Index funds now own more of Tesla than Musk

Elon Musk has strong views on a lot of topics, and passive investing is no exception. But the index fund industry’s “Big Three” — BlackRock, Vanguard and State Street — now own more of his company than Musk himself.

Tesla’s inclusion into the S&P 500 index back in December 2020 was a big moment for the stock and the market as a whole, as it was the single biggest inclusion into a major index of all time.

(This is a record Tesla will probably retain as most normal companies tend to be consistently profitable — a condition for S&P 500 inclusion — long before they get a market cap of then-ca $440bn.)

Many index funds will already have owned the stock, as they track indices that already included the electric vehicle maker, eg the Nasdaq-tracking QQQ ETF. But the S&P 500 is by far the most influential US market benchmark, and Tesla’s inclusion meant that the almost $2tn of index funds had to buy its shares at the time.

It’s been a lousy investment since then (despite a mysteriously strong 2023), undercutting the argument that index inclusion and passive funds prop up bad stocks. But as long as money keeps sloshing into index funds — which it has been — they have to buy according to Tesla’s (diminishing) weighting in benchmarks.

This means that Vanguard funds are now Tesla’s second-biggest shareholder, with a 6.85 per cent stake. BlackRock funds own 3.6 per cent and State Street Global Advisors controls another 3.13 per cent. That adds up to 13.58 per cent.

Meanwhile, Musk has been dumping Tesla stock for more than a year (most recently to finance his acquisition of Twitter), reducing his stake to 423.6mn shares, or 13.42 per cent.

(Astute readers will now understand why we’ve been checking Tesla’s shareholder registry so frequently of late.)

Some caveats. BlackRock, Vanguard and State Street all also have active funds, which can invest and probably in some cases are invested in Tesla. So their combined 13.58 per cent probably isn’t all owned by passives.

But the vast majority will be. And anyway, if you include Fidelity’s passive business Geode Capital Management (now comfortably a top-10 shareholder with a 1.55 per cent stake) and Invesco’s QQQ ETF (another 1 per cent) then the passive ownership leaps to 16.13 per cent. That must be a bit awkward for Musk.

Exactly. Right before he died, Jack Bogle (of Vanguard fame) said index/passive funds were too great a percentage of the market and he really knew what he was talking about!

There should be a shift back towards active investment. Passive has gone too far.

— Elon Musk (@elonmusk) May 1, 2022

Setting aside the fact that Musk is misrepresenting Bogle’s actual view here, Tesla’s index fund ownership is actually a bit less than the average passive ownership of most big US listed companies. The Big Three index fund companies own 15.99 per cent Apple, for example, and if you include Geode and QQQ that climbs to 18.59 per cent.

We explored last year just how passive the entire US stock market is. The best, most credible overall figure for “official” index fund ownership is the Investment Company Institute’s estimate of about 16 per cent of the US equity market as a whole.

But the reality is that there are many de facto index-tracking investors that just don’t use index funds, and are therefore not captured by fund-based data. Reverse-engineering data from trading spikes triggered by index reshuffles, two academics last year estimated that at least 37.8 per cent of the US stock market is held by passive, benchmark-hugging investors.

Still, at least Musk can now make sure that everyone is force-fed his tweets moaning about his new passive overlords.

Further reading:

— Super passive goes ballistic; active is atrocious
— Happy 30th birthday to the ETF
— How passive are markets, actually?