Shares in Tesla jumped on the news Monday that the electric car maker is joining the S&P 500 index, the array of the country’s 500 largest publicly-traded businesses.
The company’s stock rose more than 9% at the start of the trading day on Tuesday.
Tesla and its CEO, Elon Musk, already garner a lot of investor and media attention, so where on the attention scale does its addition to the S&P 500 rate? And, more importantly, what does this news mean for retail investors who have money in the company, either in stock itself or through a mutual fund or exchange traded fund?
Here are some key points to consider:
What does Tesla’s addition to the S&P 500 say about the company’s value?
A lot, several financial advisers told MarketWatch. “The S&P 500 represents the most consequential stocks in the U.S economy. It reflects that Tesla’s value and growth potential as a stock is prominent enough to deserve inclusion, and its performance is a proxy for the broader U.S. economy in the near future,” said Leo Marte, founder of Abundant Advisors, based in Huntersville, N.C.
Earlier this year, Tesla and Apple announced stock splits. But, as experts pointed out, a stock split isn’t a reflection of a company’s fundamentals. It’s just carving up shares into smaller individual pieces that, added together, amount to the same value before the stock split.
So what does Tesla joining the S&P 500 mean if I already have money in an S&P index fund?
To gain diversified exposure to the index’s high-profile, high-performing companies, investors can put their money in a variety of mutual funds or exchange traded funds.
When it comes to Tesla TSLA, +8.21%, a particular fund’s exposure to Tesla will dial up as the fund rebalances, explained Thomas Hlohinec, founder and CEO of Rise Financial Partners, based in Philadelphia, Pa.
Different funds rebalance at different times, potentially on a quarterly basis, semi-annually or annually, he said.
After a year’s time, when all of the rebalancing is complete, Hlohinec said he would expect Tesla’s share price to be higher after all the funds have bought Tesla stock to sync up with its market cap within the index.
Don’t get carried away — debates on Tesla’s value are ‘more heated than the last election’
While Tesla’s inclusion on the S&P is a notable turn, it’s not green light to go all in on more shares in a company that could be a little hard to pin down, advisers cautioned.
“Tesla is such an interesting and controversial stock,” Hlohinec said. “It’s a quasi-traditional car manufacturer. However, it has other business segments. But it’s also technology firm at the same time. It’s also a huge disrupter,” he said.
Debates on the market value of Tesla stock are “more heated than the last election,” said Mark Struthers, a financial adviser with Sona Wealth Advisors, based in Chanhassen, Minn. “It is not that [Tesla] is a bad company, it is just you are paying a lot for future growth that may, or may not, be there.”
Struthers advised investors to diversify. “The S&P 500 should not be your only investment. Too much in too few companies.”
And that lesson on concentrating too much money in too few places applies even more to stock picking, said Marte.
“Tesla’s stock will increase due to demand from index funds, but in the end, investors should focus on long-term investing in broadly diversified mutual funds. Everyone loves a stock when it’s on the rise, but we hate to admit that long-term it could be very dangerous to play in single stocks.”