1/
There's a valuable but under-reported aspect of Tesla joining the S&P 500 tomorrow: the decade long flight of capital from active funds to passive index funds and the massive, unprecedented, ongoing cash inflows passive index funds enjoy.
morningstar.com/insights/2019/…
There's a valuable but under-reported aspect of Tesla joining the S&P 500 tomorrow: the decade long flight of capital from active funds to passive index funds and the massive, unprecedented, ongoing cash inflows passive index funds enjoy.
morningstar.com/insights/2019/…
2/
On the asset valuation basis active funds managed to grow in value, but this is only because of a bull market. The actual cash outflows from active funds to index funds & the arrival of new cash to index funds are massive: $200b-$300b per year.
On the asset valuation basis active funds managed to grow in value, but this is only because of a bull market. The actual cash outflows from active funds to index funds & the arrival of new cash to index funds are massive: $200b-$300b per year.
3/
With TSLA joining the S&P 500 tomorrow, 1.67% of this ~$200b-$300b per year cash inflow will be invested into buying more TSLA stock - which is semi-permanently removed from the TSLA float and not traded again.
With TSLA joining the S&P 500 tomorrow, 1.67% of this ~$200b-$300b per year cash inflow will be invested into buying more TSLA stock - which is semi-permanently removed from the TSLA float and not traded again.
4/
That's a constant, gradual buying pressure of $3.3b-$5b investment into TSLA per year: up to 1% of the float, ~7m TSLA shares removed from the effective TSLA float.
That's a constant, gradual buying pressure of $3.3b-$5b investment into TSLA per year: up to 1% of the float, ~7m TSLA shares removed from the effective TSLA float.
5/
As float-contraction effects are highly non-linear, this gradual reduction of the float will IMO add an additional upside correction to TSLA pricing.
As float-contraction effects are highly non-linear, this gradual reduction of the float will IMO add an additional upside correction to TSLA pricing.
6/
The effects are similar to that of a big share buyback programs - and these float contraction effects were probably part of the reason that drove AAPL valuations so high in the last decade: 6.5% of all index fund inflow buying goes into AAPL.
The effects are similar to that of a big share buyback programs - and these float contraction effects were probably part of the reason that drove AAPL valuations so high in the last decade: 6.5% of all index fund inflow buying goes into AAPL.
7/
For TSLA the process is further amplified by the fact that active index funds are chronically underweight TSLA - only 10% carried 𝒂𝒏𝒚 TSLA recently - while index funds just added TSLA at 1.67% weight...
For TSLA the process is further amplified by the fact that active index funds are chronically underweight TSLA - only 10% carried 𝒂𝒏𝒚 TSLA recently - while index funds just added TSLA at 1.67% weight...
https://twitter.com/garyblack00/status/1334165161167511554
8/
Active funds being underweight TSLA might speed up the flight of capital from active funds & simultaneously adds pressure for active managers to add TSLA to their portfolio.
Active funds being underweight TSLA might speed up the flight of capital from active funds & simultaneously adds pressure for active managers to add TSLA to their portfolio.
9/
During an active fund sales pitch the first questions of well informed investors will be:
❌ "Why are you de-facto shorting TSLA against your benchmark?? 🤔😯"
Environmentally conscious investors will ask:
❌ "Why are you de-facto shorting a renewable energy company?? 😡"
During an active fund sales pitch the first questions of well informed investors will be:
❌ "Why are you de-facto shorting TSLA against your benchmark?? 🤔😯"
Environmentally conscious investors will ask:
❌ "Why are you de-facto shorting a renewable energy company?? 😡"
10/
Neither of these questions can be answered satisfactorily, so I expect active funds to start carrying TSLA in their portfolio at an accelerating rate, even if they think it's over-valued - because they just can't afford to not have it.
Neither of these questions can be answered satisfactorily, so I expect active funds to start carrying TSLA in their portfolio at an accelerating rate, even if they think it's over-valued - because they just can't afford to not have it.
11/
I.e. at the end of 2020 I expect active funds to gladly up any TSLA dip or correction offered by shorts: $695 is the entry price of passive index funds, buying up to 1.67% TSLA below this price instantly improves the performance of active funds compared to passive funds.
I.e. at the end of 2020 I expect active funds to gladly up any TSLA dip or correction offered by shorts: $695 is the entry price of passive index funds, buying up to 1.67% TSLA below this price instantly improves the performance of active funds compared to passive funds.
12/
For example, if active funds buy at ~$680 instead of $695 that's an instant 2 basis points improvement compared to the benchmark already.
Active funds benchmarked to the S&P 500 still have a lot of assets: an estimated $6t-$8t.
For example, if active funds buy at ~$680 instead of $695 that's an instant 2 basis points improvement compared to the benchmark already.
Active funds benchmarked to the S&P 500 still have a lot of assets: an estimated $6t-$8t.
13/
I expect these two TSLA buying forces to combine in 2021:
✅ Active funds rebalancing to their benchmark, up to 192m TSLA shares acquired to merely become TSLA equal-weight.
✅ Passive funds gradual cash inflow, buying 1.7 million shares of TSLA every quarter, at any price.
I expect these two TSLA buying forces to combine in 2021:
✅ Active funds rebalancing to their benchmark, up to 192m TSLA shares acquired to merely become TSLA equal-weight.
✅ Passive funds gradual cash inflow, buying 1.7 million shares of TSLA every quarter, at any price.
14/
Will people short TSLA at the "peak" & and attempt to drive down its price?
No doubt, and they might temporarily succeed - but the short term forces of active fund buying and index fund inflow buying & accumulation will be extremely strong in the next couple of months.
Will people short TSLA at the "peak" & and attempt to drive down its price?
No doubt, and they might temporarily succeed - but the short term forces of active fund buying and index fund inflow buying & accumulation will be extremely strong in the next couple of months.
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