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

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

Post by harikaried » Wed Jul 01, 2020 12:56 am

Tesla hasn't been added to S&P 500 yet, but it seems like it will be at some point. From this page showing US Stock Market Cap, Tesla today would be #23:

https://www.iweblists.com/us/commerce/M ... ation.html

Code: Select all

20 	Bank of America Corp 	BAC 	206.05
21 	PayPal Holdings Inc 	PYPL 	204.54
22 	Walt Disney Co 	 	DIS 	201.42
23*	Tesla Inc 	 	TSLA 	200.17
24 	Netflix Inc 	 	NFLX 	200.13
25 	Cisco Systems Inc 	CSCO 	196.93
26 	Merck & Co Inc 	 	MRK 	195.19
Comparing the holding percentage of the nearby stocks in VOO, Tesla would be around 0.8% if added today. For us, we're actually the opposite situation where our US Stock portion is either already total market OR "extended" (like VXF) which has over 3% of assets allocated to Tesla. The 401k only has S&P 500 or Extended as low cost US Stock choices, so when Tesla gets removed, that account will have 0% allocated to Tesla, which may be fine as we had previously decided to overweight medium/small-cap.

I realize indices change regularly probably as non-events, but if Tesla does get added to S&P 500 as a top 20 holding, there could be some activity that might be worth preparing for?

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

Post by mrspock » Wed Jul 01, 2020 3:19 am

Huh? I don't understand your question. The addition of Tesla into the index is "feature", it's not a "bug". This is what indexing is all about, up and coming companies are added, the losers drop out, constantly renewing your portfolio and tilting with the ebbs and flow of the economy.

I think you are over thinking it.

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

Post by harikaried » Wed Jul 01, 2020 5:40 am

I was thinking in the context of VOO/VFIAX with $519 billion net assets needing to buy 0.8% Tesla is quite a bit more than VXF/VEXAX with $67 billion selling 3%. Between those two funds, Vanguard will net buy over $2 billion in Tesla stock, and other funds like SPDR's SPY and iShares' IVV with nearly $500 billion combined would need to buy $4 billion.

But yeah maybe I'm over thinking this as we only own index funds anyway.

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

Post by sycamore » Wed Jul 01, 2020 6:03 am

Read the section on "Front running" in the BH wiki article https://www.bogleheads.org/wiki/Index_fund to see how funds deal with this question.

For me I'm happy to use a Total stock market fund which already owns Tesla shares. I have other stock funds too but I feel I'm covered with these Tesla-like situations.

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

Post by Prettyfrtnt » Wed Jul 01, 2020 7:12 am

harikaried wrote:
Wed Jul 01, 2020 12:56 am
Tesla hasn't been added to S&P 500 yet, but it seems like it will be at some point. From this page showing US Stock Market Cap, Tesla today would be #23:

https://www.iweblists.com/us/commerce/M ... ation.html

Code: Select all

20 	Bank of America Corp 	BAC 	206.05
21 	PayPal Holdings Inc 	PYPL 	204.54
22 	Walt Disney Co 	 	DIS 	201.42
23*	Tesla Inc 	 	TSLA 	200.17
24 	Netflix Inc 	 	NFLX 	200.13
25 	Cisco Systems Inc 	CSCO 	196.93
26 	Merck & Co Inc 	 	MRK 	195.19
Comparing the holding percentage of the nearby stocks in VOO, Tesla would be around 0.8% if added today. For us, we're actually the opposite situation where our US Stock portion is either already total market OR "extended" (like VXF) which has over 3% of assets allocated to Tesla. The 401k only has S&P 500 or Extended as low cost US Stock choices, so when Tesla gets removed, that account will have 0% allocated to Tesla, which may be fine as we had previously decided to overweight medium/small-cap.

I realize indices change regularly probably as non-events, but if Tesla does get added to S&P 500 as a top 20 holding, there could be some activity that might be worth preparing for?
I will give you a hint: it’s going to get really dirty in here!!

I have researched this topic extensively. The largest previous company to join the S and P index was Twitter at a $30B market cap. Tesla has a $200B market cap and is barreling ahead. This much buy pressure from many many billions of dollars of s and p index funds will be unprecedented.... simply without precedent. Twitter gained >>60% in the 3 months around the listing leading up to the announcement and the month after when the indexes had to then buy it.

Mercifully it also has the effect of stabilizing the day to day price of the stock. Thus making the stock even more attractive to long term buy and hold and less attractive to day traders and the annoying shorts we have taken years to vanquish.

This forum has been asleep on this topic for years. You can check my old posts. Maybe people never thought they would make money lol (people who had never driven the car once cause that changes everything).

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

Post by Prettyfrtnt » Wed Jul 01, 2020 8:40 am

1111... lol

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

Post by nisiprius » Wed Jul 01, 2020 9:02 am

My index fund already owns stock in Tesla. There aren't going to be any "significant index changes" in my index.

Image

The Vanguard Large-Cap Index Fund, VV, also, already includes Tesla. (Inclusion in this fund is based solely on capitalization, and not whether a company has had four quarters of positive earnings or whether S&P judges it to be among the "leading companies in leading industries.")

As you can see, there has not been any air between the growth charts for VV and VOO (S&P 500). Yes, there are two lines on the chart, blue for VV and orange for VOO.

When and if Tesla is added to the S&P 500, I will try to remember to plot the chart again and see if we can see if a little white fleck opened up between them, around the date when it is added. I'll bet we be able to see anything visible.

Source

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

Post by petulant » Wed Jul 01, 2020 9:12 am

harikaried wrote:
Wed Jul 01, 2020 12:56 am
Tesla hasn't been added to S&P 500 yet, but it seems like it will be at some point. From this page showing US Stock Market Cap, Tesla today would be #23:

https://www.iweblists.com/us/commerce/M ... ation.html

Code: Select all

20 	Bank of America Corp 	BAC 	206.05
21 	PayPal Holdings Inc 	PYPL 	204.54
22 	Walt Disney Co 	 	DIS 	201.42
23*	Tesla Inc 	 	TSLA 	200.17
24 	Netflix Inc 	 	NFLX 	200.13
25 	Cisco Systems Inc 	CSCO 	196.93
26 	Merck & Co Inc 	 	MRK 	195.19
Comparing the holding percentage of the nearby stocks in VOO, Tesla would be around 0.8% if added today. For us, we're actually the opposite situation where our US Stock portion is either already total market OR "extended" (like VXF) which has over 3% of assets allocated to Tesla. The 401k only has S&P 500 or Extended as low cost US Stock choices, so when Tesla gets removed, that account will have 0% allocated to Tesla, which may be fine as we had previously decided to overweight medium/small-cap.

I realize indices change regularly probably as non-events, but if Tesla does get added to S&P 500 as a top 20 holding, there could be some activity that might be worth preparing for?
Already priced in. I mean that very seriously. Investors have been watching Tesla's quarters of profitability for a while now and have been buying in anticipation of exactly the surge you're talking about. It might go up a bit more, but the people buying in anticipation of Tesla being added will dry up once it is added and might even start selling to the actual S&P 500 buyers.

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

Post by Clever_Username » Wed Jul 01, 2020 9:20 am

sycamore wrote:
Wed Jul 01, 2020 6:03 am
Read the section on "Front running" in the BH wiki article https://www.bogleheads.org/wiki/Index_fund to see how funds deal with this question.

For me I'm happy to use a Total stock market fund which already owns Tesla shares. I have other stock funds too but I feel I'm covered with these Tesla-like situations.
I'm also in the TSM-user category. I knew index funds did things to avoid front-running, but I didn't know the term until now. Thanks!
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by livesoft » Wed Jul 01, 2020 9:22 am

So we can close this thread because the answer to the title question is:

"Nothing."
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by nisiprius » Wed Jul 01, 2020 9:31 am

sycamore wrote:
Wed Jul 01, 2020 6:03 am
...Read the section on "Front running" in the BH wiki article https://www.bogleheads.org/wiki/Index_fund to see how funds deal with this question.
Indeed.

Just to be clear, an index fund is not required to buy a stock on the day it is added to the index. It is not required to buy the stock at all. An index fund is a fund whose stated goal is to track the index, but it has latitude in how it chooses to do it.

For example, if, for any reason, it thinks a stock that's being added to the index is acting funny, it does not need to buy that stock at all--it can make adjustments to its other stock holdings, in order to give the whole fund the same statistical characteristics (size, value, etc.) as if the new stock had been added, and wait to actually add the stock until things settle down.

Nowadays, most--all?--S&P 500 funds do have a policy of holding all of the stocks in the S&P 500, but it's never completely rigid. The prospectus for the Vanguard 500 Index Fund, for example, says:
The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index.
"Substantially all" and "approximately" give it enough wiggle room to dodge anything grotesquely weird in the behavior of an individual stock.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by harikaried » Wed Jul 01, 2020 10:23 am

sycamore wrote:
Wed Jul 01, 2020 6:03 am
https://www.bogleheads.org/wiki/Index_f ... nt_running to see how funds deal with this question.
Oh thanks for the link and term. So there's flexibility in when the index fund manager buys/sells to get the fund closer to the index, and one would guess it would be coordinated within a fund family, e.g., VXF would sell its shares "to" VOO, to minimize some effects on the volume of the transaction.

But for our Fidelity 401k, the timing of when it would end up with 0% Tesla due to Geode Capital Management deciding to adjust the Tesla holdings in FSMAX (Extended Market) -> FXAIX (500 Index) could be different from Vanguard or other funds.

I suppose should this mean I should exchange some FSMAX to FXAIX ahead of this event? How much -- 84/16 as suggested in https://www.bogleheads.org/wiki/Approxi ... ock_market ?

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

Post by nisiprius » Wed Jul 01, 2020 10:58 am

I suggest doing nothing at all.

You have to get used to doing nothing at all, rather than flailing around and telling yourself that you "made a mistake" when you lose a little due to chance and that you're a genius whenever you guess right by pure chance.

If you've chosen the S&P 500 rather than the total market, for whatever reason--accident, availability, something Warren Buffett said, some weak belief that it is a little better than the total market--whether you're "right" or "wrong" over the long term, you should expect to see times when you do a little worse, and times when you do a little better.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by retired@50 » Wed Jul 01, 2020 11:08 am

nisiprius wrote:
Wed Jul 01, 2020 10:58 am
I suggest doing nothing at all.

You have to get used to doing nothing at all, rather than flailing around and telling yourself that you "made a mistake" when you lose a little due to chance and that you're a genius whenever you guess right by pure chance.

If you've chosen the S&P 500 rather than the total market, for whatever reason--accident, availability, something Warren Buffett said, some weak belief that it is a little better than the total market--whether you're "right" or "wrong" over the long term, you should expect to see times when you do a little worse, and times when you do a little better.
+1
The sheer fact that you've analyzed Tesla and tried to figure out where it would rank in the S&P 500 tells me you've already devoted too much of your life to this question.

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

Post by tibbitts » Wed Jul 01, 2020 11:11 am

harikaried wrote:
Wed Jul 01, 2020 12:56 am
Tesla hasn't been added to S&P 500 yet, but it seems like it will be at some point. From this page showing US Stock Market Cap, Tesla today would be #23:

https://www.iweblists.com/us/commerce/M ... ation.html

Code: Select all

20 	Bank of America Corp 	BAC 	206.05
21 	PayPal Holdings Inc 	PYPL 	204.54
22 	Walt Disney Co 	 	DIS 	201.42
23*	Tesla Inc 	 	TSLA 	200.17
24 	Netflix Inc 	 	NFLX 	200.13
25 	Cisco Systems Inc 	CSCO 	196.93
26 	Merck & Co Inc 	 	MRK 	195.19
Comparing the holding percentage of the nearby stocks in VOO, Tesla would be around 0.8% if added today. For us, we're actually the opposite situation where our US Stock portion is either already total market OR "extended" (like VXF) which has over 3% of assets allocated to Tesla. The 401k only has S&P 500 or Extended as low cost US Stock choices, so when Tesla gets removed, that account will have 0% allocated to Tesla, which may be fine as we had previously decided to overweight medium/small-cap.

I realize indices change regularly probably as non-events, but if Tesla does get added to S&P 500 as a top 20 holding, there could be some activity that might be worth preparing for?
You have prepared already because besides owning a 500 index you also own a 500 completion index, in approximately a market-weight proportion. Very clever of you.

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

Post by bertilak » Wed Jul 01, 2020 11:15 am

nisiprius wrote:
Wed Jul 01, 2020 10:58 am
I suggest doing nothing at all.

You have to get used to doing nothing at all, rather than flailing around and telling yourself that you "made a mistake" when you lose a little due to chance and that you're a genius whenever you guess right by pure chance.

If you've chosen the S&P 500 rather than the total market, for whatever reason--accident, availability, something Warren Buffett said, some weak belief that it is a little better than the total market--whether you're "right" or "wrong" over the long term, you should expect to see times when you do a little worse, and times when you do a little better.
I got to S&P500 via Tax Loss Harvest (TLH) from Total Stock Market. I don't expect to change back unless there is another TLH opportunity -- an opportunity I would rather not have. I much prefer there NOT BE a loss to harvest.

TO THE OP: This was and will not be the only change to the makeup of the S&P500. From Wikipedia, in reference to the S&P500: Between January 1, 1963 and December 31, 2014, 1,186 index components were replaced by other components.
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by Prettyfrtnt » Wed Jul 01, 2020 11:22 am

There’s never been anything at all near to this in comparison. The vast majority of companies going in and out are in the 300s and 400s. It’s absolutely unprecedented to have a 200B, 0.8% of total S and P market cap company suddenly get listed. 8-) :sharebeer :moneybag

S and P has a market cap of 20T last I checked. Index funds last year passed individual stocks for majority ownership. These trillions of dollars of funds now will need to get TSLA... oh but the market has it figured out all ready. Okay...

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

Post by Big Dog » Wed Jul 01, 2020 11:37 am

I agree with the others in that it's already priced into TSLA.

But a better question for shorters is who does TSLA replace?

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

Post by jrbdmb » Wed Jul 01, 2020 11:46 am

Prettyfrtnt wrote:
Wed Jul 01, 2020 11:22 am
There’s never been anything at all near to this in comparison. The vast majority of companies going in and out are in the 300s and 400s. It’s absolutely unprecedented to have a 200B, 0.8% of total S and P market cap company suddenly get listed. 8-) :sharebeer :moneybag

S and P has a market cap of 20T last I checked. Index funds last year passed individual stocks for majority ownership. These trillions of dollars of funds now will need to get TSLA... oh but the market has it figured out all ready. Okay...
Do you really think that the thousands (tens of thousands?) of stock pickers and institutional investors out there haven't already anticipated this?

BTW, one of the requirements to be added to the S&P 500 is it must have at least four consecutive quarters of positive earnings. Unless TSLA significantly beats its estimates and turns a profit in the 2nd quarter 2020, it will not be in the S&P for at least xxxxx a quarter or perhaps a year, depending on which source you believe.

(Edit: I found one source that said four consecutive quarters of profitability are required. Another source said profitability over the last year total and a profit in the most recent quarter. Anyone know for sure which is correct?)
Last edited by jrbdmb on Wed Jul 01, 2020 12:04 pm, edited 3 times in total.

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

Post by MadHungarian » Wed Jul 01, 2020 11:58 am

The whole purpose of using passive whole-market indexes is so that we don't have to worry about these sort of single-stock issues.

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

Post by Prettyfrtnt » Wed Jul 01, 2020 12:32 pm

jrbdmb wrote:
Wed Jul 01, 2020 11:46 am
Prettyfrtnt wrote:
Wed Jul 01, 2020 11:22 am
There’s never been anything at all near to this in comparison. The vast majority of companies going in and out are in the 300s and 400s. It’s absolutely unprecedented to have a 200B, 0.8% of total S and P market cap company suddenly get listed. 8-) :sharebeer :moneybag

S and P has a market cap of 20T last I checked. Index funds last year passed individual stocks for majority ownership. These trillions of dollars of funds now will need to get TSLA... oh but the market has it figured out all ready. Okay...
Do you really think that the thousands (tens of thousands?) of stock pickers and institutional investors out there haven't already anticipated this?

BTW, one of the requirements to be added to the S&P 500 is it must have at least four consecutive quarters of positive earnings. Unless TSLA significantly beats its estimates and turns a profit in the 2nd quarter 2020, it will not be in the S&P for at least xxxxx a quarter or perhaps a year, depending on which source you believe.

(Edit: I found one source that said four consecutive quarters of profitability are required. Another source said profitability over the last year total and a profit in the most recent quarter. Anyone know for sure which is correct?)

They need one dollar of profit. And they will be listed. I’d say the retail investors have won on tsla. (And apple before it).

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

Post by harikaried » Wed Jul 01, 2020 12:51 pm

nisiprius wrote:
Wed Jul 01, 2020 9:02 am
As you can see, there has not been any air between the growth charts for VV and VOO (S&P 500). Yes, there are two lines on the chart, blue for VV and orange for VOO.
Image
Source
Ah thanks for the perspective where over 10 years, VV is 0.76% higher than VOO. Here's looking at just the last 1 year with similar 0.81% difference:
Image

Edit: Although this means in the first 9 years of the past 10, VV was underperforming by .04%… Unclear how much of VV gains in the last year are due to TSLA which would have gone from $10k to $48,322.29.

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

Post by JonnyB » Wed Jul 01, 2020 1:05 pm

Prettyfrtnt wrote:
Wed Jul 01, 2020 11:22 am
There’s never been anything at all near to this in comparison. The vast majority of companies going in and out are in the 300s and 400s. It’s absolutely unprecedented to have a 200B, 0.8% of total S and P market cap company suddenly get listed.
Berkshire Hathaway was added to the S&P 500 in 2010 with a value $158 billion which was about 1.6% of S&P market cap.

Might be interesting to go back into the boglehead archives and see the same discussions back then.

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

Post by harikaried » Wed Jul 01, 2020 1:19 pm

JonnyB wrote:
Wed Jul 01, 2020 1:05 pm
Berkshire Hathaway was added to the S&P 500 in 2010 with a value $158 billion which was about 1.6% of S&P market cap.
Interesting. Here's an article from January 27, 2010 with estimates of Berkshire being 1.1% of S&P 500 with SPY and IVV around $100 billion net assets buying $1 billion of Berkshire stock:

https://etfdb.com/2010/sp-500-etfs-prep ... -addition/

So, mentioned earlier in this thread, SPY and IVV buying 0.8% Tesla would be around $4 billion and VOO would be another $4 billion. And it seems like generally index investing has increased since 2010.

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

Post by harikaried » Thu Jul 02, 2020 3:49 am

If Berkshire was $158 billion at end of January 2010, it would have been added at position 10 just behind IBM $160 billion and ahead of JPM $153 billion according to https://www.iweblists.com/us/commerce/M ... Jan10.html

Tesla after hours has gotten up to +7% with a potential market cap of $223 billion slotting it at "just" between #17 Verizon $228 billion and #18 AT&T $215 billion.

Do index fund managers try to time the market? Assuming all of them believe buying Tesla sooner rather than later should get a better price thus meeting or beating the index benchmark as well as the assumption that buying later means more of an underperformance with the potential drop in Tesla price as shares are sold for those wanting to cash in. Or I suppose alternatively the manager could decide to wait for the dip…

I suppose that's why we index and don't need to worry about these things. :wink:

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

Post by sycamore » Thu Jul 02, 2020 5:51 am

harikaried wrote:
Thu Jul 02, 2020 3:49 am

I suppose that's why we index and don't need to worry about these things. :wink:
Yep, one reason among many!

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

Post by peterwantstosave » Thu Jul 02, 2020 6:18 am

The beauty of indexing, for me, is that I know longer make space to think about what individual companies are doing or not doing. It's wonderful, truly.

Hope this helps, Peter

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

Post by nisiprius » Thu Jul 02, 2020 7:40 am

John C. Bogle has been clear that to him the phrase "index fund" meant "total market index fund--as closely as possible." An S&P 500 fund was good enough, but a total market fund was preferable. For example, in a 2004 speech, he said:
...the original idea of the index fund—own the entire U.S. stock market, own it at low cost, hang on to it forever—has been, to put it bluntly, bastardized.
He also commented
From the outset, I realized that the 500 Index, by owning large-cap stocks that represented 75% to 80% of the value of total U.S. market, would closely parallel, but not precisely match, the stock market’s return, since the Index excluded mid-cap and small-cap stocks. So in 1987, we started a fund called the Extended Market Fund, indexed to those smaller companies. If used in harness with the 500 Fund, it would provide a total market exposure...and in 1991, a Total Stock Market Index Fund, modeled on the Wilshire Total (U.S.) Market Index...
and
the brute evidence of the past three decades makes a powerful case against the quest to find the needle in the haystack. Investors would clearly be better served by simply owning, through an index fund, the market haystack itself.
I can't recall the slightest hint in any of Bogle's writing that the S&P 500 was somehow preferable to the total market; it was merely an acceptable approximation to the total market, and the best that could be done when the fund was created.

From the point at which the Vanguard Total Stock Market Index Fund's expense ratio dropped to be equal to the 500 Index Fund, in my opinion Total Stock simply superseded 500 Index. Reasons for using the 500 Index are limited: a) tax considerations if you already have a large holding in a taxable account; b) only available choice in a 401(k) plan; c) heard someone, e.g. Warren Buffett mention it, and looked no further; d) pursuing some obscure theory that the S&P 500 amounts to active management and that it is total-market-beating active management.

So, I still have three questions for harakareid.

1) If you are investing in the world's biggest mutual fund, the Vanguard Total Stock Market Index Fund, why do you care about what happens to the S&P 500?

2) If you are deliberately investing in the 500 index Fund rather than the Total Stock Market Index fund, why?

3) If the issues with front-running the S&P 500 are so big, glaring, and obvious that it is easy to get rich by doing it, why isn't there any "S&P 500 Anticipation Fund" that selectively invests in stocks just before they get added to the S&P 500--either an active mutual fund based on human prediction, or a passive fund or ETF based on some rule-based model that predicts addition?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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

Post by harikaried » Thu Jul 02, 2020 10:48 am

nisiprius wrote:
Thu Jul 02, 2020 7:40 am
1) If you are investing in the world's biggest mutual fund, the Vanguard Total Stock Market Index Fund, why do you care about what happens to the S&P 500?
After several rounds of TLH activity earlier this year, we don't own any Vanguard funds. But of our US Stocks portion, our dollar weighted average number of holdings is 3430 across various Fidelity and Schwab index funds. For an index investor and with Fidelity ETF screener showing SPY, IVV and VOO as the 3 largest ETFs, all of which follow S&P 500 index, this upcoming event seems to be the largest interesting activity to an index in the last 10 years.
nisiprius wrote:
Thu Jul 02, 2020 7:40 am
2) If you are deliberately investing in the 500 index Fund rather than the Total Stock Market Index fund, why?
The reason why our weighted holdings isn't closer to VTI's 3493 is because roughly 1/3 of our US Stocks is in Extended Market and the remainder is in Total Market. Many years ago, we decided to use the 401k as the rebalancing account across our portfolio, so whenever we need to rebalance, we just copy over the 3 percentages for US, Intl and Bonds from our spreadsheet and hit rebalance. We went with a single Extended US index fund instead of also S&P 500 index fund for simplicity and small tilt, but I had not considered it growing to be such a large portion of our portfolio, so maybe it's worth revisiting that decision.

So back to the first question, a good chunk of our money is in the Extended Market index which is changing with the removal of Tesla, and we don't own any funds that follow just S&P 500 (but maybe should ?).
nisiprius wrote:
Thu Jul 02, 2020 7:40 am
3) If the issues with front-running the S&P 500 are so big, glaring, and obvious that it is easy to get rich by doing it, why isn't there any "S&P 500 Anticipation Fund" that selectively invests in stocks just before they get added to the S&P 500--either an active mutual fund based on human prediction, or a passive fund or ETF based on some rule-based model that predicts addition?
Well, if we consider the Berkshire event from 10 years ago and Tesla event soon as the ones that are meaningful, building a fund around once-a-decade events might not be worthwhile or consistent enough -- who knows if something this eventful will happen again. And the front-running effect is probably a relatively small factor of an individual stock price that probably depends more on the company's performance which is the reason for preferring index funds and avoiding individual stocks in the first place.

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

Post by physixfan » Fri Jul 03, 2020 10:59 pm

Interesting question. This article is quite informative on this topic: https://seekingalpha.com/article/400999 ... d-to-index

Let's wait and see what happens. I guess there will be a severe short squeeze when it is announced to be listed SP500. It should be anticipated already, but it will happen anyway...

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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 04, 2020 1:02 am

What is Tesla?
Risk is not a guarantor of return.

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

Post by TIAX » Sat Jul 04, 2020 2:11 am

nisiprius wrote: Just to be clear, an index fund is not required to buy a stock on the day it is added to the index. It is not required to buy the stock at all. An index fund is a fund whose stated goal is to track the index, but it has latitude in how it chooses to do it.
Although funds don't have to buy stocks on the day they are added to the index, some funds do fully replicate the index (for example, VXUS) and would have to buy the stock at some point.

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

Post by harikaried » Sun Jul 05, 2020 2:32 am

physixfan wrote:
Fri Jul 03, 2020 10:59 pm
Interesting question. This article is quite informative on this topic: https://seekingalpha.com/article/400999 ... d-to-index
That article suggests index funds want to minimize tracking error which puts pressure on buying as soon as possible. What can fund managers do in general to reduce that? Can they overweight a transitioning stock in Extended fund ahead of time to sell to the S&P 500 fund? If so, does that only really work for smaller companies that could get covered by the cash portion of the fund?

Alternatively, I notice Vanguard says "Portfolio holdings may exclude any temporary cash investments and equity index products." Does that allow for temporarily pre-purchasing stock before reporting it as a holding? This could maybe allow the larger S&P 500 funds to use the cash available instead of being limited by cash of other sources and later dealing with shuffling? Then again, Fidelity seems to show its S&P 500 FXAIX as Cash & Net Other Assets 0.00% while its prospectus says "The fund may not be fully invested at times, either as a result of cash flows into the fund or as a result of reserves of cash held by the fund to meet redemptions."

But I suppose a fund wouldn't want to incorrectly buy ahead of time in case the company doesn't actually get added to the index?

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

Post by Ed 2 » Sun Jul 05, 2020 4:12 am

harikaried wrote:
Wed Jul 01, 2020 12:56 am
Tesla hasn't been added to S&P 500 yet, but it seems like it will be at some point. From this page showing US Stock Market Cap, Tesla today would be #23:

https://www.iweblists.com/us/commerce/M ... ation.html

Code: Select all

20 	Bank of America Corp 	BAC 	206.05
21 	PayPal Holdings Inc 	PYPL 	204.54
22 	Walt Disney Co 	 	DIS 	201.42
23*	Tesla Inc 	 	TSLA 	200.17
24 	Netflix Inc 	 	NFLX 	200.13
25 	Cisco Systems Inc 	CSCO 	196.93
26 	Merck & Co Inc 	 	MRK 	195.19
Comparing the holding percentage of the nearby stocks in VOO, Tesla would be around 0.8% if added today. For us, we're actually the opposite situation where our US Stock portion is either already total market OR "extended" (like VXF) which has over 3% of assets allocated to Tesla. The 401k only has S&P 500 or Extended as low cost US Stock choices, so when Tesla gets removed, that account will have 0% allocated to Tesla, which may be fine as we had previously decided to overweight medium/small-cap.

I realize indices change regularly probably as non-events, but if Tesla does get added to S&P 500 as a top 20 holding, there could be some activity that might be worth preparing for?
If I was long term investor in VOO . Yes, I would prepared to do nothing. That’s what I do as investor in Total Stock market index fund. DCA every week for 20 years already.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel

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

Post by harikaried » Sun Jul 05, 2020 7:24 pm

Hmm… Would Tesla start selling these if they did not make a profit in 2020 Q2 for S&P 500 inclusion? :confused

https://shop.tesla.com/product/tesla-short-shorts
Celebrate summer with Tesla Short Shorts. Run like the wind or entertain like Liberace with our red satin and gold trim design. Relax poolside or lounge indoors year-round with our limited-edition Tesla Short Shorts, featuring our signature Tesla logo in front with “S3XY” across the back. Enjoy exceptional comfort from the closing bell.
Image

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

Post by harikaried » Mon Jul 06, 2020 3:07 pm

Here's at the close today July 6th:
Image

Code: Select all

14 	Home Depot Inc 	HD 	268.36
15*	Tesla Inc 	TSLA 	254.39
16 	Intel Corp 	INTC 	252.09
Tesla is just slightly ahead of Intel by market cap, and checking Fidelity's "ETPs Holding INTC in Basket" sorted by "Exposure to INTC":

Code: Select all

SPDR S&P 500 ETF             	SPY	$2.7B
ISHARES CORE S&P 500 ETF	IVV	$1.9B
VANGUARD S&P 500 ETF    	VOO	$1.4B
Looks like Tesla is now #15 and would be 1% of S&P 500 with the 3 largest ETFs needing to buy at least $6 billion in TSLA.

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

Post by occambogle » Fri Jul 10, 2020 3:33 am

Hi, just curious regarding timing... does S&P review/announce possible inclusions/removals on some kind of known schedule/dates, or just whenever they like?
Presumably Tesla couldn't be included, at the earliest, until after they report Q2 2020 earnings... which they now say will be after market close on July 22.

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

Post by manuvns » Fri Jul 10, 2020 12:02 pm

at 20b short positions and price in bubble territory TSLA is a tempting short stock .

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

Post by Angst » Fri Jul 10, 2020 12:29 pm

Perhaps the larger stocks in the various S&P 500 Completion Index funds out there (like VEXAX) get to look forward to something of a bump when Tesla leaves? :D

Tesla represents about 2.5% of the index

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

Post by Prettyfrtnt » Fri Jul 10, 2020 2:20 pm

Angst wrote:
Fri Jul 10, 2020 12:29 pm
Perhaps the larger stocks in the various S&P 500 Completion Index funds out there (like VEXAX) get to look forward to something of a bump when Tesla leaves? :D

Tesla represents about 2.5% of the index
1500?!?

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

Post by kevinpet » Fri Jul 10, 2020 2:55 pm

harikaried wrote:
Sun Jul 05, 2020 2:32 am
Can they overweight a transitioning stock in Extended fund ahead of time to sell to the S&P 500 fund? If so, does that only really work for smaller companies that could get covered by the cash portion of the fund?
That seems to be a definite no. The shareholders of the extended market fund have a lot of overlap with the shareholders of the S&P 500 fund, but they aren't the same and the funds need to be managed separately according to their own objectives.

The S&P 500 fund could start buying before it was officially in the index (if the prospectus allows) and the extended could start selling ahead of time, but they would need to have valid reasons within those funds to do so.

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

Post by harikaried » Fri Jul 10, 2020 3:05 pm

Since starting this thread last week, Tesla's market cap has increased 43% from $200 billion to $286 billion. In terms of estimated S&P 500 weighting, that increases from 0.8% to 1.1%, which now roughly matches the percentage Berkshire was added at 10 years ago at #10 (just ahead of JPM). Currently Tesla would be #13 (which happens to be just behind of JPM now):

Image

Code: Select all

12 	JPMorgan Chase & Co 	JPM 	293.40
13*	Tesla Inc 		TSLA 	286.49
14 	UnitedHealth Group Inc 	UNH 	276.26
Last edited by harikaried on Fri Jul 10, 2020 3:06 pm, edited 1 time in total.

alex_686
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Re: What to do with significant index changes, e.g., S&P 500 adding Tesla

Post by alex_686 » Fri Jul 10, 2020 3:06 pm

kevinpet wrote:
Fri Jul 10, 2020 2:55 pm
The S&P 500 fund could start buying before it was officially in the index (if the prospectus allows) and the extended could start selling ahead of time, but they would need to have valid reasons within those funds to do so.
They really can't. When the prospectus is written the lawyers insist on the widest most permissive language possible. But that is not the way things play out.

First, the SEC has various marketing regulations on the books. If you say you are a S&P 500 index fund you have to cleave very closely to the index. You can't front run the inclusion because it might be helpful and beneficial for the client. The client is buying the index as constructed by the S&P and the portfolio manager can't make that type of subjective decision.

Second, index funds are primarily judged on tracking error. i.e., does the fund's return replicate the index's return? A positive return will result in a higher tracking error.

Lastly, the latest trick has not been for the arbitrage trades to front run the index and buy shares ahead of time expecting a pop. Rather, it is to manipulate the entry price into the index and funds via 'heartbeat trades'. This eliminates tracking error. So even if the price is higher, the fund benefits. Maybe not you.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.

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

Post by Dottie57 » Fri Jul 10, 2020 3:14 pm

nisiprius wrote:
Wed Jul 01, 2020 10:58 am
I suggest doing nothing at all.

You have to get used to doing nothing at all, rather than flailing around and telling yourself that you "made a mistake" when you lose a little due to chance and that you're a genius whenever you guess right by pure chance.

If you've chosen the S&P 500 rather than the total market, for whatever reason--accident, availability, something Warren Buffett said, some weak belief that it is a little better than the total market--whether you're "right" or "wrong" over the long term, you should expect to see times when you do a little worse, and times when you do a little better.
+1

I have SP500 in 401k because total stock is not. IRA holds total stock. I can’t find a difference in performance. Relax. Let your strategy unfold.

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

Post by Angst » Fri Jul 10, 2020 4:29 pm

Prettyfrtnt wrote:
Fri Jul 10, 2020 2:20 pm
Angst wrote:
Fri Jul 10, 2020 12:29 pm
Perhaps the larger stocks in the various S&P 500 Completion Index funds out there (like VEXAX) get to look forward to something of a bump when Tesla leaves? :D

Tesla represents about 2.5% of the index
1500?!?
The S&P 1500 does not "complete" the S&P 500, it includes it, and it also includes the S&P 400 and the S&P 600; it's the S&P "composite" index. But there are more than 1500 companies out there in the "total stock market", and one of them is Tesla! The S&P Completion Index however includes all NYSE, American stock exchanges and Nasdaq OTC stocks, Tesla too! :wink:

Click on VEVAX in my post above. I will admit that I was kidding a bit in my post, but I stand by it in principle.

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

Post by harikaried » Sun Jul 12, 2020 1:36 am

Looking at some more history of interesting additions to S&P 500, it looks like there's another 10 year gap from 2020 Tesla to 2010 Berkshire Hathaway to just before 2000 Yahoo!

Back before Y2K/post-dot-com, looks like things looked like…

Code: Select all

 1 Microsoft		MSFT	583
 2 General Electric	GE	504
 3 Cisco Systems	CSCO	353
 4 Exxon Mobil		XOM	283
 5 Wal-Mart Stores	WMT	283
 6 Intel		INTC	271
 7 Nippon T&T		NTT	262
 8 Lucent Technologies	LU	252
 9 Nokia		NOK	197
10 BP Amoco		BPA	196
…
39 Yahoo!		YHOO	 97
According to this article, Yahoo! did get a 64% bump from $56 billion market cap to roughly the above market cap after announcement of it getting added to the index, but seems like percentage-of-index-wise, it was not as significant as now. https://www.yahoo.com/news/tesla-appear ... 31996.html

So perhaps there is indeed a bump, but Yahoo! (and others) did drop quite a bit within a year.

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

Post by Prettyfrtnt » Mon Jul 13, 2020 8:40 am

Very crazy situation. Shall be super weird for the indexes... My July 1 post had actionable information.

One dollar of profit and it’s going to be more extraordinary than it already is.

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

Post by occambogle » Mon Jul 13, 2020 9:50 am

Tesla up 14% today to around $1750, and CNBC saying this makes it the 10th largest U.S. stock by market value.....

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

Post by corp_sharecropper » Mon Jul 13, 2020 10:23 am

I need to come clean with you guys. Over the last few months I have been unable to stop myself from putting on bearish option plays for Tesla... I mean come on, it just feels so intuitive that it is irrationally performing, how can the market really think what was once <$1K in value just a few months ago is now worth almost $2K? But like I said, I'm coming clean, every single time TSLA has just blown right through my strategy, I can totally identify with all these people who have been putting on short positions over the years thinking "this thing has to come back down to earth eventually!". So, as a word of warning to my fellow bogleheads never risk more than you can afford to lose and repeat that quote about solvency over and over before considering going this route (but just don't do it), because it doesn't matter if you think the market is being irrational, the market just is, and you have to play ball on the market's terms.

"Markets can stay irrational longer than you can remain solvent"
-John Maynard Keynes

I'm sure some day Tesla will have a decent correction, but the number of investors to profit on it will be tiny compared to the numbers that repeatedly lost money and have long since capitulated (I'm guessing a fair number literally have/will capitulate simply from not having enough funds left to keep their positions).

ETA: I was pretty prudent with limiting the damage personally, but I'm not going to be doing it again that's for sure

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