Tesla and S&P inclusion: inefficiency of index trackers

[biaggio]

After it was announced in mid November that Tesla would be included in the S&P500 index its share price has gone up 70%. Allegedly the latest bull run on the stock reflects investors that want to sell the stock to S&P trackers. This situation illustrates the inherent inefficiency of index trackers who have to buy high (stock entering the index esp. if the stock experienced a bull run) and sell low (stock leaving the index). Of course these events are relatively rare and companies tend to stay in the index for longer periods of time.

I wonder if any of you people from this forum are part of this group hoping to sell to indexers?

Source https://www.ft.com/content/d3e332a7-870 ... 2233ae412b

[unfold]

I certainly had to restrain myself to not buy some stocks. Eventually I decided that I didn't understand the exact dynamics good enough. Could there be a way the funds could rebalance without the stockprice taking a hike?

[Lucky C]

On the flip side, I've read that stocks tend to do pretty well after they leave an index since there may have been too much selling leading up to / at the point that they leave the index.

Tesla is replacing Apartment Investment and Management Co.

[unemployable]

On the flip side, I've read that stocks tend to do pretty well after they leave an index since there may have been too much selling leading up to / at the point that they leave the index.

Tesla is replacing Apartment Investment and Management Co.

Generally the outgoing companies are either viable business that have hit a rough patch in the cycle and/or have made some strategic mistakes, or they're no longer viable businesses. So they either outperform or go to zero.

I'm thinking of the Dow companies here. I believe with the S&P averages it's like the Premier League and they just get relegated to the Midcap.

[Lucky C]

Yes, the outperformance after leaving the index might be with DJIA companies mainly. I haven't studied it so I'm not sure. But XOM recently left the Dow and energy in general seems to be due for a comeback vs. other sectors in coming years.