Tesla, ETF’s and Distortion

I can’t help think the return of the stock picker is nigh.

Here are some samples of concern with being invested in passively managed market capitalisation based Exchange Traded Funds (ETF’s)

Tesla’s entry into the S&P 500 Index will force index funds to buy about $73 billion worth of its shares, S&P Dow Jones Indices said.

‘Your’ S&P 500 ETF will be “forced” to acquire Tesla shares and I think many ‘active’ managers may do the same, simply to prevent underperforming against the index.

This means that investors in a S&P 500 ETF will become owners of Tesla shares on December 21, 2020 when the company has a whopping market capitalisation of ~$554 billion.

Furthermore, the market cap of whichever company leaves the S&P 500 (to make room for Tesla) will hardly be comparable.

For example, lowly weighted HollyFrontier and Xerox have market caps of $4 billion.

Adding to the peril, is that the six FAANGM stocks (Facebook, Apple, Amazon, Netflix, Google & Microsoft) already account for 27% of the index’s composition;

while the top 10% weighted stocks in the S&P 500 provide 54% of the index’s concentration and risk;

and lastly, ‘indexing’ now accounts for or controls 45% of the whole market.

Distortion is everywhere.


December 2, 2020

by Rob Zdravevski


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