18.08.2020 – Special Report. CFD traders and investors should keep an eye on Tesla – the company recently announced a stock split. And with the fourth consecutive quarter of profit, the e-car manufacturer is about to be admitted to the S&P 500, where the giant would probably be an immediate bullisher. And in any case a powerful source of unrest. Especially since the next stop is Dow Jones. We’re going to shed some light on the background.

Stock split at Tesla

Rarely has a single share caused such a turmoil in the major indices. Last week Tesla shook up the financial market with an announcement that also affected the Dow Jones and the S&P 500: the car manufacturer announced a five-to-one stock split. The split will come into effect on August 31. The final result for the major indices seems rather bullish, but is still unclear in the end – at best volatility should increase, which should be what traders and investors take for a trade in the fear indicator VIX.


Gigantic price gains

The blog “ValueWalk” has summarized the matter in a concise manner: On the one hand, the stock split will make the stock optically cheaper and thus attract new investors. It is no coincidence that the share price rose sharply after the split was announced. TSLA gained almost half of General Motors’ market cap in the after-market. This is astonishing, because de facto nothing has changed – the value of the company is now simply reflected in five shares instead of one.

So far too expensive for the Dow

Solution of the riddle: With the split, the inclusion in the Dow Jones comes closer, as the financial blog “The Motley Fool” stated. Since the Dow Jones is a price index, a company with an extremely expensive share would have upset the balance. And hence the split. Without this, Tesla would account for 30 percent of the Dow; even with the split, Tesla still has a weight of around 7 percent.

Before that the S&P 500 is waiting

Before that, however, the company will enter the S&P 500. With the fourth consecutive profit quarter reported at the end of July and a plus in the current three-month period, Tesla is qualified for entry into the broad-based index, as “ValueWalk” further noted. Tesla can now be included in the index at any time. Perhaps the announcement also coincides with the removal of the bought-up companies E*Trade or Tiffany. Another possibility would be to announce Tesla’s inclusion in the routine review in September. In any case, he said that investment funds might only have a few days to reposition themselves – perhaps they would buy the stock before or after the announcement.

A new giant for the indices

This complicates matters. With a market capitalisation of 270 billion dollars, fund managers would have to make major shifts, which according to Bloomberg is likely to be one of the most difficult issues in recent years. After all, in absolute figures Tesla is the largest stock ever included in the indices. Index specialist Gerry O’Reilly of fund provider Vanguard told the news agency that fund managers would have to sell shares worth 35 to 40 billion dollars in other stocks to make room for Tesla.

Super Liquidity Event

Whereby we wonder why index funds that track the Dow Jones or the S&P 500 do not have to sell 270 billion in other stocks one to one to open a gap for Tesla. Perhaps some fund managers deliberately want to drive up index prices by having a surplus of Tesla. In any case, according to the Vanguard manager, the inclusion will be a “super liquidity event,” meaning that some long-invested investors will cash in and sell their shares to index funds that need to replicate the SPX or the Dow.

Financial tricks at Tesla?

The conclusion to be drawn from this mixed situation: inclusion in the indices would be a knighthood for Tesla. This could generate new interest in the stock – and new purchases by exchange-traded funds. However, many astute investors have certainly been anticipating the development for just as long. What could speak for heavy selling according to the motto “sell the news”.
Moreover, there is a low risk that the index listing will burst. For example, fund manager David Einhorn of Greenlight Capital warned that Tesla’s quarterly figures had led the committee that decides on the composition of the indices upside down. Among other things, Tesla had postponed cheques to employees and expenses for research and development as well as depreciation for production in China – and thus reduced costs.
Nevertheless: “The consensus is that S&P will add TSLA to the S&P 500 index at the next opportunity with a large weighting, forcing millions of passive investors to sell the other 499 stocks to make room for TSLA at whatever the price du jour. We think the S&P 500 Index Committee has a tough decision to make as to how to respond to being gamed like this.
So all that is clear is that there will be unrest. Especially since Tesla is a notoriously volatile stock anyway. The Bernstein Bank is keeping an eye on the matter for you – and wishes you successful trades and investments!

Important Notes on This Publication:

The content of this publication is for general information purposes only. In this context, it is neither an individual investment recommendation or advice nor an offer to purchase or sell securities or other financial products. The content in question and all the information contained therein do not in any way replace individual investor- or investment-oriented advice. No reliable forecast or indication for the future is possible with respect to any presentation or information on the present or past performance of the relevant underlying assets. All information and data presented in this publication are based on reliable sources. However, Bernstein Bank does not guarantee that the information and data contained in this publication is up-to-date, correct and complete. Securities traded on the financial markets are subject to price fluctuations. A contract for difference (CFD) is also a financial instrument with leverage effect. Against this backdrop, CFD trading involves a high risk up to the point of total loss and may not be suitable for all investors. Therefore, make sure that you have fully understood all the correlating risks. If necessary, ask for independent advice.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81% of retail investor accounts lose money when trading CFDs with this provider.
You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.