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When’s it going to happen?

Speculation continues to be rampant in 2020 over what might happen if and when Tesla Inc.  (TSLA) - Get Tesla Inc Report gets added to the S&P 500 undefined, now that it's met the profitability threshold required to join the big index.

Index shakeups are on everyone's mind this week, following a big shuffle in the Dow Jones Industrial Average.

A Tesla add for the S&P is a bigger deal than it may seem.

Tesla made headlines a few days ago when it passed Walmart  (WMT) - Get Walmart Inc. Report in market value, becoming the ninth most valuable stock in the U.S.

One consequence of that is the fact that Tesla is big. Since the S&P 500 is a free-float capitalization weighted index, Tesla’s current price tag would make it the 11th-largest S&P component right now, with just under a 1.1% weight in the index.

The last time a new constituent that large was added to the S&P was Berkshire Hathaway undefined, which had an almost identical weight when it was added – the only difference is that the S&P (and the passive money that tracks it) is worth significantly more today than it was back then.

So, what would the S&P 500 look like right now with Tesla in it?

For starters, it’d be higher than it is today [1]:


Assuming Tesla joined at the start of the year and the S&P 500 was rebalanced continuously, it winds up about 4% higher with Tesla in it.

Part of that is because of how insane Tesla’s 2020 rally has been relative to its large peers:


Tesla literally stands apart.

(The chart above also highlights the size effect we’ve been talking about lately.)

Of course, the next big question is what happens to Tesla’s stock price when a bunch of passive investors are mandated to start dumping money into one of the highest-weight S&P 500 components at the same time.

When it happened to Berkshire, shares outperformed the S&P 500 by 18% in the month and a half that followed its inclusion in the index.

We’ll take a closer look at what that could mean for Tesla’s stock price up ahead… Stay tuned.

Update: Here's the followup look at the impact on TSLA shares.

Meanwhile, here’s what the top 15 stocks in the S&P 500 would be if the index were rebalanced today:


[1]: To make things a little more interesting, the S&P 500 chart uses continuous rebalancing, with weights based on daily free-float-adjusted market capitalization and assumes a simple rebalance that knocks off the smallest index component when Tesla is added. Changing those assumptions changes the chart a bit, but not dramatically.