What Happens When Tesla Joins the S&P 500?

Moreover, it was anticipated that they would be buying shares from hedge funds, other investors and traders who have stockpiled Tesla shares and were looking to get the highest price they can.

"Trading on Friday, Dec. 18 will be extremely hectic but very professional," said Silverblatt on Thursday.

Both the index buyers and potential Tesla share sellers have had ample notice of the Tesla addition — a full month instead of the usual five days that S&P Dow Jones usually provides when changing the index — but the change will take place all at once, not in two or more stages as some market professionals had preferred.

"Since we've given a month's notice, everyone has had time to plan out their strategies," Silverblatt said.

What's Next?

Beyond Friday, he expects Tesla's addition to the S&P 500 will add volatility to the index, for a couple of reasons: The stock has been very volatile this year throughout its sharp ascent from roughly $84 a share at the start of the year to over $600, and its market weighting in the index, about 1.5% based on Thursday's price, will be higher than all but six other stocks in the index.

Tesla's forward price/earnings multiple, near 150 and several times higher than the forward P/Es for other heavyweights in the index on Thursday — the forward P/Es of Apple, Google and Microsoft were near 32, for example — will also increase the P/E of the S&P 500.

A big move in Tesla stock could have an outsize impact on the performance of the S&P 500.

Had Tesla been a constituent of the S&P 500 for all of 2020, it would have tilted the total index return by 2%, according to Goldman Sachs strategists led by David Kostin.

Goldman's derivatives research analysts, however, don't expect Tesla's inclusion in the index will have more than a "small mechanical impact" on volatility in the S&P 500 and and the VIX, the volatility index based on S&P 500 options.

See: Tesla on Track to Join S&P 500