Tesla Inc. climbed in premarket trading after S&P Dow Jones Indices said it will be added to the S&P 500 index in one shot on Dec. 21, a move that will ripple through the entire market as money managers adjust their portfolios to make room for shares of the $538 billion company.
Investors in the electric vehicle maker welcomed the simpler process, sending Tesla shares up 4.7% to $594 at 8:27 a.m. EST Tuesday. The stock, which closed at a record high on Nov. 27, is up about 578% this year.
“This is a better outcome than what investors overall had expected,” said Gary Black, a private investor who used to be the chief executive of Aegon Asset Management, noting that there was a “non-zero” probability that S&P might delay one piece of the listing into next year, and that the latest announcement takes that off the table.
Given Tesla’s massive market size, S&P consulted with investors in November, asking for feedback on whether the stock should be folded into the index all at once or in two parts, which would have been unprecedented. The electric-vehicle maker would be the seventh-biggest company in the S&P 500 at its current market value, falling between Berkshire Hathaway and Visa.
With about $11 trillion in funds tied to the S&P 500, money managers have been looking toward a few busy weeks ahead no matter how Tesla was included in the index. Whether it was one fell swoop or two separate tranches, managers of index-tracking funds would still have had to offload stocks of several other companies to make room for the mammoth newcomer in their portfolios.
“It looks like they’re ripping the band-aid off,” said Steve Sosnick, chief strategist at Interactive Brokers. “It’s ultimately less disruptive than trying something new with the largest index addition ever.”
S&P Dow Jones Indices, announcing the plan in a brief statement Monday, said it will make public on Dec. 11 which company Tesla will replace in the index. The index provider said it will release a full statement Tuesday morning.
Adding the company in the traditional way is “simple and easy to understand” Mr. Black said.
After the initial buying of Tesla into the Dec. 21 inclusion, the stock may pull back, if history is any guide, according to Mr. Black. The shares may fall about 10% to 20%, a pattern that would be consistent with what happened to Facebook after its entry into the S&P 500 seven years ago.
Tesla’s market capitalization is larger than any other company had at its debut in the S&P 500. Berkshire Hathaway previously held that record. It was worth about $127 billion when it was included in the index in 2010.