By Jake Willms, Quantitative Analyst
The S&P 500, perhaps the world’s most famous index, is about to include a new company to its ranks: Tesla. Here’s what it means for investors.
It is important to understand that the S&P 500 is both a market-capitalization-weighted index and a float-weighted index. This means that the percentage held by each individual company is determined by the market capitalization and adjusted for shares available for public trading. Both of these factors help the index manage the weights over time, and the Tesla portion will be no different.
Tesla has a market cap of over $400 billion, which ranks in the top 10 of U.S. companies. I would expect Tesla to receive a sizable weighting within the index upon its inclusion, but keep your expectations in line with this; its still just one of 500 companies that the index invests in. Also, many shares will be purchased in response to this move, so its safe to assume that the availability of shares will decrease and thus limit the weighting the company can have inside the index. Something around 1% is a safe expectation.
Moving forward, Tesla’s growth as a company remains unclear. As other established automakers like General Motors (GM), Ford, and Volkswagen move into the electric vehicle industry, Tesla will start to face tougher competition. Maintaining their pricing power and brand dominance should prove a real challenge in the long-term, but fortunately for Tesla they have other avenues of growth to explore with batteries and solar power products.
Whatever ends up happening to Tesla in the future isn’t likely going to shake up the S&P 500 too much, thanks to its well-diversified index weights. But if you’re like me and you invest in this famous index, it helps to know when major companies are about to be included.