Shares of Tesla dropped more than 6% after hours on Friday after the S&P 500 Index Committee decided to move Etsy, Teradyne and Catalent into the S&P 500, but abstained from including Elon Musk’s electric vehicle and solar energy company.
Some Tesla investors expected the company to be included this quarter, as the company reported its fourth consecutive quarter of profitability in July.
According to S&P Dow Jones Indices, there’s over $11.2 trillion in assets benchmarked to the S&P 500, with roughly $4.6 trillion of the total in indexed funds. An inclusion for Tesla would mean tracking funds would need to buy more than 120 million shares of Tesla stock, soon.
The make-up of the S&P 500 is determined by what’s known as the “Index Committee” at S&P Dow Jones Indices. Inclusion is based on quantitative as well as qualitative factors.
Companies must be U.S. based, and listed on either the NYSE, the Nasdaq or the Cboe. They also must have a market cap of more than $8.2 billion, and report four straight quarters of profit as determined by U.S. generally accepted accounting principles (GAAP).
Even if a company meets these criteria as well as the other stipulations, that does not guarantee inclusion in the index. The committee meets on a quarterly basis to rebalance the index, but companies can be added or removed from the S&P at any time. Given the potentially market-moving nature of additions and deletions from the index, the process is tightly guarded. Even companies that are set to be added receive no advance warning.
Tesla shares are still up nearly 400% for the year, including a recent run after the company implemented a five for one stock split.