By Michael Wursthorn and Gunjan Banerji

Shares of Tesla Inc. declined in their S&P 500 debut Monday as the massive wave of demand that had propelled the stock ahead of its inclusion subsided.

The electric-car maker's shares slumped 5.1% in morning trading, suggesting some investors were cashing out following Tesla's addition to the S&P 500. The declines in Tesla, the sixth-largest company in the market-cap-weighted index, contributed less than one-tenth of a percentage point to the S&P 500's 1.2% slide.

The swoon also coincided with broader stock-index declines as investors grew jittery about worsening coronavirus cases in the U.K and stricter lockdown measures. The worsening cases served as a wake-up call to many after enthusiasm about coronavirus vaccinations has pushed stocks to records in recent weeks.

For Tesla investors, Monday's slide was a small dent in what has been an otherwise blockbuster year of gains. Shares of the Palo Alto, Calif., company are up 687% this year and set a record Friday, creating scores of millionaires who had bet heavily on the company and its charismatic and sometimes controversial chief executive, Elon Musk. A significant chunk of those gains came after S&P Dow Jones Indices last month said it would add Tesla to the benchmark, with Tesla rising nearly 6% on Friday alone.

But the picture is different for index investors who on Monday suddenly found themselves owning a piece of the most valuable car maker in the world. Investors in the SPDR S&P 500 Trust exchange-traded fund, one of the biggest tracking the benchmark, and other index-tracking ETFs and mutual funds that had missed out on Tesla's rally are now feeling the impact of the car maker's slide on Monday.

Tesla went into the S&P 500 with a 1.7% weighting, just smaller than Facebook Inc. and bigger than Berkshire Hathaway Inc., according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. For every $11.11 move in shares of Tesla, the S&P 500 fluctuates one point.

Moving forward, Tesla's wild moves also will influence the S&P 500. Tesla has been far more volatile than the S&P 500 this year. Goldman Sachs Group Inc. analysts recently estimated that Tesla's addition to the S&P 500 index would potentially add about one-quarter of a point to the Cboe Volatility Index, or VIX, the options-based gauge of market turbulence. Traders had said that this inclusion also would ripple through the derivatives markets for both Tesla and the S&P 500.

On Monday, the gauge jumped about 5 points in early trading to 26.87, on track to close at the highest level since early November, as major U.S. indexes logged declines.

Even bullish Tesla investors who are optimistic about the company's long-term prospects had said that they were preparing for a fall in the company's share price after S&P 500 inclusion when the initial, concentrated burst of demand from passive investors subsided.

Investors bearish on Tesla -- and there are many -- went even further. Several investors and analysts had raised concerns that Tesla exhibited some classic signs of a bubble with the potential to burst. Some also drew comparisons with Yahoo Inc., the internet company whose market value peaked less than a month after it joined the S&P 500 in December 1999.

"These two instances represent the environment at the time," said Michael O'Rourke, chief market strategist at JonesTrading. "There's a lot of money chasing a lot of yet-to-be-proven businesses. That's definitely the definition of a speculative frenzy."

Index-tracking funds bought some $90 billion worth of Tesla stock by the end of Friday's session, said Mr. Silverblatt, and trimmed their positions from smaller stocks in the index by an equivalent sum. A big concern heading into Friday's session was whether index funds would be able to buy the right amount of shares at the closing price to ensure they reflected the composition of the S&P 500. Funds that fell short would register the mismatch as a tracking error.

For two of the biggest S&P 500-tracking ETFs, that doesn't appear to be a problem.

The SPDR S&P 500 Trust fund, the world's biggest ETF with $318.4 billion in assets, carried roughly the same weighting for Tesla as the S&P 500 as of Friday, as did the iShares Core S&P 500 ETF, which has $237.7 billion in assets.

Write to Michael Wursthorn at Michael.Wursthorn@wsj.com and Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

12-21-20 1231ET