The stocks owned by millions of investors will change in the week ahead without those investors buying or selling anything.
If you own mutual funds, index funds or exchange traded funds that track the two most important stock indices, the S&P 500 and the NASDAQ 100, what you own beginning Monday is different than what you owned Friday. Both indices undergo a rebalancing before the opening bell in the new week.
Rebalancing these stock baskets is a regular affair. The S&P 500 does it quarterly. The NASDAQ 100 does it once a year. The shuffle helps fuel some volatility for stocks being kicked out as they are sold by ETFs and mutual funds, and as the new members are purchased. But like so much of 2020, this year is different.
Attention during this year’s exercise is focused on Tesla, and for good reason. The electric vehicle company has a market value of about $600 billion. That’s six-times the combined value of Ford and General Motors. Tesla is the largest company ever added to the index.
What took so long? S&P 500 rules require its components to be profitable for a year before they are added to the list. When Tesla shows up in the index, it will be the sixth most influential stock — between Google and Warren Buffet’s Berkshire Hathaway — giving it more sway over the index than stalwart members like Johnson and Johnson, JPMorgan Chase and Procter and Gamble.
Tesla comes to the benchmark S&P index after a 640 percent rally this year. Other high-fliers will be joining the NASDAQ 100 group. Stay-at-home stars like cyber exercise bike maker Peloton and computer cloud security firm Okta are up more than 350 and 120 percent respectively in advance of being added to the index.
Rebalancing these indices leads to big trading volumes and plenty of investor attention. They reflect hot investment trends, but long-term investors should not let rebalancing throw their investment goals out of balance.
