The S&P/ASX 200 Index is Australia’s equivalent to the S&P 500 in the United States. It is the benchmark institutional investable stock market index in Australia. The S&P ASX 200 Index includes the 200 largest stocks by float-adjusted market capitalization. Although the index is only one of several Australian indices published by S&P Dow Jones (called the S&P/ASX family of indices), it is considered the main benchmark of that grouping.
The ASX tracks 11 sectors that can be further divided into 24 industry groups, 68 industries and 157 sub-industries. Financials make up the largest weighting in the sector. The newest sector, Real Estate, was added in 2016.
The composition of the index is evaluated every quarter. For a stock to maintain its listing on the index if must continue to meet the criteria established by the index.
The S&P/ASX 200 Index is a representation of the 200 largest companies in Australia based on their float-adjusted market capitalization. The companies selected to be part of the index are also selected based on their liquidity. In this article, we’ll take a closer look at the S&P/ASX 200 Index including a review of how it evolved with the Australian stock market. We’ll also take a look at how the components are selected and how much weighting is applied to each sector.
What is the S&P/ASX 200 Index?
The S&P/ASX 200 is an index that helps investors gauge the performance of Australia’s 200 largest index-eligible stocks that are listed on the Australian Securities Exchange (ASX) by float-adjusted market capitalization. The index is also considered to be a measure of the health of the Australian economy.
The companies (otherwise known as constituents) are drawn from eligible companies listed on the ASX. The stocks can be primary of secondary listings. A secondary listing is assigned when a company has its primary listing in another country or on another exchange. The index only includes common and preferred stocks. Securities with some characteristics of fixed income investments (i.e. hybrid stocks) are excluded from the exchange.
The index uses float-adjusted market capitalization to determine the components of this index to ensure that the index has the proper liquidity. For an index to be successful, it has to be able to be traded by institutional asset managers. Therefore, if a stock is lightly traded (i.e. it has a low free float) it can be hard to trade. The combination of being representative, liquid and tradable is the three primary reasons why the S&P/ASX 200 is considered to be the pre-eminent Australian benchmark index.
History of the S&P/ASX 200
The 20-year history of the S&P/ASX 200 makes it a relative infant in terms of stock exchanges. However, the Australian stock market has a rich, 150-year history. That is when the first regional market was established in Melbourne in 1861.
In the following decades, new regional exchanges were established in Sydney (1871), Hobart (1882), Brisbane (1884), Adelaide (1887), and Perth (1889). The exchanges traded independently until 1937 with the formation of the Australian Associated Stock Exchange (AASE) which created uniform listing and commission rules.
In 1938, Australia published its first share price index. However, it was not until 1979 that Australia created its first index (the All Ordinaries Index or “All Ords”) index that became the first official share price index for the entire Australian share market. The All Ords index was primarily created as a simple way to measure market movement. It was not intended to be an instrument for investors to measure their portfolio or the performance of an individual stock.
The Australian Stock Exchange, which would become the benchmark for the S&P/ASX Index was established in 1987. In 1999, the ASX announced that the S&P suite of indices would be used as the institutional benchmark for the Australian share price market. This move provided the means for Australia’s indexes to be used as a measuring tool to compare share price as a benchmark for portfolio returns.
The index originated in its present form in April 2000. In 2006, the Australian Stock Exchange merged with the Sydney Future Exchange (SFE) to form the Australian Securities Exchange (ASX).
As of November 2018, Australian stock market was the sixteenth largest stock market in the world. It had a domestic equity market of approximately $1.859 trillion AUD.
What are the components of the S&P/ASX 200 Index?
The S&P/ASX 200 Index breaks down the Australian share market following the Global Industry Classification Standard (GICS). Using the global standard makes it possible for investors to accurately compare the performance of companies in the ASX 200 to the indexes of other countries, such as the CAC 40 (France).
To that end, the ASX is broken up into 11 large sectors that are further broken down into 24 industry groups in 68 industries and 157 sub-industries. The ASX does not list any companies in 9 sub-industries. The most recent addition to the ASX was the “Real Estate” sector which was added on September 16, 2016.
Each of the 11 sectors in the ASX 200 has a benchmark index that is specific to the ASX companies in that sector. Because, in some sectors, the number of companies listed on the ASX may be very small, those sectors may include only a handful of companies.
The index is rebalanced quarterly. A stock can fall off the index if it fails to continue meeting the eligibility criteria. The index is dominated by large companies.
How are the sectors weighted in the S&P/ASX 200 Index?
As of June 2019, the largest 10 stocks in the index made up 44% of the index. Of these 10 stocks, 50% were banking groups. In fact, financials account for almost one-third of the index.
- Financials – 31.6%
- Materials – 17.1%
- Health Care – 9.9%
- Industrials – 8.4%
- Real Estate – 7.7%
- Consumer Discretionary – 6.5%
- Consumer Staples – 5.8%
- Energy – 5.1%
- Communication Services – 3.5%
- Information Technology – 2.3%
- Utilities – 1.9%
How can investors invest in the S&P/ASX 200 Index?
Like any indexes, investors can’t directly trade the index. Instead, a common way to trade the S&P/ASX 200 Index is through exchange-traded funds (ETFs) and exchange-traded notes (ETNs). There are a number of these instruments that use the ASX 200 as its benchmark index. There are also ways to trade the index in the futures and options market. Investors can find a list of these products in a monthly fact sheet that is published in the index.
The final word on the S&P/ASX 200 Index
Of the many S&P indices that track the Australian stock exchange (ASX), the S&P/ASX 200 stands alone as the institutional investable benchmark in Australia. The stocks chosen for the index are selected from eligible companies listed on the Australian Securities Exchange. The S&P/ASX 200 uses float-adjusted market capitalization to measure the performance of the 200 largest index-eligible stocks listed on the Australian Stock Exchange (ASX).
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