If you have a retirement account, you probably just became a Tesla investor.
No, Elon Musk didn’t gift you shares of the electric carmaker. And you aren’t going to suddenly see Tesla stock — which was up more than 600% year to date during the third week of December — pop up in your portfolio.
So how did you become a Tesla investor without even noticing?
Here’s How We All Suddenly Became Tesla Investors
On Monday, Dec. 21, Tesla joined the S&P 500 index, which tracks the performance of 500 of the largest companies in the U.S. S&P 500 index funds, which mirror the makeup and performance of the S&P 500 index, are the most popular mutual funds and exchange-traded funds (ETFs) for retirement accounts.
They’re passively managed, which means the fund manager doesn’t decide what to invest in. They buy and sell shares so that the fund’s makeup and performance reflects the index. The bottom line is that if you own an S&P 500 fund, the person who manages it had no other choice but to invest your money in Tesla.
How Did Tesla Join the S&P 500?
A notoriously secretive investment committee decides what companies are included on the S&P 500. Like any company, Tesla had to meet stringent criteria to be considered, including:
- A market cap of at least $8.2 billion, meaning that the value of all its outstanding shares must be worth a minimum of $8.2 billion. Tesla easily smashed that requirement, considering its market cap is nearly $600 billion.
- At least 50% of its outstanding shares are available for public trading. Musk, Tesla’s CEO, owns about a 20% stake in Tesla. But what if he owned 55% or 60%? Tesla would be ineligible.
- It must have reported positive earnings in the latest quarter. Tesla earned a profit of $331 million in the third quarter of 2020.
- It must have four consecutive quarters of net profit. This was the biggest hurdle for Tesla. But Q3 of 2020 was actually its fifth consecutive quarter of earning a profit.
Tesla was rejected by the S&P 500 committee in September before getting the thumbs-up in November. We don’t know the “why” behind either decision, given how tight-lipped that committee is. But it’s likely that the stock’s reputation for volatility had something to do with its initial rejection.
The S&P 500 is market cap-weighted, which basically means the larger the company, the more heavily it’s weighted. The carmaker is the largest company to join the S&P 500 in the index’s 90-plus-year history.
The committee considered adding Tesla in two phases because of all the buying and selling that has to happen for fund managers to make room for a $600 billion company. The stock Tesla is replacing, Apartment Investment and Management, had a market cap of just $6 billion before it announced plans to split into two companies in mid-December.
Should You Care That You’re a Tesla Investor?
Probably not. Sure, Tesla’s stock has a reputation for being volatile. But it still will only account for about 1.5% of the value of your S&P 500 funds for now. That means if Tesla shares lost a third of their value, your fund would be worth 1% less. The flip side, of course, is that if they double, your fund’s value only goes up by 1.5%.
But the beauty of the diversified portfolio you get with S&P 500 funds is that you don’t have to lose sleep over how any single company performs. Tesla may get a lot of hype. But how the other 499 stocks in the index perform matters way more to you.
Robin Hartill is a certified financial planner and a senior editor at The Penny Hoarder. She writes the Dear Penny personal finance advice column. Send your tricky money questions to DearPenny@thepennyhoarder.com.
This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.