In recent news, Elon Musk's net worth took a hit when a judge in Delaware ruled that a compensation package he received in 2018 was excessive and unfair to shareholders. While the financial implications of this decision are being widely discussed, there is another important aspect of the story that deserves attention - the role of passive funds in instigating this drama.
When Tesla was announced to be included in the S&P 500 index in November 2020, it caused a frenzy among active investors who saw an opportunity to front run the looming passive bid. In an article for Forbes at the time, I questioned whether S&P 500 investors really wanted to buy Tesla after it had already experienced a significant surge in value. However, despite the concerns raised, passive investing giants like Vanguard and Blackrock went ahead and purchased Tesla shares, as they typically follow a market-cap-weighted investment process that emphasizes chasing stocks with the highest momentum.
