Amid an already hectic trading session, as investors contend with larger-than-normal trading volumes due to quadruple witching, the phenomenon when options and futures on indexes and equities expire, electric automaker Tesla is on the precipice of joining the ranks of the S&P 500, in what will be the largest rebalancing in the history of that index.
Tesla is set to begin trading on the S&P 500 on Monday, but all the trading action commences at the close on Friday, generating what could be such a potentially significant trading volume that some traders are concerned could result in problems at the close.
“This will be one of the largest trading days in a long time,” said Harry Whitton of market maker Old Mission, noting that the large dollar amount involved could make it the largest trading day in history.
With a market capitalization of more than $600 billion after a 700% rally this year, Tesla is being added to the benchmark all at once, where 129.9 million shares of Tesla will need to be bought to inject it into the S&P 500, generating the most significant rebalancing of the S&P 500 in history. It is projected that passive funds tracking the S&P 500 will be required to purchase over $85 billion of Tesla, while selling $85 billion of the rest of the index to compensate.
Several major exchange-traded funds like the Invesco QQQ Trust (QQQ), which mirrors the Nasdaq 100, will be rebalanced alongside the S&P 500 Friday. With quadruple witching already in play, this could result in serious gyrations for the market.
“Two unprecedented phenomena will be converging,” Steve Sosnick, chief options strategist at Interactive Brokers, wrote in a recent note. “The index has never added such an immensely large stock at the same time that options volumes and open interest are at record highs.”
Sosnick is leery that the cocktail of the Tesla addition, the quadruple witching, and the rebalancing in the rest of the S&P 500 could result in extremely high imbalances in demand for stock that may result in price disruptions.
“There is a potential for massive market on close imbalances because this is the biggest stock entry ever. There is an awful lot of money that will be sloshing around at that time,” he said.
“Because this is such an event, we could be in for a much more volatile market on close than people are used to, particularly with so many retail traders involved in stock options that could swing in or out of the money,” Sosnick added.
For investors looking to purchase Tesla using ETFs, there are several options to consider besides the S&P 500 or the corresponding SPY ETF. The Global X Autonomous & Electric Vehicles ETF (DRIV), ARK Innovation ETF (NYSEArca: ARKK), and VanEck Vectors Low Carbon Energy ETF (NYSEArca: SMOG) are all worth examination.
Up 1.4% on Friday alone, the ARK Innovation ETF (ARKK) is the flagship actively-managed fund from the team at ARK Invest. The advisory firm, led by Catherine Wood, has an impressive track record doing what most stock pickers fail to do: beating the market.
For more market trends, visit ETF Trends.