By Noel Randewich and Lewis Krauskopf
(Reuters) -Shares of Tesla (NASDAQ:TSLA) gained on Friday in a busy day for the electric car maker's stock ahead of its much-anticipated grand entrance into the benchmark S&P 500 index.
Elon Musk's Tesla on Monday will become the most valuable company ever admitted to Wall Street's main benchmark, accounting for over 1% of the index. The shares have surged over 60% since mid-November, when its debut in the S&P 500 was announced.
The company's shares were up 2.2% to $670.30 in mid-day trading, hitting a record high, although the stock did briefly turn negative during the session. Tesla shares have soared some 700% so far in 2020.
Tesla's addition to the S&P 500 forced index-tracking funds to buy about $85 billion worth of Tesla shares by the end of Friday's session so their portfolios correctly reflect the index, according to S&P Dow Jones Indices. Those funds will simultaneously have to sell other S&P 500 constituents' shares worth the same amount.
Turnover in Tesla shares hit about $30 billion at the mid-day mark of Friday's session, with trading volume topping 44 million, according to Refinitiv data.
The inclusion of Tesla's shares may be a double-edged sword for index trackers.
"Index-based funds will be paying a higher price than those that bought the stock when the entry date was announced, but will benefit as the fund better represents the U.S. large-cap universe," said Todd Rosenbluth, head of ETF and mutual fund research at CFRA. "Tesla’s absence in the prominent index has been notable in 2020."
Actively managed funds that benchmark their performance against the S&P 500, many of which until now have avoided investing in one of Wall Street's most controversial stocks, will also be forced to decide whether to own Tesla.
"Everyone has known this is coming for two or three weeks, so the real question now is if it continues to be an outperformer and, if so, then what is the catalyst," said Thomas Hayes, managing member at Great Hill Capital LLC in New York.
Tesla's inclusion will ripple through the S&P 500 itself.
Because of Tesla’s high market value compared to its expected earnings, the addition of the stock to the S&P 500 is expected to increase the index’s forward 12-months price-to-earnings ratio from 22 times to 22.3 times, according to David Aurelio, senior manager of equity markets research at Refinitiv.
"There are a lot of concerns from our clients out there that this addition could be a negative for the S&P 500," said Randy Frederick, vice president of trading and derivatives for Charles Schwab (NYSE:SCHW) in Austin, Texas. "The reason why it has been kept out of the S&P is due to its volatility."
While some investors view Musk as a visionary entrepreneur, others worry about missed production targets and corporate governance risk after Musk was forced to step down as chairman to settle fraud charges in 2018.
California-based Tesla’s stock surge has put its market value at over $600 billion and making it the sixth most valuable publicly listed U.S. company, with many investors viewing it as wildly overvalued.
Tesla’s meteoric rise has made it the most valuable auto company in the world despite production that is a fraction of rivals such as Toyota Motor (NYSE:TM), Volkswagen (DE:VOWG_p) and General Motors (NYSE:GM).
Tesla is by far the most traded stock by value on Wall Street, with $18 billion worth of its shares exchanged on average in each session over the past 12 months, easily beating Apple (NASDAQ:AAPL), in second place with average daily trades of $14 billion, according to Refinitiv.
A blockbuster quarterly report in July cleared a major hurdle related to profitability that had prevented Tesla's inclusion in the S&P 500.
About a fifth of Tesla's shares are closely held by Musk, the chief executive, and other insiders. Since the S&P 500 is weighted by the amount of companies' shares actually available on the stock market, Tesla's influence within the benchmark will be slightly diminished compared with its overall value.