2 Problems Tesla Creates For The S&P 500

TSLA) in 2020 has been its potential inclusion in the S&P 500 after first becoming eligible following a profitable second quarter. While Tesla’s addition to the S&P 500 could trigger a wave of buying as funds and money managers rebalance their portfolios, adding Tesla to the popular index could also create at least two problems for SPDR S&P 500 ETF Trust (NYSE: SPY) investors.

DataTrek Research co-founder Nicholas Colas said both problems would be caused by Tesla’s ballooning market cap, which currently sits at $417 billion.

“This would make the 500 more volatile over time, especially if/when concerns about a bubble in the stock prove true,” Colas said of Tesla. “It is barely profitable, and its black ink comes from the sale of government mandated credits rather than factory operating margin.”

At that point, five different sectors could potentially have one single stock representing greater than 20% weighting:

• Tesla at 20% of Industrials
• Apple, Inc. (NASDAQ: AAPL) at 25% of Technology.
• Amazon.com, Inc. (NASDAQ: AMZN) at 25% of Consumer Discretionary.
• Chevron Corporation (NYSE: CVX) at 23% of Energy.
• Facebook, Inc. (NASDAQ: FB) at 24% of Communication Services.

Colas said including Tesla in the S&P 500 would create a major headache for the selection committee in terms of the overall volatility and diversification of the index, as well as the volatility and diversification of individual sectors.

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