The all important S&P/ASX 300 index
TheS&P/ASX 300 is a significant index. It is one that many fund managers or investors use as a cutoff for investments. Entering the S&P/ASX 300 can be a major milestone for companies, signifying they have actually entered the big league.
The Vanguard Australian Shares Index (ASX:VAS) seeks to replicate the index.
Vanguard Asia Pacific chief investment officer Duncan Burns told * full replication is the purest form of indexing, where an index manager holds all the securities in the portfolio at or close to their index weight.
“For instance, at the recent balance on March 18 VAS, Vanguard’s $28bn flagship Australian shares fund/ETF fund held all 301 (yes, 301 that occasionally happens) lines of the ASX 300 benchmark at or very close to benchmark weight, give or take 0.01% to 0.02% at the security level,” Burns said.
“So starting at the top of the ASX, you have the major banks and miners with a market cap of hundreds of billions, all the way down to the last few securities of the 300, with a market cap of around one billion.
“As a result, VAS contains all 300 securities (or 301 securities for accuracy as at March 18) in percentages according to their market cap.”
Economics 101 – Supply and demand
Share markets are a function of supply and demand for available shares. If demand increases for a particular stock the price will go higher, but if it reduces then the price will go lower. If a stock gets listed in a particular index then this can increase demand.
Burns said the concept of indexing is generally simple to understand, which is great for investors but not at all simple to execute.
“It requires significant resources to produce benchmark performance consistently and efficiently,” he said.
“Imagine trying to recreate VAS on your own, buying every single security and trying to figure how much of each security you need, to replicate that index.
“But a successful index manager will produce a portfolio with performance that replicates that of the benchmark index while minimising the additional costs that produce tracking errors.
He said managing changes when companies move in and out of a specific index, without adversely impacting portfolio performance takes considerable skill and the best managers put a great deal of effort into trading disciplines to avoid rebalance costs.
“From Vanguard’s perspective, as a provider of predominantly index funds, managing the ever-changing weightings of securities within indices and markets are a daily occurrence,” he said.
“The beauty of buying an index fund that tracks the ASX 300 is not only the diversification that most index fund investors seek, it is also that all this rebalancing gets done for you regularly, typically at low cost.”
A ball invitation
Simply being on an index can boost a company’s share price.
Just like getting invited to a ball hosted by Queen Charlotte in Netflix favourite Bridgerton, exposure can in itself elevate status and further grow the wealth of a company.
For listed stocks, that means the equivalent of putting on your best attire, polishing your manners and doing your very best for an invite to the ball of the season (in this case, the ASX 300).
Investors should be sure to pay attention to who is getting an invitation.
