Tesla gains 5% as S&P 500 committee says its stock will be added to the index in one single step (TSLA)

REUTERS/Steve Nesius

• Tesla gained 5% on Tuesday as the S&P 500 Index Committee decided to add Tesla stock to the index all at once on December 21.
• Due to Tesla's large market valuation of more than $500 billion, the committee had considered either adding Tesla stock to the index in stages, or doing it all at once.
• The committee's decision to add Tesla stock to its index in one fell swoop will create unprecedented demand for Tesla stock as trillions of dollars in funds tied to the S&P 500 are forced to buy the electric vehicle company.
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Tesla is joining the S&P 500, but how it would be added to the index had been up in the air until yesterday.

With a market capitalization of more than $500 billion, Tesla is the largest company ever to be added to the S&P 500, creating an unprecedented decision for the S&P 500 Index Committee.

The committee weighed whether to add Tesla to the index all at once, or to piece meal the addition over a period of time. The committee even sought feedback from market participants on how to best add Tesla to the index.

On Monday, the committee decided that it would add Tesla to the S&P 500 Index at its full float-adjusted market capitalization weight in one fell swoop prior to the open on December 21.

Shares of Tesla jumped as much as 5% in Tuesday trades.

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If Tesla manages to hold on to its current market valuation until the index addition, the EV manufacturer would be a top 10 holding in the index with a weighting of more than 1%.

With nearly $5 trillion in funds indexed to the S&P 500, more than ten million shares of Tesla stock will be in demand as passive S&P 500 ETFs and mutual funds are forced to follow the index and buy Tesla.

This doesn't include the nearly $7 trillion that is benchmarked to the S&P 500 by active managers, who may or may not decide to add Tesla to their portfolio.

Goldman Sachs estimated that the index inclusion of Tesla will spur an $8 billion buying frenzy in Tesla stock.

The S&P 500 Index Committee factored into its decision the expected liquidity of Tesla and the market's ability to accommodate significant trading volumes on this date, according to the release. 

Now the big question is what company will Tesla replace in the S&P 500. That answer will be revealed on December 11, the committee said. 

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