By Noel Randewich

(Reuters) - Shares of Tesla <TSLA.O> tumbled 7% in extended trade on Friday after the electric car maker was excluded from a group of companies being added to the S&P 500, among them Etsy, whose stock market value is less than a 20th of Tesla's.

The decision by S&P Dow Jones Indices is a blow to Tesla investors who widely expected the company to join the benchmark stock index after a blockbuster quarterly report in July cleared a major hurdle for its potential inclusion.

S&P Dow Jones Indices said in a statement it was adding online craft seller Etsy <ETSY.O>, semiconductor equipment maker Teradyne <TER.O> and pharmaceutical technology company Catalent <CTLT.N> to the S&P 500, effective Sept. 21, and removing H&R Block <HRB.N>, Coty <COTY.N> and Kohls <KSS.N>.

Shares of Etsy jumped 6% in extended trade, Teradyne rose 2%, and Catalent added 2%.

S&P Dow Jones Indices senior index analyst Howard Silverblatt declined to say why Tesla was not added to the S&P 500, which is tracked by index funds with at least $4.4 trillion in assets.

"The market is continuously changing, and we need to reflect that in our indices," Silverblatt said.

With a market capitalization over $370 billion, Tesla is one of the most valuable companies on Wall Street. Even after a 16% drop in its share price from record highs this week, Tesla remains more valuable than 95% of the S&P 500's existing components, including Johnson & Johnson <JNJ.N> and Procter & Gamble <PG.N>.

Etsy, Teradyne and Catalent have a combined stock market value of about $40 billion.

Tesla, which is up nearly 400% so far in 2020, is among the most loved - and hated - stocks on Wall Street. It is the U.S. stock market’s highest-profile bet on the rise of renewable energy and the decline of fossil fuels, and Tesla’s Model 3 sedan has made major inroads among consumers.

Its recent stock gains have been driven by Tesla's unexpectedly strong quarterly results released in July, as well as by bets that it would be added to the S&P 500, which would trigger massive demand for its shares from index funds that track the benchmark.

Tesla bears point to looming competition from Porsche <PSHG_p.DE>, General Motors <GM.N> and other longer-established rivals. They are also skeptical of Tesla’s corporate governance under Chief Executive Elon Musk, who in 2018 agreed to pay $20 million and step down as chairman to settle fraud charges.

Short sellers are betting $24 billion that Tesla’s shares will fall, among the largest short levels on record for a U.S. company, in dollars, according to S3 Partners.

(Reporting by Noel Randewich in San Francisco; Additional reporting by Akanksha Rana in Bengaluru; Editing by Leslie Adler)