Tesla will add volatility to index funds: advisor

Mercadien Asset Management president Ken Kamen tells Reuters' Fred Katayama what the addition of Tesla's turbocharged stock to the S&P 500 will mean for investors of index funds.

Video Transcript

FRED KATAYAMA: Turbo-charged trading on shares of Tesla Friday ahead of the electric carmaker's inclusion in the S&P 500 on Monday. Let's discuss the stock's prospects and the implications for the index. We're joined by Ken Kamen of Mercadien Asset Management from Yardley, PA. Good afternoon, and welcome back, Ken.

KEN KAMEN: Thank you.

FRED KATAYAMA: It's supposed to be the largest issue ever put on the S&P 500. What will it mean, the inclusion of Tesla, for S&P index investors?

KEN KAMEN: Well, what's really interesting is, you know, there's always this conversation between active or passive. I think this shows that there's really no such thing as really passive investing, that somewhere, someone in the food chain is making a decision about what allocation should be there. What's interesting to me, though, is that now that Tesla's trading at what is-- may or may not be an inflated price, but certainly a price that's risen over the last year on some expectation of it being in the index, people are actually buying high. They're being forced to buy the security at-- you know, at a relatively high price from its recent history. And that's an interesting thing because the whole object of investment is to buy low and sell high.

So I think this is a real good wake-up opportunity for people that have been, you know, kind of leaving their portfolios on autopilot and just indexing to recognize that you're not always owning securities, you know, at the levels you want. And you're being forced to own them where the index does. And if you just look at things in aggregate, I guess it's one thing. But eventually, when momentum isn't the thing that moves Wall Street all the time, I think stock picking is going to matter. And this selection really points that out, in my mind.

FRED KATAYAMA: So are you concerned about the potential volatility of Tesla?

KEN KAMEN: Well, what's interesting is Tesla is, like, four or five times more volatile than the S&P, you know? So they're now going to add something in there that, you know, every $11 move in Tesla, approximately, is a another-- it's a one-point S&P move. So they're adding some real volatility there, and people are going to have to recognize that, at some extent, what they see in the S&P is not what they were seeing all along, as far as, you know, the moves going.

It is really interesting, though, because they're going to be knocking out a bunch of companies. Or at least let me say this, people are going to have to knock out a lot of their portfolios to get the money to buy the Tesla, if they're going to emulate this. So it could have an interesting effect to make other things very good buys that might be coming out.

So I just-- you know, I've always had this problem with buying a huge basket of stocks and forgetting about fundamentals. Fundamentals matter. And you know, I just think it's important that people look at that and recognize that this is happening now.

FRED KATAYAMA: When you say fundamentals matter, are you insinuating that this could perhaps be a bubble stock that's added to the S&P?

KEN KAMEN: Well, you know, the reality of it is kind of buy on the rumor, sell on the news. It might be one of the oldest adages on Wall Street. And you know, the stock has had a real run-up, and Tesla, certainly-- you know, I'm not taking a position on the company, but you know, it certainly seems like it's priced for perfection and priced for things to go exactly the way they hope they're going to go. So it seems that if the stock is going to have a correction, it could have an oversized effect on the S&P 500, and people need to recognize that.

FRED KATAYAMA: Well, it's expected that funds will be buying a lot at the close of trading today. Should investors avoid the last hour of trading?

KEN KAMEN: I think, yeah. I mean, absolutely. In today's-- it's not only that. It's quadruple witching and all these other types of things. I think that people kind of almost have to ignore the close because, as you said earlier, we've never seen a company with this large a market capitalization being added to the index. So who knows what wackiness is going to happen in the last 10 minutes of trading, when they have market-on-close orders.

FRED KATAYAMA: There's that FOMO, fear of missing out. Should investors avoid picking up Tesla today? People might be thinking, hey, it's going to be included in the S&P 500, a lot of buying. Why not pick up today?

KEN KAMEN: I'm thinking it might be the opposite. I think that buying has already happened. And after, you know, the buy on the rumors, sell on the news type thing, Monday might be a different story. So I'd actually maybe be prepared for the S&P to be down on Monday, as people kind of jockey for position, as they rebalance portfolios.

Because it's not only the index. It's all the derivatives that happen to that-- all the hedge funds, all the emulators, all the other knock-on type of investments, which, quite frankly, might have a much bigger effect on the market on Monday than Tesla. But I don't want to also leave people with the impression that this is some watershed, major event. This is just some temporary technical noise in the market, and people are going to have to recognize that the S&P is likely to become a more volatile security.

FRED KATAYAMA: All right. Thanks, Ken, for your thoughts.

KEN KAMEN: Thank you.

FRED KATAYAMA: Our thanks to Ken Kamen of Mercadien Asset Management. I'm Fred Katayama in New York. This is "Reuters," and have a wonderful weekend.