It's a complete mystery to me why they don't raise some capital at this valuation. They could wipe off all the debt and have a decade's worth of capex in cash for a very small dilution.
What I don't understand is how all the S&P 500 index funds don't get soaked every time a stock enters or leaves the index. Everyone in the world can front-run those giant trades, just like we're seeing now. Do the index funds just absorb the losses every time or do they have enough flexibility to avoid it somehow?
This is a perennial quant strategy. Buy the names likely to be included into the index, short those that are likely to be dropped.
And the answer is that arbitrage has mostly wiped out the premium. The average gain (loss) on being added (removed) to the index has steadily decreased since the 1990s[1].
[1] https://repository.upenn.edu/cgi/viewcontent.cgi?article=102...
What they do instead is hold a limited portfolio of 10, 50, 100 stocks from the S&P500 that best "represent" the index.
Technically Tesla is already in the S&P500; the real question is whether index fund managers are going to decide to start using it in their representation of the index.
The other commenter is also correct. There are many ways to hedge in favor of or against a stock issue becoming indexed by S&p500 funds in a way to dampen the impact of people trying to 'front-run' (although it's not actually frontrunning in the legal sense)
Say you have, say, $10M under management, and the index is at $3,228.90, as it is right now according to Google. For simplicity, let's just make your share price equal to the exact value of the index (which it theoretically would be with no tracking error).
If you do the division, you find out that you have to allocate 3097.02994828 shares. If you're an ETF, that's literally impossible. If you're a mutual fund, you can do it, but it introduces some accounting overhead to deal with fractional shares and the like. That's okay for the mutual fund, but not great.
As far as taxes, one thing you want to do is hold at least some cash in your fund's portfolio so you don't have to be constantly buying and selling to fulfill purchases. Buying and selling generate capital gains, which you want to avoid as much as possible. However, this also introduces a bit of cash drag to the portfolio, which introduces some tracking error, so your share price will never exactly match the index. That right there blows our assumption that your share price is exactly the current value of the index.
Again, because of taxes, you don't want to just own the exact amount of stock necessary to allocate the number of shares you have outstanding. You probably want a bit of a buffer in terms of shares, so you can deal with orders by just twiddling bits internally in your accounting system rather than trying to go to the market and buy shares "just in time" (which is, of course, literally impossible, because the index moves in sub-millisecond time steps due to HFT).
So, given that you can't just own 1 share each of all 500 S&P 500 companies and say that's one share of your fund, what you do is go and pick a basket of stocks that, when added up together, correlate well to the index price. You can pick 10, 30, 50, 100, or whatever stocks, but you have to do a lot of number crunching to figure out precisely which stocks you want to include.
You want to do this tax-efficiently (remember what I said about avoiding buying and selling), and you also want as low of a tracking error as possible. This is a hard problem. Software can aid in solving this problem, but you need to pay people to make sure that your software does something sensible and isn't going to drown you in taxes.
And, then, there's the small matter of dividends, which complicates the hell out of things. If you don't own all 500 stocks and call that 1 share of your fund, your dividend will not match the sum of all the dividends of all 500 stocks in the index. That's fine, but you have to be aware of it, and you have to track dividend dates and amounts for however many stocks you hold.
Did that convince you that running an index fund isn't as simple as it sounds? :) That's why all funds, including index funds, have a nonzero expense ratio. Ya gotta pay for all this processing.
Oh, and I haven't even covered rebalancing and all the headaches that go with that at scale. And, because you're not Joe Six Pack investor, you're not trading on a $0 commission platform. You're paying for pro-level access to the market.
TL;DR: Owning all 500 stocks and bundling them as 1 share is pretty impractical. Since every trade you make on the open market costs money and possibly generates tax liability, you want to avoid that as much as possible and fulfill orders via moving bits around in your internal accounting systems. These systems are nontrivial.
Isn't this only applicable to mutual funds? AFAIK ETFs use some sort of loophole to avoid having to pay taxes.
ETFs are also theoretically more tax efficient for the end investor than mutual funds [0]. In practice, this may or may not matter. For example, Vanguard, being both the largest provider of mutual funds and the second largest provider of ETFs [1] is able to take advantage of both their scale, and a patented legal and accounting structure they use for their mutual funds to make this largely a difference without a distinction for them. Essentially, what they do is join the mutual fund to an ETF that then siphons off the tax liability through the loophole you mentioned [2]. The patent expires in 2023, so you'll probably see other companies doing this too, in 3 or 4 years, unless the IRS decides to do something about it.
[0]: https://www.fidelity.com/learning-center/investment-products...
[1]: https://en.wikipedia.org/wiki/The_Vanguard_Group
[2]: https://web.archive.org/web/20200713200218/https://www.bloom...
This doesn't pass the sniff test. Funds calling themselves "S&P 500" funds but not actually holding the 500 companies in the index seems like false advertising at best and downright fraud at worst. And rebalancing a fund's holdings should be an automated process whose cost should be covered by the funds fees.
They're the type of object that looks very simple from the outside, and acts very simply, but, under the covers there's a good deal of stuff going on. It's kind of like how the steam engine is a very simple concept (in fact, the ancient Greeks invented a simple steam engine [0]), but, if you look at it at the very lowest level, you can't model how each individual water molecule contributes to the functioning of the whole.
That's not to say index funds have emergent behaviors. Rather that they work internally in ways you, the investor, don't need to care about, because they're designed to have that fairly predictable and simple external behavior.
Put another way: ever wonder why an index fund would need to have any management fee at all (i.e. why there's a nonzero expense ratio)? The reason is because they are managed, and you have to pay people to do that.
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If you choose not to own all 500, that is going to introduce some tracking error. A casual search turned up [1], which, although old, has some interesting numbers on the tracking error, expense ratio, and alpha [2] of several funds. I found it interesting that some funds actually generated a small amount of alpha. I bet over time the mean alpha for a sampled-index strategy is 0 though, just by the law of large numbers.
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[0]: https://www.etf.com/etf-education-center/etf-basics/understa...
[1]: https://seekingalpha.com/article/217707-keeping-track-of-the...
[2]: Alpha, intuitively speaking, is basically the amount of excess return over and above what you'd get if you theoretically just owned the whole index with 0 transaction fees. Pretty much, it encapsulates "how much did this strategy beat the market by." Predictably, alpha values for these funds are small and close to zero. Most are negative, meaning you're going to lag the market. Unless you have enough money to use a direct indexing strategy, you basically have to live with that.
Consider a random company like say Dropbox, and take a wild guess that they might have a 2% chance of making the S&P 500 in the foreseeable future. That small chance is already built in to the current stock price, assuming efficient enough arbitrage. If that perceived chance were to rise, so would the stock price, and as it approached 100% would converge to the post-index inclusion value.
Stated another way: By the time an index fund needs to acquire a particular stock, enough arbitrageurs and market-makers have already acquired it that they're willing to sell at the price the index fund will pay. There isn't really a loss for the index fund to absorb. If there is, it shows up as tracking error in the fund's value not perfectly replicating the index, which is a common occurrence for plenty of reasons.
Horrifyingly terrible idea in so many ways it almost plow my mind.
Many legacy production sites that don't make much sense, with massive political entanglement and maybe even worse union labor contracts.
A balance sheet full of leases for cars that will collapse in value.
A product portfolio that has few profitable products and non that are gone be profitable in 5 to 10 years.
The massive amount of dealers you would have that have no intensive at selling EVs.
> Use Tesla's tech and rapidly turn Ford into a 100% electric manufacturer.
So basically throw everything away Ford is currently good at and replace it with thing Tesla is already good at?
You need to completely redesign product to make them full EV, you can't just plot a bunch of batteries in a Ford truck and sell them.
> crap the ridiculous, impractical Cybertruck (which will flop after it initially sells well, the novelty will quickly wear off)
Nonsense statement based on your own priors. It has more re-orders then anything and has an incredible price. If you are a contractor the operation cost will be unbeatable. If you are an off-roader the power and clearance will be unbeatable. If your a life-style drive you have something that is more unique then other trucks.
In terms of practicality it better then any other truck. The only thing I heard as a counter argument is that, it is not so easy to load from the side.
> focus on electrifying Ford's very lucrative truck lineup
So just buy Ford so you can call your truck an F150? Those trucks all look the same, Tesla could just make a truck that basically looks the same.
You taking an a huge amount of assets that are quickly losing value, just to get a bunch of production legacy facilities that you have to convert to EV anyway.
Building new clean sheet production facilities without unions in strategic locations design for full vertical integration is a much better investment.
They see themselves as far more than a car company, and their opinion is that they are going to inherit a lot of the energy sector. I suspect that they believe their stock is still a bargain.