Tesla Inc. shares climbed Thursday after analysts at Goldman Sachs boosted the price target by 70% to $780 on the clean energy car maker, ahead of its scheduled addition to the S&P 500 later this month.
The world’s most traded equity benchmark announced last month that it would list Tesla shares on December 21. That move could trigger a collective 73 million in new purchases from investment funds that track the world’s most-traded index, said Todd Rosenbluth, head of ETF and mutual fund research at CFRA, in a new analysis on passive ETFs.
This is important for every S&P 500 investor to keep in mind.
“Index-based ETFs change more often than you think,” Rosenbluth said. With the $550 billion Tesla’s approximately 1.5% addition to the market-cap weighted S&P 500, the company will also likely take a 1.5% position in the SPDR S&P 500 ETF, he said—as well as the iShares Core S&P 500 ETF and the Vanguard S&P 500 ETF.
Combined, these ETFs manage approximately $540 billion in assets, and while annual turnover is just 3%, the impact for ETFs will be notable, Rosenbluth predicted. “It is not yet known what stock [Tesla] is replacing, but it will likely come from the smallest in the S&P 500 index, while ETFs will trim exposure to other stocks, including mega-caps Johnson & Johnson and Procter & Gamble to make room in the portfolio,” he added.
A Tale Of Two Low-Volatility Funds
Investors in smart-beta ETFs, meanwhile, are incurring modestly higher turnover than market-cap weighted funds. In November, two lower-volatility ETFs, the iShares Edge MSCI USA Min Vol Factor ETF and the Invesco S&P 500 Low Volatility ETF, were among those reconstituted, Rosenbluth said.
Unlike the SPDR S&P 500 fund, “which makes few changes at seemingly random times, ETFs focused on lower volatility, quality and other smart-beta investment styles will be reconstituted on a set schedule during the year as the broader stock universe is rerun through screens predetermined by the index provider,” said Rosenbluth.
The Invesco low-volatility fund was reconstituted in late November to own the 100 least volatile stocks in the S&P 500. It has an annualized turnover of 49%, but unlike some mutual funds with a similar turnover rate, the ETF is not expecting to pass along any capital gains in 2020, Rosenbluth noted.
During the latest portfolio changes, the Invesco low volatility fund modestly increased exposure to consumer staples (raising them to 26% of assets from 24%) and reduced its exposure to utilities (which fell to 4%, down from 6%) since the fund rebalanced in February 2020, Rosenbluth said.
The iShares low-volatility fund, meanwhile, saw its stake in communications services boosted by the addition of video game makers Activision Blizzard and Electronic Arts. “The fund's 11% stake in consumer staples was less than half the 26% for [Invesco’s fund]," Rosenbluth said. The iShares version is also more diversified across the sectors than Invesco’s, as it has bands preventing deviation by more than 500 basis points, he added.