Tesla Shows Broader Indexes Better

December 22, 2020

As this pandemic year comes to an end (thankfully), it’s been a shockingly good year for U.S. stocks. As of Dec. 17, the year-to-date total returns, per Morningstar, were:

 

Ticker Fund 2020 YTD Returns
VOO Vanguard S&P 500 ETF 17.23%
VO Vanguard Mid-Cap ETF 18.35%
VB Vanguard Small-Cap ETF 18.64%
VTI Vanguard Total Stock Market ETF 20.15%

 

Now it would be intuitively obvious that the Vanguard Total Stock Market ETF (VTI) would return north of 17.23% but south of 18.64%. And a little more intuition would say it should be much closer to the S&P 500, since most of the value of U.S. stocks is in that index. Intuition, however, is usually wrong when it comes to investing. Its return was significantly higher: 20.15%.

Why? Tesla wasn’t in the first three index funds but is, of course, in the total market index.

Tesla is now in in the S&P 500 as of today, but that’s after a whopping 683.95% gain this year in what is now the sixth most valuable U.S. stock. And, of course, my total stock index fund also owns stocks I’ve never heard of going into the new year, like Zoom Video Communications, which is up 496.72% year to date.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Goldman Sachs estimates the return of the S&P 500 would have been higher by 2 percentage points had Tesla been included all year. 

In fact, Robert J. Waid, managing director at Wilshire Associates, told me that there are about 10 other U.S. companies, in the Wilshire 5000 Total Market Index, with market caps greater than $50 billion but not in the S&P 500.  The Wilshire 5000 is an index similar to the CRSP US Total Market Index VTI follows.  He asked why a company as large and widely held as Telsa is not in any of the S&P size indexes (500, 400 & 600)?  Waid noted that about 1.24 percentage points of the Wilshire 5000 return this year came from Tesla

Second Problem
Part of the reason Tesla soared could have to do with the announcement of Tesla’s admission to the S&P 500. In short order, all of the S&P 500 index funds must go out and buy Tesla.

This Yahoo Finance article notes:
“At this point in time, Tesla will be the largest issue we've ever put into the index,” Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, told Yahoo Finance Live on Friday.

Silverblatt estimates that S&P 500 index funds will need to buy $85.2 billion of Tesla stock. It stands to reason that speculators could have driven the stock up with this common knowledge so the S&P 500 Index funds could be buying based on a higher price driven by speculators. And of course, those S&P 500 funds must sell positions to raise the $85.2 billion.

Beauty Of A Total Index Fund
Total index funds like Vanguard’s VTI and the iShares Core S&P Total U.S. Stock Market ETF (ITOT) had to do nothing. They already owned Tesla, and benefited from its stellar performance.

As Tesla stock soared, it became a larger component of the total stock index. They don’t have to sell any stocks or buy another share of Tesla. That’s why I always rate broader index funds better.

I’ve previously written about the case against S&P 500 index funds, calling it the “Google effect.” John Bogle responded to my article. I may need to update it and term it the “Tesla effect.”

Allan Roth is the founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected], or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter.

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