"Will Tesla Stock Keep Going Up? Exploring the Mechanics of S&P 500 Inclusion (TSLA)" | Tesla Daily with Rob Maurer
I found the article containing the quote from David Blitzer (previous chairman of the S&P Index Committee) that Maurer references in the video:
Inside the S&P 500: Adds, drops and tall tales - InvestmentNews and here's the quote in text instead of audio:
A portfolio manager running an S&P 500 fund is not constrained to buy only at the close on the day the stock is added to the index. He or she can buy at any time and can spread purchases over a few days or weeks if it will yield a better price. The flexibility gives the portfolio manager an opportunity to time the buying to his advantage and use his understanding of the index. Some hedge fund managers and speculators do buy when an index addition is announced and expect to sell to an index fund a few days later. Some may also forecast (guess) what stock will be added next and buy in advance.
I bolded what are important distinctions. Blitzer is saying that a
hedge fund can front-run a probable inclusion to try to profit from an
index fund needing to wait until official announcement. This is covered a bit later with Maurer's "inside source" saying that even
index funds are given leeway to buy a month earlier and/or a month later than inclusion to help reduce the demand effects on share price.
I'm doubtful this exists as Maurer states. Index funds can't speculate on what's going to be added nor when it's going to be added. First, it would be quite risky for an index fund to buy into a stock that hasn't been officially announced. As Maurer showed, the announcement itself can come any time within a 6-week window. And, as we saw with SNAP, that announcement might never come. And even if the fund managers are confident the S&P will include it, that 6-week window could see massive price swings that would affect the fund's performance, especially for a stock that's in the top 15 of 500. Thus, it would be extremely risky for an S&P Index fund to buy Tesla before it was announced, and so I can't see index funds doing that. Hedge funds, sure, but that's different.
Here is the prospectus for SPY, one of the larger S&P 500 Index Funds, which says (note the bolded part):
S&P may periodically (ordinarily, several times per quarter) replace one or more Index Securities due to mergers, acquisitions, bankruptcies, or other market conditions, or if the issuers of such Index Securities fail to meet the criteria for inclusion in the Index. In 2019, there were 26 company changes to the Index. Ordinarily, whenever there is a change in shares outstanding or a change in an Index Security of the Index, S&P adjusts the divisor to ensure that there is no discontinuity in the value of the Index.
The Trustee aggregates certain adjustments and makes conforming changes to the Portfolio at least monthly. The Trustee directs its stock transactions only to brokers or dealers, which may include affiliates of the Trustee, from whom it expects to obtain the most favorable prices for execution of orders. Adjustments are made more frequently in the case of significant changes to the Index. Specifically, the Trustee is required to adjust the composition of the Portfolio whenever there is a change in the identity of any Index Security (i.e., a substitution of one security for another) within three (3) Business Days before or after the day on which the change is scheduled to take effect. If the transaction costs incurred by the Trust in adjusting the Portfolio would exceed the expected variation between the composition of the Portfolio and the Index (“Misweighting”), it may not be efficient identically to replicate the share composition of the Index. Minor Misweighting generally is permitted within the guidelines set forth below. The Trustee is required to adjust the composition of the Portfolio at any time that the weighting of any stock in the Portfolio varies in excess of one hundred and fifty percent (150%) of a specified percentage, which percentage varies from 0.08% to 0.02%, depending on the net asset value of the Trust (in each case, “Misweighting Amount”), from the weighting of the Index Security in the Index. For the year ended September 30, 2019, the Misweighting Amount was 0.02%.
3 days is not a month, and the percentage allocation of stocks is pretty darn tight. I do not see how true index funds can front-run inclusion of TSLA into the S&P 500, nor can they take up to a month to get their allocation right, as TSLA's price can fluctuate wildly in that month, putting the fund's return goal of matching the S&P 500 at significant risk.
I continue to believe the $46Billion of Tesla stock needs to be bought starting at announcement and continuing for no more than 3 days beyond actual inclusion.
But, almost everyone with serious money invested or to be invested in TSLA knows this. The question for me right now is whether so many funds will buy up so much TSLA now that by the time the announcement comes, there is actually more supply from them than demand from the index funds.
