Tesla stock will be added to the S&P 500 in one step before the opening on December 21.

Tesla will be added to the S&P 500 in a single step despite its market capitalization of over $ 500 billion, the S&P Dow Jones Indices said on Monday, forgoing a possible phased approach that was seen to mitigate the impact of the addition. of such a large company in the United States. stock market reference.

The stock will be added to its free float-adjusted market cap before trading opens on December 21, the index provider said. The free float adjustment means that only publicly available stocks are taken into account when evaluating a company’s weighting. The company Tesla will replace will be named on December 11, according to a press release.

The move follows comments from the investment community, which S&P Dow Jones Indices sought out due to the difficulty of adding a company the size of Tesla. The electric vehicle maker will be the largest company ever added to the S&P 500.

S&P Dow Jones Indices announced that Tesla would join the S&P 500 earlier in November, when it said it plans to add Tesla at the same time before the market opens on December 21, or in two tranches on the 21st. December. 14 and 21 Dec.

“In its decision, S&P DJI took into account the wide range of responses received, as well as, among other factors, Tesla’s expected liquidity and the market’s ability to accommodate significant trading volumes on that date,” said the index provider. Tesla’s addition to the S&P 500 will coincide with the expiration of stock options and stock futures, among other financial instruments, which should make it easier to add due to the high volume of transactions that day.

According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, Tesla’s float-adjusted market value of $ 437 billion will result in $ 72.7 billion in required trades for index fund managers who track the index. benchmark, in addition to normal trading activity on December 21. .

“The fact that when S&P initially made the announcement, they asked for feedback from the investment community on how to handle the addition tells you everything you need to know to show how unique this situation is,” said Bespoke Investment Group founder Paul Hickey.

Tesla shares have jumped nearly 40% since it was announced to join the index, bringing its gain since the start of the year to nearly 580%.

Hickey attributed the recent rally in stocks to the anticipation that stocks will need to be bought by fund managers.

According to the S&P Dow Jones Indices, there are currently over $ 11.2 trillion in assets compared to the S&P 500, with around $ 4.6 trillion of the total in indexed funds. The index provider said the addition of Tesla “will generate one of the largest funding deals in S&P 500 history” as portfolio managers sell positions to make way for Tesla.

“Where it gets interesting is in other stocks that index funds will have to sell in order to make room for TSLA,” Hickey added.

Goldman Sachs recently estimated that the addition of Tesla could lead to a demand of $ 8 billion from active US large-cap mutual funds. When index funds are added to the mix, this figure is significantly higher.

The company’s inclusion in the S&P 500 was taken for granted after Tesla reported its fourth straight quarter of earnings in July, the latest obstacle in the company’s path. But it was ignored during the quarterly rebalancing of the S&P 500 in September, which momentarily pushed stocks down.

The composition of the S&P 500 is determined by what is known as the S&P Dow Jones Indices “Index Committee”, which analyzes quantitative and qualitative factors. Ultimately, the index is intended to be representative of the US market as a whole.

Tesla shares gained more than 4% in extended trading after the announcement.

To subscribe to CNBC PRO for exclusive news and analysis, and live business day programming from around the world.