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Stock Market: What Happens If Tesla Enters S&P 500 (bloomberg.com)
51 points by mancerayder 2 days ago | hide | past | favorite | 51 comments

The S&P 500 made sense when tracking all public companies would have been too much work, but this kind of bookkeeping has gotten much easier. For example, Vanguard offers a low-fee total stock market index: https://investor.vanguard.com/mutual-funds/profile/VTSMX

If your model is "buy everything" then you avoid many awkward situations like this one.

Kindof. The mere fact that the S&P 500 exists causes the potential jump in price for that one stock, but since you hold everything in VTSMX, you also see the jump in TSLA.

Worse, since you own every stock (not really, but close enough), you now have the 500 companies representing about $27 trillion of market cap, and then thousands more representing only another $8-9 trillion. So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday).

So if you want the whole stock market, buy it in multiple pieces - a large cap, a small cap, and a mid-cap funds.

As to your bookkeeping comment about being easier, you are absolutely correct. In fact, a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index).

Market cap source: https://siblisresearch.com/data/us-stock-market-value/

> So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday).

This doesn't seem that bad to me?

Imagine that you own FOO and BAR. They're each 1% of your holdings and each 1% of the US stock market. Now they merge. How much of your holdings should be the new company FOOBAR? Seems to me like it should be 2% now that FOOBAR is ~2% of the market.

AAPL, AMZN, GOOG, etc each represent a large number of products and businesses, and I don't see why you'd want to decrease your exposure just because they trade under a single stock symbol.

One of the commonly expressed intents for buying indices is lazy diversification. By having vastly unevenly-weighted indices, one fails to accomplish that aim.

Assuming diversification is the goal, your comment would only be true (that 1+1 and 2 are equivalent) if the constituent parts of hyper-scale companies operated independently. In reality, I'd say that rarely happens.

At best, you get something like Facebook (there can only be so many true chiefs). At worst, you get something like GE (cannibalizing viable businesses to feed others).

And all of this is to say nothing of that fact that, historically, Amazons don't become 2x Amazons with the frequencies that {mid-cap} become {large cap}, simply by virtue of total addressable market maximums in mature business areas.

FOO is Salesforce. BAR will be my future start-up. After the IPO I will make sure that Salesforce acquires all our shares and your example will become the ultimate example for finance or stock text books.

In the 2000 crash, VTSAX came back about a year before the S&P 500 did.

source: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

see the drawdowns tab.

Right. But that’s not what I mean.

Split the total market into 3 funds and see how much better it compares to your solution. (Drawdowns tab also)


I think what you're seeing is the higher yield (+risk) of the small-cap fund. See this comparison to VISGX only:


I agree with bsmith. SCV is riskier, and in theory provides better returns. You can minimize the risk a little by tilting a little, like Paul Merriman recommends.

As long as we are performance chasing[0].. CAGR 27.22%! or Bitcoin before the pop, or any of the big FAANG's alone :)

Obviously I'm not suggesting you actually buy and hold UPRO 100% AA.

The problem is, we have no idea what the future holds, and can only guess. Buying the market(VTSAX/VTI) is the next best thing, you can't really do wrong, but you also won't "win" in the sense that you only get winners. Or VT if you want the global market.

0: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...

> Worse, since you own every stock (not really, but close enough), you now have the 500 companies representing about $27 trillion of market cap, and then thousands more representing only another $8-9 trillion. So any change in the smaller companies is dwarfed by one good (or bad) day of AAPL, AMZN, GOOG, etc (as happened yesterday).

> So if you want the whole stock market, buy it in multiple pieces - a large cap, a small cap, and a mid-cap fund.

But this only makes sense because you think holding companies based on market sector (equally weighting each sector) makes more sense than just basing it on the size of the company. What evidence do you have that this is a better approach?

Fama and French determined that higher exposure to their size factor led to outperformance. Equal weighting increases your portfolios size exposure. See https://en.m.wikipedia.org/wiki/Fama%E2%80%93French_three-fa...

> a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index).

That’s not the point though. A one time buy is easy - rebalancing quarterly, and rebalancing when a huge new company is added is the hard part (as evidenced by the need for buying $35-40Billion worth of TSLA and selling an equivalent amount of other stocks).

Depends on the scale. For vanguard, it’s a lot of work.

For a financial advisor, the software to rebalance runs in a web browser on a laptop (heck, even an iPad!).

Rebalancing has been figured out and automated very well for a few years now, with several different vendors all competing.

> In fact, a competent financial advisor has the tools to trade the S&P themselves for clients (literally buying all 500 stocks individually and in correct proportions to the index).

At lower cost than what you’d pay via a large investment company like Vanguard/Fidelity/BlackRock?

VTI/VTSAX is 80% S&P 500 by market cap. You get slightly better diversification into mid- and small-cap stocks, but at minuscule weights that don't make much of a dent in the performance of the fund. In practice, there's little difference between holding VTI/VTSAX and, say, VOO/VFIAX.

(VTSMX is closed to new investors. VTSAX is the current fund.)

The S&P500 still serves a purpose for very large funds (pension funds, endowments, etc), whose main problem is how to allocate tens of billions of dollars each quarter, and for these, their playbook has included the S&P500 for a long time.

They're not going to drop it simply because there are other ways; for them it's about being conservative and cautious about any decision they make.

I don't see an edge here. It could very well be that the stock sells off when the announcement comes because it has been well anticipated. This is not a risk-free trade as some make it out to be. Proceed with caution.

More in-depth analysis by Rob Mauer:

- Part 1 https://m.youtube.com/watch?v=JN8PNPBkaWc - Part 2 https://m.youtube.com/watch?v=3v-FFbdd_VM

I wonder if it would be good time to do another equity raise. They raised 2 billion dollars earlier this year at a price of 767 (1,430 now) to fuel their growth because they thought there share price was high then.

Once the inclusion is announced, it seems like a perfect time to me to announce another massive capital raise to further fuel their growth now that their share price is almost double from their previous raise and the index funds are going to have to buy about $35 billion to $40 billion of shares to get to the proper weighting according to the article. Why not do a massive capital raise which the index funds will buy a ton of to help get them to the proper weighting.

They don't need to, and it would make no sense to further dilute current shareholders. They have enough cash for operations and investments, free cash flow is increasing fast and will continue to do so, it makes no sense for shareholders to do a secondary to be included in the SP500 (the SP500 board may ask Tesla to offer liquidity but that is the index funds' problem not Tesla's, and such a concession would only benefit front runners instead of long terms investors). Besides, if market cap continue to grows as expected, SP500 will have to add TSLA at any price (otherwise the whole concept of SP 500 Index would be at risk). Also, many are waiting for Batter and Powertrain day to assess Tesla's ability to ramp production to 10+ million EVs in ~2030) so unless those plans disappoint, raising equity before September would be a let down.

It doesn't seem to me like current shareholders are paying a lot of attention to the fundamentals, and will be just as happy to bid the price into the stratosphere after a further dilution as they were to bid it into the stratosphere after the most recent dilution.

The fact of the matter is that the entire purpose of the stock market is supposed to be to direct capital into productive investments. There is absolutely no way that Tesla management can look at the next 10-20 years of global economic and business developments (a period in which Tesla will likely be fighting for its survival as traditional automakers finally begin to compete in the EV space) and conclude that "gosh, there is no set of circumstances in which we could execute better with a few billion dollars of additional reserve capital in the bank."

I think the Feb raise by Tesla was probably done because they (Musk) thought that COVID-19 would hit the US and cause a lot problems, unlike most people at the time. Diluting his holdings to put $2 billion in the bank for Tesla to get through the COVID problems seemed like a good idea. Now it looks like Tesla is not going to be hit as hard as he predicted and Musk would like to keep his percent ownership in Tesla as high as possible. He has said that when he needs personal cash he borrows against his stock holdings rather than selling them(at the tune of about $1 billion at the moment, iirc).

Musk has also said that growth in his companies are mostly people constrained and not capital constrained. His companies can raise capital any time they decide it is a good idea.

I guess I'm old enough to remember 2019, when Elon Musk raised the specter of the company running out of cash if they didn't engage in massive cost cutting [1,2]. Or even 2018, when Tesla's stock price crashed because Musk was joking about bankruptcy [3].

But leaving recent history aside: the fact of the matter is that Tesla is now valued at 136% the market capitalization of Toyota, an organization that currently ships about 50x more vehicles each year than Tesla does.

The only possible way for Tesla to achieve earnings from car sales that justify this stock price* (on a reasonable time scale) is to build out their manufacturing capabilities at an unimaginable scale and pace. The amount of capital that this will require is vastly higher than anything Tesla has raised before. And since the period we're discussing is long enough that we can't predict global market conditions, Tesla may find themselves doing this remarkable build-out during a period where capital isn't easy or inexpensive to come by.

* I'm assuming here that the market cap of Tesla reflects some realistic theory about future earnings, and isn't just a massive and unjustified bubble. Which it probably is.

[1] https://www.theverge.com/2019/5/17/18629166/elon-musk-tesla-... [2] https://finance.yahoo.com/news/tesla-may-avert-bankruptcy-bu... [3] https://www.wsj.com/articles/tesla-shares-sink-as-musk-jokes...

Of course they don’t need to, that’s not the point at all. They have, essentially, free money sitting there for the taking. A There is no guarantee the stock price will keep climbing, it could very well fall based on the P/E of 740. Borrowing against today’s inflated price in order to make acquisitions and investments actually seems like the fiscally responsible move.

Wait, do you support raising equity or borrowing from banks, at today's rate? I'm not sure what you consider being cheaper, and for who.

Not OP but pretty sure he means a raise, at an incredibly cheap price for the company and shareholders.

Let's assume that the company has more cash that it can spend now, that its free cash flow grows faster than capex + opex. Then, if an equity raise is "incredibly cheap for shareholders", that would mean shareholders consider the stock price to be higher than what they expect in the future, i.e many would be selling and the stock price would come down. I don't assume the stock market to be rational but this thesis does not hold much, as the company can easily raise debt now, at a much cheaper price for shareholders than equity. Let's wait and see.

"They have enough cash for operations and investments"

I dont think they do; I dont think they have enough to finance producing 10 million cars a year with the money they have on hand + selling their current cars. Eventually they will have to either tap the debt markets or issue more stock.

maybe their price will be significantly higher later, maybe it wont be - thats up for them to decide. But it makes sense people are suggesting it

It's more complex. Basically, you have to be careful when playing with a bubble, or you'll pop it.

Their astronomical stock growth, with no underlying business reasons (as in - nothing fundamentally changed about their business, or their competitors), that even CEO says made company overvalued, 50% ago is a bubble.

They may grow into it, or slowly deflate it. But big pop of the bubble can be deadly to a company.

> Their astronomical stock growth

Meanwhile, bond holders are asking for 4% more than similarly-size companies:

> This is remarkable data, Tesla’s five-year bonds are yielding nearly 400bps more than their possible market capitalization neighbors in the S&P 500.

* https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...

It's definitely a good idea. Companies seem to do equity raises when they perceive their stock price as overvalued. Musk has outright said this when their stock price was even lower too. The question will be if they need to do one though.

How is that a good idea? They are already building 3 giant factories (Shanghai cont, Berlin, Austin), have enough cash for that and some more. They are profitable, free cash flow continues to increase as Model Y are delivered globally. They couldn't spend their money faster. Why would existing shareholders support a secondary?

They seem to, but then if you had bought Tesla shares the day they announced the raise, you would be looking at a huge speculative gain in your investment.

I suppose the day before, because the price would jump in the first few seconds of trading.

Vanguard has a search page where you can see how much Tesla (or any other stock) is in various Vanguard funds and ETF's. For example, it looks like it's 0.3% for VTI. [1]

[1] https://advisors.vanguard.com/VGApp/iip/site/advisor/analysi...

For more on S&P, an interview with one of the committee members:

> Today on the Rational Reminder Podcast we have joining us Dr. David Blitzer who is the Managing Director and Chairman of the S&P Dow Jones index committee. He has been there from the time when indexes were barely even being traded and the first time S&P Futures began trading, and since then, indexing has turned into the massive phenomenon we all know today. Indeed, S&P indexes were (and still is) at the center of this explosion. Today Dr. Blitzer talks to us about the early days of indexing and shares some of his ideas about why indexing became so popular. We also discuss the possible reasons why some people still choose actively managed funds and the effect that the abundance of research has had on their dwindling appeal. Ever wondered where the rapid growth in indexing will end up? What happens after indexing? Can indexing become too big? Be sure to join us for this masterclass on indexing!

* https://rationalreminder.ca/podcast/54

Blitzer recently retired:

* https://en.wikipedia.org/wiki/David_M._Blitzer

My take:

- Buy some TSLA now that its price has fallen recently.

- Try to find out what other S&P 500 stocks would hedge fund managers have to sell to make room for TSLA. I suspect these won't be best-performing or long-term most promising stocks. Sell / short them now before they plunge, if you hold them for whatever reason.

The S&P committee can ask Tesla to issue shares to be sold directly to large funds so that the price doesn't move too much. This could be an opportunity for Tesla to raise 10 to 20B, which wouldn't be such a bad move, as it would allow them to erase all their debt and build more gigafactories or make acquisitions. So there is no guarantee that the stock price will go up even if Tesla gets included.

An observation someone made before the recent Q2 results were announced:

> They will almost certainly make a profit [this quarter]. Last year they lost $400 MM in Q2. This year they sold almost exactly the same number of cars. They sold them at lower prices. They operated two car factories instead of one, which drives up fixed costs. There is no reason they should genuinely do better this year than last. But, since we are all willing to be blind to this obvious book cooking, they will, for sure, announce a profit.

* https://www.thebeartrapsreport.com/blog/2020/07/19/gaming-th...

I think "book cooking" is a bit exaggerated.

They received a larger amount of government incentives, and more cars sold means more software sold (autopilot, etc), which has huge margins.

That's, in my humble view, the main reason why they managed to make a profit, despite the larger capex you have mentioned.

I'm not a Tesla fanboy but I have to admit that, besides the currently hyped stock price, I think it's a company that will do well in the long run.

Does this mean if I bought an all-cap etf, I won't be overpaying or get front runed? VTI for instance already holds Tesla shares.

Your not over paying or getting front runed regardless, so I guess the answer is yes.

Why not? Doesn't inclusion into the index cause a surge in demand and therefore in price?

Just FYI, if you are buying on Robinhood or similar service, you are getting front-runed. That’s why it’s free.

That sounds super illegal: https://en.m.wikipedia.org/wiki/NBBO do you have a source to back up your claims?

No, he doesn't. He's under the impression that selling order flow is the same as front running.

It would be illegal if Robinhood did the front running. They don't. Instead they sell your trade to a HFT firm to execute. What do you think is going on at the other side of that trade.

They're dancing around the legal definition of front running, and they've gotten their hand slapped in the past for it. (E.g. they were fined $1.25M in 2019 for actual front running per the legal definition.)

> What do you think is going on at the other side of that trade.

A market maker happy to take the spread on a trade from someone that isn’t going to slam them with 5 more 100 lot orders and force them into an overly large short position. Nobody is going to front run my 25 share QQQ order.

Citadel wants to execute our orders, executing odd lot trades from retail traders is lower risk and more profitable than transacting with ‘market participants’ with good information and lots of capital.

>It would be illegal if Robinhood did the front running. They don't. Instead they sell your trade to a HFT firm to execute.

I'm skeptical that this interpretation/loophole actually exists. If you're executing the trade, you're the broker. Shuffling it between firms doesn't absolve you of the responsibility. The fact they got fined means it clearly didn't work.

What they got fined for was playing brokers off each other for the same order in order to maximize their fee. This violates the best execution principle. Now they give each order to one broker only, irregardless of the fee.

But why is the broker giving a fee to Robinhood to handle the trade? That only makes sense for them to do if they have the stock available at a lower price point than the Robinhood user is getting--had the order gone straight to market it would have cleared at a better price.

The broker is paying Robinhood for the burden of handling the order. Why? What's the profit for them? If they just sent your order to the market and it cleared at the market rate, there is none. Instead they do a number of tricks that are designed to profit off of foreknowledge of the order before it hits the market, while trying not to run afoul of front-running regulations. When they succeed, they do so by taking money that you left on the table.

All that said, I still use Robinhood. I don't trade at high enough volumes to get upset over these hidden costs, and I'm under no illusions that other retail brokerages aren't doing exactly the same thing.

Payment for order flow isn't frontrunning.

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