jul 23, 2020 11:57 am

Nate79 wrote:
Wed Jul 22, 2020 6:19 pm
The oldest annual report I could find was 2013 and they owned it then. They went public in 2010. I'm sure others can find more definitive data.
Here's the Form N-CSR filed with the SEC for December 31, 2010: https://www.sec.gov/Archives/edgar/data ... _final.htm

Small-Cap had 486k shares worth $13 million. Small-Cap Growth had 302k shares worth $8 million. Extended Market had 97k shares worth $3 million. Total Stock Market had 348k shares worth $9 million.

While December 31, 2019 annual report for Vanguard Total Stock Market Index Fund shows 4.1 million shares worth $1.7 billion. And as of 06/30/2020, 4.2 million shares worth $4.6 billion.

Domadosolo
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$TSLA in the S&P500 - what's the impact?

Post by Domadosolo » Sat Aug 01, 2020 8:23 am

[Topic merged into existing thread on same topic.- Mod Misenplace]

How will the addition of Tesla to the S&P500 affect the index on the day of the addition?
- Theoretically : Assuming no other stock, nor Tesla changes value that day;
- Pragmatically : All Bogleheads' oracles' speculation ? :D

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Nate79
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Re: $TSLA in the S&P500 - what's the impact?

Post by Nate79 » Sat Aug 01, 2020 10:05 am

Domadosolo wrote:
Sat Aug 01, 2020 8:23 am
How will the addition of Tesla to the S&P500 affect the index on the day of the addition?
- Theoretically : Assuming no other stock, nor Tesla changes value that day;
- Pragmatically : All Bogleheads' oracles' speculation ? :D
There are a few threads on this topic. Here is one and the search box can find the others.

viewtopic.php?t=319040

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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 » Mon Aug 03, 2020 5:09 am

Domadosolo wrote:
Sat Aug 01, 2020 8:23 am
How will the addition of Tesla to the S&P500 affect the index on the day of the addition?
This Bloomberg Businessweek article has some quotes from Vanguard:

When Tesla Hits the S&P 500, It’ll Spark the Wildest Passive Trade Ever
At the current prices of Tesla and other stocks, managers of passive funds will have to sell about $35 billion to $40 billion of shares in the rest of the index’s companies to make a hole big enough to fit purchases of Tesla shares, according to Gerry O’Reilly, a principal and portfolio manager at indexing giant Vanguard Group Inc. “Assuming it’s going to be added, it’ll be an all-hands-on-deck type of trading,” he says.

While Tesla’s stock may be bid up by traders trying to take advantage of demand from indexers, other investors may treat it as what O’Reilly calls a “super liquidity event.” That is, longtime Tesla shareholders who are looking to trim positions may try to get out when they know index funds have to buy. The two kinds of investors could cancel each other out. “There are all sorts of crosscurrents,” O’Reilly says. He says he’s confident Vanguard will be able to handle the switch without a major “tracking error”—that is, a dislocation between the performance of the index and the funds that follow it.
Sounds like Vanguard is prepared with a plan that needs to be executed, and the article estimates 0.8% float-adjusted weighting for Tesla, so that limits how much the tracking error can be although unclear what level becomes "major."

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