About
The S&P/ASX 200 was established in April 2000 and replaced the All Ordinaries as Australia’s primary share index.
The transition occurred when Standard & Poor’s (S&P) assumed responsibility for Australia’s suite of indices, bringing the Australian share market into the global spotlight. Although considered one of the “Big Three” credit rating agencies (along with Moody’s Investors Service and Fitch Ratings), S&P is most recognised for its global suite of indices. Widely regarded as the benchmark for equity investments, its indices are noted for their highly liquid and tradable constituents, encouraging investment by even the largest institutional investors.
As of April 2013, the S&P/ASX 200 represents approximately 80% of the Australian share market by capitalisation.
Control of Australia’s primary index moved from the ASX to S&P in 2000.
Index Goal
The primary goal when constructing the S&P/ASX 200 index, was not to replicate a fixed percentage of the Australian share market capitalisation, but to establish a highly liquid and tradable index with low turnover. This would allow the index to be used as a benchmark for investment returns, and for other S&P/ASX indices to be constructed as benchmarks for varying investment classes and objectives.
Measuring Performance
The S&P/ASX 200 contains a fixed number of constituents. Its numerical value (or level) represents the total weighted market capitalisation of its 200 constituents, relative to a base period. Therefore, a move in the index from 5,000 to 5,500 would indicate the total weighted market capitalisation of its constituents had risen 10%.
Selection Criteria
A security must meet certain criteria to be eligible for inclusion in the S&P/ASX 200 index.
1 – Eligibility
A security must be listed on the ASX, and must be an ordinary or preferred equity stock (e.g. no bonds, warrants or convertible stocks).
2 – Market Capitalisation
A security must be of adequate size to be considered institutionally investable. The size criterion used for the S&P/ASX 200, is based on the average daily market capitalisation of a security for the previous six months. When this figure is compared to its peers, a security must meet an arbitrary minimum ranking benchmark.
3 – Investable Weight Factor (IWF)
Securities carry different weights in an index depending on their size (i.e. the size of a company directly correlates to the impact it will have in the movement of an index). The influence a stock has on the underlying index is dependant on its IVF. The IVF is the float-adjusted portion of a company’s equity. Therefore, shares owned by company founders, directors, government agencies, or any “strategic holdings” (e.g. longer-term holders with greater than 5% of issued shares) are excluded from the IVF.
4 – Liquidity
A securities liquidity is measured not in absolute terms, but relative to its peers. The formula used is:
RELATIVE LIQUIDITY = STOCK MEDIAN LIQUIDITY / MARKET LIQUIDITY
Where:
Stock Median Liquidity is the median daily traded value of a stock, divided by its average weight-adjusted market capitalisation for the previous six months.
Market Liquidity is the market capitalisation weighted average of the Stock Median Liquidity for the 200 constituents.
Note: The above criteria are used for inclusion into the index, and not for continued membership. As low index turnover is important, a security in the index may on occasions violate one or more of the selection criteria without being removed.
Index Maintenance
Regular maintenance of the S&P/ASX 200 is required to accurately reflect changes in its constituent’s market capitalisation and liquidity.
Quarterly Rebalancing
Changes are implemented on the third Friday of March, June, September and December. Two weeks notice is given on impending changes.
Intra-Quarterly Additions
Generally only occur when there is a vacancy in the index due to a deletion. Two to five business days notice is given.
Intra-Quarterly Deletions
Generally only occur due to mergers, acquisitions and suspensions. Two to five business days notice is given.
Please see the announcements page for recent S&P/ASX 200 index announcements.
