The S&P/ASX 200 index explained

Recent financial market instability has brought increased attention to the performance of the world's share markets. It's not uncommon for the nightly news on TV to include footage of a bank's dealing room or investors at a stock exchange somewhere watching the prices of their stocks on a large public display.

Most of us would be aware of the concept of an equity index as a gauge of share market performance. However very few people would have a more than superficial understanding of how an equity index is constructed and maintained, or how they might go about getting investment exposure to an equity index.

This article examines the local sharemarket benchmark index, the S&P/ASX 200, and some of the other indices in the S&P/ASX suite of indices. A brief history is given as well as an explanation of how the index is managed, where to find more information and how an investor could gain exposure to index returns.

History

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. As institutional investors grew increasingly sophisticated, there became a need to introduce a benchmark index that was complementary to the narrowly defined market capitalisation and liquidity requirements for equity portfolios. Hence, S&P, in partnership with ASX, developed the S&P/ASX 200.

The S&P/ASX 200, together with the entire S&P/ASX index series, was launched in April 2000. The S&P/ASX 200 covers approximately 80 per cent of the Australian equity market by capitalisation, and is regarded as Australia's equity benchmark with over A$200 billion measured and managed according to the index.

The S&P/ASX 200

The S&P/ASX 200 measures the performance of the 200 largest index-eligible stocks listed on the ASX. Representative, liquid and tradable, the S&P/ASX 200 is widely considered Australia's pre-eminent benchmark index and is used to measure portfolio performance for market practitioners, such as fund managers, institutional investment managers and professional advisers. 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.

A stock's weight in an index is determined by the float-adjusted market capitalisation of the stock. The float adjustment removes controlling and strategic shareholdings from the market capitalisation calculation to ensure that only the portion of the company's float that is truly available to investors is included in the index calculation. Holdings excluded from the market capitalisation calculation include government and government agencies, controlling and strategic shareholders/partners and other entities or individuals which hold more than 5 per cent (excluding insurance companies, securities companies and investment funds). Also, stocks in the index must have enough trading activity to meet certain liquidity thresholds to ensure that funds tracking the index can buy and sell index constituents relatively easily.

The index series

This index series offers investors exposure to a set of highly liquid and tradable indices whose total market capitalisation is large enough to approximate the market segment being benchmarked while keeping the number of stocks at a set minimum. This creates a highly cost-effective, easily replicable trading instrument that provides an appropriate barometer of the market's performance. The fixed number of stocks also ensures minimum turnover as changes are made due to corporate activity or a reduction in a stock's size or liquidity that makes it ineligible for inclusion.

The benchmark S&P/ASX 200 is part of a suite of indices that represent the Australian market capitalisation hierarchy. Included in the hierarchy are the S&P/ASX 20, the S&P/ASX 50, and the S&P/ASX 100 and the S&P/ASX 300 representing the largest ASX listed 20, 50, 100 and 300 companies respectively.

The index suite also contains component indices such as the:

• S&P/ASX Small Ordinaries which is comprised of companies included in the S&P/ASX 300, but not in the S&P/ASX 100 and is used as an institutional benchmark for small cap Australian equity portfolios.
• The All Ordinaries index which is considered the total market indicator for the Australian equity market. The index is comprised of the 500 largest securities listed on the ASX and the constituents are not screened for liquidity. It is the only index that is not float-adjusted.
• The S&P/ASX All Australian 50 and the S&P/ASX All Australian 200. Launched in June 2007, the S&P/ASX All Australian 50 and 200 are made up of ASX listed securities that have been defined as 'domestic' or 'Australian' for index purposes.

Industrials and Resources Indices

With resource companies playing a significant role in the Australian economy there is a requirement to identify the performance of resources stocks and their relative distinction to other market segments. Consequently industrials and resource indices are available 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. Resources are defined as companies from the Energy sector and the Metals & Mining industry. The industrials indices are composed of everything else. The decision to split the Australian equity market between Resources and Industrials allows benchmark comparisons to be made against portfolios that are tailored to the respective broad sectors.

Gold and Metals & Mining Indices

Launched in August 2006, these indices recognise the mining sector's importance in the Australian equity market, and enhance the profile of the Gold and Metals & Mining industries within both the Australian and international markets. The S&P/ASX 300 Metals & Mining index is based on the S&P/ASX 300, and is comprised of companies that are classified in the Metals & Mining industry. The S&P/ASX All Ordinaries Gold index includes companies from the Gold sub-industry of the All Ordinaries index.

Property Trusts and Financials X-Property Trusts

In July 2002 two sector indices were introduced to the Australian market to reflect the importance of property trusts as a distinct sector for institutional investors in Australia. This was achieved by fragmenting the Financials sector into Property Trusts and Financials excluding Property Trusts.

When are changes made to the S&P/ASX 200?

The S&P/ASX 200 index is 'rebalanced' quarterly. Rebalancing means reviewing index constituents to ensure adequate market capitalisation and liquidity is maintained. Rebalancing changes take effect on the third Friday of March, June, September and December.

Between rebalancing dates, an index addition can be made if there is an index deletion. Deletions can occur between index rebalancing dates due to acquisitions, mergers and spin-offs or due to suspension or bankruptcies.

How can I find which companies are in the S&P/ASX 200?

A list of index constituents can be found on the S&P/ASX 200 section of the S&P website. Simply select Constituent List on this page to see which companies currently make up the S&P/ASX 200.

Can I trade the indices?

Perhaps the easiest means to gain exposure to the index is via an Exchange Traded Fund (ETF). ETFs can be bought and sold on the ASX in the same way that a stock can. State Street Global Advisors offers ETFs on the S&P/ASX 50, S&P/ASX 200 and the S&P/ASX 200 Listed Property Trust index. These ETFs are designed as a low cost means to track the underlying index as closely as possible, thereby giving an investor returns equivalent to that of the index.

Investors can also obtain leveraged exposure to the S&P/ASX 200 through ASX CFDs or products from issuers such as ABN AMRO and its Index MINIs product.

Note: The S&P/ASX 200 Listed Property Trust index will become known as the S&P/ASX 200 A-REIT index from 5 March 2008.