I recently came across the following:
S&P/ASX Index Methodology
How Australian Indices Are Constructed And Maintained
S&P/ASX Index MethodologyHow Australian Indices Are Constructed And Maintained
This document outlines the methodology
framework that guides Standard &
Poor’s in the construction and maintenance
of the S&P/ASX indices.
S&P/ASX 20
The S&P/ASX 20 is comprised of the 20
largest and liquid stocks listed in the Australian market.
S&P/ASX 50
The S&P/ASX 50 is comprised of the 50
largest and liquid stocks listed in the Australian market.
S&P/ASX 100
The S&P/ASX 100 is comprised of the S&P/
ASX 50 plus the S&P/ASX MidCap 50.
S&P/ASX 200
The S&P/ASX 200 is comprised of the S&P/
ASX 100 plus an additional 100 stocks.
S&P/ASX 300
The S&P/ASX 300 is comprised of the S&P/
ASX 200 plus up to an additional 100
stocks.
S&P/ASX MidCap 50
The S&P/ASX MidCap 50 is comprised of
the S&P/ASX 100 excluding the S&P/ASX
50.
S&P/ASX Small Ordinaries
The S&P/ASX Small Ordinaries is comprised of the S&P/ASX 300 excluding the
S&P/ASX 100.
S&P/ASX Sector Indices
Sector indices are calculated for both the
S&P/ASX 200 and S&P/ASX 300. Sector
constituents are determined by the Global
Industry Classification Standard (GICS).
S&P/ASX Industrials & Resources
Industrials and Resources indices are calculated for the S&P/ASX 100, S&P/ASX 200,
S&P/ASX 300, S&P/ASX MidCap 50, and
S&P/ASX Small Ordinaries. Constituents
are determined by the GICS assigned to each
stock. A company classified in either the
GICS Energy Sector (1st tier) or the GICS
Metals and Mining Industry (3rd tier) will
fall into the appropriate Resources index.
All other remaining stocks will fall into the
appropriate Industrials index.
S&P/ASX Index Methodology
INDEX COMMITTEE
The governing body of the S&P/ASX
indices is the Standard & Poor’s Australian Index Committee. The Index Committee comprises five members,
representing Standard & Poor’s and
the Australian Stock Exchange (ASX),
and is responsible for setting policy,
determining index composition, and
administering the indices in accordance with the S&P/ASX index methodology.
A representative from Standard &
Poor’s is the chairman of the Index
Committee. Meetings are held on a
quarterly basis as well as on an as-
needed basis should unusual corporate
events warrant. The Index Committee
reserves the right to use discretion to
include, exclude, adjust, or postpone
the inclusion of a stock, the shares,
and the Investable Weight Factor
(IWF) of a stock.
ELIGIBILITY
In order to be eligible for inclusion in
any of the S&P/ASX indices stocks
must meet certain criteria:
Listing
Only stocks listed on the Australian
Stock Exchange will be considered for
inclusion in any of the S&P/ASX indices. New listings will only be considered for inclusion once the Standard &
Poor’s Index Committee has had sufficient time to quantitatively analyse the
performance of the stock.
Size
Stocks are assessed based on the average of their previous six-month day-
end free float adjusted market
capitalisation. In times of high volatility the current market capitalisation of
the stock may also be considered.
Liquidity
Only stocks that are actively and regularly traded are considered for inclusion in any S&P/ASX index. A stock’s
liquidity is measured relative to its size
peers. The minimum relative liquidity
for purposes of inclusion will depend
upon the size of the company. Relative
liquidity is calculated as follows:
Relative liquidity = stock median liquidity/market liquidity
Stock median liquidity is the median
daily liquidity for each stock over six
months. Daily liquidity for each stock
is the daily value traded divided by
day-end market capitalisation adjusted
for free float.
Market liquidity is determined using the
weighted average of the stock median
liquidities of the largest 500 domestic
stocks. The six-months average market
capitalisation used as part of the market capitalisation criteria is used for
this purpose.
Free Float
A minimum free float threshold of
30% exists for a stock to warrant inclusion in the S&P/ASX indices.
STOCK WEIGHTINGS
The Investable Weight Factor assigned
by the Standard & Poor’s Australian
Index Committee determines a stock’s
weighting in the S&P/ASX indices.
Investable Weight Factor (IWF)
A stock’s IWF is based on its free float.
Free float can be defined as the per
centage of each company’s shares that
are freely available for trading in the
market. It may also be described as the
contestable shares in the marketplace
for each company.
For S&P/ASX index purposes free
float is defined as excluding the following holdings:
• Government and government agencies;
• Controlling and strategic shareholders/partners;
• Any other entities or individuals
which hold more than 5% of the
stock (excluding insurance companies, securities companies, finance
companies and investment funds
such as mutual and pension funds),
and;
• Other restricted portions, such as
treasury stocks or strategic holdings.
IWFs are reviewed annually as part of
the March quarterly rebalance. However, any single event that alters the
free float of a security in excess of 5%
will be implemented as soon as practicable by an adjustment to the IWF.
Index Committee Intervention
on IWFs for Illiquid Stocks
The Standard & Poor’s Australian Index Committee acknowledges that for
some lightly traded stocks, the free
float market capitalisation may not be
representative of the underlying liquidity of the stock.
In order to prevent stocks being on the
index at a disproportionately high
weight than otherwise would be the
case, the Index Committee reserves
the right to down weight stocks (or
exclude them) if their relative liquid-
Standard & Poor’s
ity is significantly lower than companies on the index of similar free float
capitalisation.
Intervention by the Index Committee
for a stock presently in the S&P/ASX
indices will generally involve down
weighting a stock to half its free float
capitalisation.
SECTOR AND INDUSTRY CLASSIFICATION
Standard & Poor’s uses ten economic
sectors, as defined by the Global Industry Classification Standard (GICS).
An economic sector is defined as a
group of industries that have similar
fundamental characteristics. These sectors are common across all Standard
& Poor’s indices, including the S&P
500. Standard & Poor’s generally classifies an index constituent according to
the source of its largest revenue share.
For example, companies with multiple
lines of business, such as conglomerates or multi-industry companies, are
assigned to the sector that accounts for
the largest percentage of its revenue.
Unique to Australia, Standard &
Poor’s has created an additional two
sector indices: Property Trusts and
Financials excluding Property Trusts.
These sector indices reflect the significance of the Property Trusts sector in
the Australian market.
INDEX DELETIONS &
ADDITIONS
A guiding principle of Standard &
Poor’s index management is the minimisation of turnover among index
constituents. An index addition generally will be made only if an index vacancy is created by an index deletion.
The Index Committee determines
S&P/ASX index additions based on
historic analysis of a stock’s market
capitalisation, free float, and liquidity.
Quarterly Rebalance
Constituents are rebalanced quarterly
to ensure adequate market capitalisation and liquidity. Both market capitalisation and liquidity are assessed
using the previous six months’ worth
of data. Quarterly rebalance changes
take effect on the third Friday of December, March, June, and September.
The S&P/ASX 300, unlike the other
indices, is rebalanced every six
months, with changes taking effect on
the third Friday of March and September.
Intra Quarter
The most common reason for deleting
a stock from an S&P index intra quarter is acquisition by another company.
Additionally, stocks may be deleted for
the following reasons:
Voluntary Administration
A company is removed from the index
immediately after filing for voluntary
administration.
Restructuring
Each company’s restructuring plan is
analysed in depth. The restructured
company and any spin-offs are reviewed for index inclusion or exclusion.
CHANGES TO INDEX
SHARES ON ISSUE
In order to minimise portfolio turnover for S&P/ASX index fund managers, S&P treats stock placements and
buy-backs independently to the ASX.
S&P/ASX Index Methodology
Subsequently, the number of shares
quoted by the ASX for a particular
stock may differ to the number quoted
in the S&P/ASX indices. Index shares
will change under the following circumstances:
Intra Quarter
• Market-wide placements and
buybacks that are 5% of the index
issued capital and greater than
A$50 million;
• Shares issued as a result of dividend reinvestment plans, and;
• Rights issues, bonus issues, and
other major corporate actions.
Quarter End
If the aggregated difference between
the ASX quoted shares and S&P/ASX
index quoted shares at quarter-end is
greater that A$100 million or 5% of
the index issued capital, shares will be
adjusted to reflect those quoted by the
ASX. Shares that are changed will be
rounded to the nearest 10,000.
ANNOUNCEMENT OF
INDEX CHANGES
Quarterly rebalance announcements
are made approximately 10 business
days prior to the changes taking effect.
Intra quarter changes are announced
approximately five days prior to the
implementation of anticipated corporate events whenever practical, bearing
in mind that the timing of such events
is occasionally uncertain.
Announcements for removals and replacements of companies are made via
a press release to the ASX Company
Announcements Platform (CAP),
where Standard & Poor’s Index Services has its own company code: ZSP.
Standard & Poor’s 3
STANDARD & POOR’S AUSTRALIA
Level 26, 56 Pitt Street
Sydney NSW 2000
Tel: (61) 2-9255-9870
Fax: (61) 2-9255-9871
Level 37, 120 Collins Street
Melbourne VIC 3000
Tel: (61) 3-9631-2000
Fax: (61) 3-9650-4803
www.standardandpoors.com.au
Analytic services and products provided by Standard & Poor’s are the result of separate activities designed to preserve the independence and objectivity
of each analytic process. Standard & Poor’s has established policies and procedures to maintain the confidentiality of non-public information received
during each analytic process.
Obviously the Directors have't read this.
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