The S&P/ASX 200 is recognized as the institutional investable benchmark in Australia. The index covers approximately 80% of Australian equity market capitalization. Index constituents are drawn from eligible companies listed on the Australian Securities Exchange. The S&P/ASX 200 is a highly liquid and investible index, designed to address investment managers’ needs to benchmark against a portfolio characterized by sufficient size and liquidity.
The S&P/ASX indices are real-time, market capitalization-weighted indices that include the largest and most liquid stocks in the Australian market. The S&P/ASX 200 covers approximately 80% of the Australian equity market by capitalization, with a constituency that is highly liquid and tradable. Such characteristics ensure that the S&P/ASX 200 is representative of the Australian market while maintaining a limited number of eligible securities.
The S&P/ASX 200, together with the entire S&P/ASX index series, was launched in the Australian market in April 2000. Before April 2000, the All Ordinaries index was considered Australia’s institutional benchmark. The All Ordinaries index was launched in January 1980, to act as an indicator of the Australian equity market.
Upon its introduction in April 2000, the S&P/ASX 200 replaced the All Ordinaries index as the primary gauge for the Australian equity market. The S&P/ASX 200 measures the performance of the 200 largest index-eligible stocks listed on the ASX by float-adjusted market capitalization. Representative, liquid and tradable, it is widely considered Australia’s preeminent benchmark index. The index is float-adjusted, covering approximately 80% of Australian equity market capitalization. Listed companies place immense significance on their membership in the S&P/ASX 200 index. Inclusion in the index generates significant institutional interest for constituents, and proliferates widespread media and buy/sell side analytical coverage.
All common and equity preferred stocks (which are not of a fixed income nature) are eligible for inclusion in the indices. Hybrid stocks such as convertible stock, bonds, warrants, and preferred stock that provide a guaranteed fixed return are not eligible. Listed Investment Companies (LICs) that invest in a portfolio of securities are not eligible for index inclusion.
Companies that are currently under consideration for merger or acquisition are not eligible for inclusion or promotion within the S&P/ASX index hierarchy.
The S&P/ASX indices only include securities that are considered to be institutionally investable, and market capitalization is a key criterion for stock selection. Stocks are included if they are large enough to meet the minimum ranking requirements for the representative indices within the Australian market.
The market capitalization criterion for stock inclusion is based upon the daily average market capitalization of a security over the last six months. The stock price history (last six months), latest available shares on issue and the Investable Weight Factor (IWF) are the relevant variables for the calculation. The IWF is a variable that is primarily used to determine the available float of a security for ASX listed securities.
A stock’s weight in an index is determined by the float-adjusted market capitalization of the stock. This is a function of current index shares, the latest available stock price and the IWF. The IWF represents the float-adjusted portion of a stock’s equity capital. Therefore any strategic holdings that are classified as either corporate, private or government holdings reduce the IWF which, in turn, results in a reduction in the float-adjusted market capital.
The index is calculated using the Weighted Average Market Capitalization methodology where the price multiplied by the free float gives the market capitalization of its constituents. The weightage of each company is arrived at by dividing the market capitalization of each company with the total market capitalization of all the 200 companies. The larger the market weightage of the company the larger is the impact due to 1% change in its price on the index.
The S&P/ASX 200 index constituents are rebalanced quarterly to ensure adequate market capitalization and liquidity. Quarterly rebalancing changes take effect on the third Friday of March, June, September and December.
Financials constitute 45.5% followed by Materials at 17.5%, Consumer Staples at 7.9%, Industrials at 6.8%, Energy at 6.2%, Telecommunications at 5.3%, Healthcare at 4.5%, Consumer Discretionary at 3.9%, Utilities at 1.7% and Information Technology at 0.7% for the sector allocation in the index.
The S&P/ASX 200 has given a return of 15.62% on a year on year basis and has gained 3.37% on a month on month basis. The index reached an all-time high of 6828.7 in November 2007. The index has a Price to Earnings ratio of 16 in the current scenario. Commonwealth Bank has the highest weightage in the index followed by BHP Billiton, Westpac Banking Corporation, ANZ Banking Group, National Australia Bank Ltd., and Telstra Corp Ltd. while others have less weightage each in the index.