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On Monday, Tesla will be the largest company ever added to the SP 500, and, with a market capitalization of $650 billion, the sudden weight it will throw into the market could have strange consequences, reports Matt Phillips.

Companies worth a fraction of Tesla would have been included in the index long ago, but the approach that has made it such a valuable company has brought challenges. Despite all its technological innovations, Elon Musk’s celebrity billionaire aura and a high-risk, high-reward approach to business, Tesla for the longest time was unable to meet the most humdrum requirement of corporate America: turning a profit. Criteria for inclusion require the sum of the company’s fully audited profits in the four most recent quarters to be positive. Tesla hit that mark only this year.

Chris Mack, a stock portfolio manager at the investment adviser Harding Loevner in Bridgewater, N.J., has plenty of good things to say about Tesla as an innovative company. But he doesn’t own the shares in his funds, which is focused on buying large cap technology companies that have a proven track record of profitability, making them suitable for long-term holdings.

But many investors won’t actually have a choice about buying Tesla’s shares.

The SP 500 is one of the most widely followed barometers of the American stock market, serving as the benchmark against which investors measure more than $11 trillion worth of investments. Of that, more than $4.5 trillion are in index funds designed to mirror the stocks in the SP.

Those funds have been buying up shares of Tesla since mid-November in preparation for Tesla’s admission to the SP 500, which has sent its shares up over 60 percent since the announcement that the company would be included.

Article source: https://www.nytimes.com/live/2020/12/21/business/us-economy-coronavirus/