Tesla shares cost average investors 4 7.4 billion

Tesla (Nasdaq: DSLA) Has always attracted a lot of attention. Its high-speed electric vehicles have become symbols of technological advancement, and the company that helped CEO Elon Musk develop into a player to dominate its new industry has delighted shareholders in the first decade of its initial public offering (IPO).

But for index fund investors, Tesla has brought the latest into long-running controversy. Because it is Index funds Tesla has spent $ 90 billion to buy shares – and in two short days, they have already lost $ 7.4 billion to their financial partners.

Image Source: Getty Images.

Buying at the highest price of all time

Index funds had known for more than a month that Tesla stock was going to become a hot topic. It was mid-November Announced by S&P Dow Jones That Tesla should join S&P500 Index, Effective December 21 from the start of trading.

This means that index funds should aim to buy as many shares as possible on December 18th. In that sense, their income is the same as that of the S&P 500.

However, unlike the index – which has the advantage of not having to actually implement its investment strategy of holding about 500 block shares – the funds had to figure out how to make that purchase when the markets were as volatile as possible. This is a high order because Tesla’s market capitalization is over $ 600 billion, which means that the electric vehicle manufacturer represents a significant percentage of a massive multi – billion dollar market.

Eventually, index funds paid about $ 90 billion in Tesla shares, according to S&P Dow Jones index analyst Howard Silverflat. As you can see in the table below, on Friday afternoon Tesla’s share price was close to 95 695, the absolute dollar price that those funds could pay.

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DSLA Chart

The higher that spike the more effective the price index fund investors will pay. Source of data: DSLA Data by Y. shorts.

$ 7.4 billion win

Shares of Tesla traded at about 38,638 per share on Tuesday afternoon. This marked the second time the losses had exceeded 8%. The $ 90 billion share of index funds that bought late Friday was already $ 7.4 billion lower than it was two days ago.

As you can see above, the fall from the height looks like a mirror image of Tesla’s climb before the code change takes effect. The impact of forced purchases of index funds is evident from how stocks have risen and fallen around the event.

Funds could have done better

The downside is that index funds do not have to take this financial success. Shares of Tesla traded above $ 400 before the S&P Dow Jones Index to keep a close view of the stock’s movements. Stock price drops above $ 500 per share in three days, by the end of November, Tesla rose above $ 600 a share.

Tesla’s share price stayed for the next two weeks. In the final run for more code admissions, Tesla made one more push upwards. The last-minute spike did not reach the $ 700 level, and it was very brief, not even shown on many intraday stock charts. Nevertheless, the S&P 500 is the official final figure for calculating performance going forward.

Why index funds don’t care about you

The problem with index funds is that they have no incentive to avoid the sporting potential that inevitably leads to such losses. Most of the time, when companies are included in the S&P 500 they are very small, so the negative impact on shareholders is not as big as it was here. Nevertheless, it occurs less frequently each time a new stock index is added.

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Investors choose index funds only to keep track of the index. When codes create such suspensions, financial managers blindly follow the rules, to the detriment of their shareholders.

Now everyone is rooted for Tesla

Of course, given Tesla’s past performance, It is certainly possible that in the future this stock will rise to $ 700 and beyond. This could happen today or even before the end of 2020. If that happens, everyone will be forgiven. Now a part of Tesla’s index, every index fund investor wants to walk.

This is the invisible price that index fund shareholders pay because index funds are helpful to ordinary investors. In the case of Tesla, it took 4 7.4 billion out of their hands and put it in the hands of those who were not constrained by strict and quick investment rules.

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