In this article, we discuss how the ASX200 Index is constructed and maintained. The ASX200 is the leading benchmark index for the Australian Stock Exchange, and accounts for approximately 80% of the entire market capitalisation of ASX listed stocks.
The ASX200 is a market-cap weighted and float-adjusted stock market index. Market-cap weighted means that stocks are firstly included in the Index based on their market capitalization, which is simply the overall value of the company, determined by the number of shares on issue multiplied by the share price. For inclusion in the ASX200, he stocks market capitalization is assessed over the prior 6-month period. More so, the contribution of a stocks performance to the overall Index performance is weighted based on their market capitalization, meaning that the performance of the larger stocks have a larger impact on the performance of the Index.
Float-adjusted is important, as this can affect the liquidity of a stock. The free float is the percentage of shares that are freely tradable on the ASX. Often, companies can have a portion of their shares that are not freely tradable. As a example, Crown (CWN) only has a free float of approximately 63% of the company’s market capitalization, as the other 37% is held off market by James Packer.
The list of ASX200 stocks is thus determined by a companies market capitalisation, adjusted for the free float.
Over time, share prices move up and down, new companies emerge, and some go out of business, meaning that the constituents of the ASX200 need to be adjusted on an ongoing basis. To provide an example, since the early 1990’s there have been over 850 companies who at some stage have been a member of the ASX200. This responsibility lies with Standard and Poors (S&P), and is conducted on a quarterly basis, thus the term ‘quarterly rebalancing’. The rebalancing occurs after the market closes on the third Friday of March, June, September and December, and the market is informed of the upcoming changes one week in advance, or two weeks in the case of the September change. The most recent rebalance occurred in June 2020, and resulted in six stocks being removed from the ASX200, which were Estia Health (EHE), HUB24 (HUB), Jumbo Interactive (JIN), Mayne Pharma Group (MYX), Pilbara Minerals (PLS), and Pinnacle Investment Management (PNI). These stocks were replaced with the following five stocks; Centuria Industrial Reit (CIP), megaport (MP1), Mesoblast (MSB), Omni Bridgeway (OBL), and Perseus Mining (PRU).
It is important to stay abreast of Index changes, as the quarterly rebalancing process can have a significant impact of a companies share price. Is a company is included into the ASX200, generally speaking, it will lead to an increase in buying demand for the companies shares. There are many passive funds and ETFs which will hold a stock based on whether or not it is included in a particular index, On the other hand, if a stock is removed from the ASX200, many passive funds will no longer be required to hold the stock, and thus will sell, leading to an increase in selling pressure.
