Tesla’s entry into the S&P 500 has cost investors tracking or benchmarked against the index of blue-chip US stocks more than $45bn since December.

The electric vehicle pioneer was already the world’s seventh-largest listed company when it was finally admitted to the S&P at the end of 2020 — more than a decade after entering some other indices such as the Russell 1000.

Its stock had rallied 764 per cent in the 12 months beforehand — partly in anticipation of forced buying on entry to the S&P 500 — and its market capitalisation equalled the total market cap of the nine largest automakers by sales volume, which between them accounted for 94 per cent of global sales in 2020, according to Research Affiliates, a Californian investment house.



Tesla’s share price then fell in the six months after its admission while the stock it replaced, Apartment Investment and Management (AIV), rallied 48 per cent.

This rebalance cost investors 41 basis points of their portfolios, said Rob Arnott, chair of RA, a tidy sum given that the S&P 500 is directly tracked by about $4.6tn of capital, with a further $6.6tn benchmarked against it.

“AIV outperformed Tesla by a stupendous margin,” Arnott said in a blog post. “A pensioner with a $100,000 allocation to the S&P 500 is about $410 poorer as the result of the December index rebalance. Unfortunately, this cost is totally unnoticed by investors because it is baked into the index’s performance.”

While Tesla is an extreme case, Research Affiliates’ analysis suggests market cap-weighted indices have a clear tendency to systematically “buy high, sell low” when they rebalance.

Since 2000, an average of 23 stocks have entered (and left) the S&P 500 each year, sometimes because of corporate action such as mergers, acquisitions or bankruptcy among existing constituents, on other occasions as a result of growth by companies outside the index.

RA found that 65 per cent of new entrants see their share prices rally between the day their impending admission is announced and the day that change becomes effective.

In contrast, 60 per cent of the discretionary deletions from the index fall between announcement and exit dates. On average, deletions underperformed additions by 6.2 percentage points over this period, plus a further 1 point on the day after the change is enacted as index trackers catch up.

Over the subsequent 12 months, prices move in the opposite direction: additions on average underperform the index, albeit by only 1 percentage point, but deletions beat it by an average of almost 20 points.