Exactly two years ago this week, S&P Dow Jones Indices made the controversial decision to add electric vehicle maker Tesla Inc TSLA to the S&P 500 index with the stock trading at an all-time high and the automaker sporting a $550 billion market capitalization.
Two years later, critics of the timing of Tesla's addition have been vindicated.
What Happened? When Tesla was added to the popular S&P 500 index, which is tracked by the SPDR S&P 500 ETF Trust SPY, it was by far the largest stock ever added to the index. On Dec. 21, 2020, Tesla joined the S&P 500 as its sixth-largest member by market cap. Since the S&P 500 was market cap-weighted, larger members had a larger impact on the movement of the overall index.
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Since Tesla joined the S&P 500, the index gained a lackluster 3.2% overall. However, that return would be slightly higher if not for Tesla, which was down 46.5% in that stretch, including a 68.7% year-to-date decline in 2022.
Why It's Important: The S&P 500 is the most popular index used by financial analysts, journalists and the general public to track the performance of the entire U.S. stock market.
It is also one of the most common indexes tracked by mutual funds and ETFs that make up a sizable portion of American investors' collective retirement investments. In fact, the three largest ETFs by assets under management all track the S&P 500 index. The SPY ETF, the iShares Core S&P 500 ETF IVV and the Vanguard 500 Index Fund ETF VOO have a combined $922 billion in AUM.
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Tesla's market cap has fallen to just $391.2 billion, but it remains the ninth-largest member of the S&P 500.
Adding insult to energy, the company's brand as a force for environmentalism and progress took a beating along the way. In fact, S&P booted Tesla from its environmental, social and governance (ESG) index in May 2022, citing concerns over Tesla's "lack of a low-carbon strategy" and "codes of business conduct."
The reputation of controversial Tesla CEO Elon Musk has also taken a hit since the billionaire acquired the social media platform Twitter for $44 billion in October 2022. Musk has contributed to the Tesla selling pressure by dumping $23 billion in Tesla shares in 2022 to help fund his Twitter acquisition.
Oppenheimer analyst Colin Rusch downgraded Tesla from Outperform to Perform this week and said Musk's behavior since taking over Twitter, including temporarily banning several journalists, has "severely damaged" Tesla's investor sentiment and further sullied Musk's personal brand.
Benzinga's Take: S&P 500 investors who were annoyed with S&P for adding Tesla at what many said at the time was a bubble valuation have every right to be irritated at the timing of the addition given Tesla's horrible performance over the past two years.
In S&P's defense, companies must report four quarters of profits to be eligible for S&P 500 inclusion, and Tesla didn't hit that profitability mark for the first time until 2020.
Photo: sdx15 via Shutterstock
© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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