Each quarter index provider Standard & Poors (S&P) updates the holdings for various Australian Security Exchange (ASX) indexes.
These including the ASX 20, ASX 50, ASX 100, ASX 200, ASX 300 and ASX 500.
The changes will be effective from March 21.
Here are the major updates that will impact widely held exchange-traded funds (ETFs).
Why does the index need updating?
Company share prices go up and down meaning the biggest companies can change week-to-week or even day-to-day.
Moreover, new companies are listed and existing companies are bought.
As a result, each quarter the index provider will tell ETF issuers what companies need to be bought and sold so the index remains balanced.
Why should I keep track of index changes?
An index is just a basket of companies based on a particular methodology.
While the methodology may be appropriate at the time, changes to holdings may mean the product doesn’t reflect your investment goals.
An index ten years ago can look very different to that same index today.
S&P/ASX 200 Index
The ASX 200 represents the 200 largest public companies on the Australian Stock Exchange.
The index welcomed four new companies – AVZ Minerals, City Chic, De Grey Mining and Home Consortium.
Neither AVZ nor De Grey is profitable, with both searching for resource deposits.
This means much of their value is potential future profits, rather than today’s earnings.
Four companies fell out – Mesoblast, Skycity, Spark and Unibail-Rodamco-Westfield.
S&P/ASX 300 Index
The ASX 300 represents the 300 largest public companies and is considered the investable universe of most Australian fund managers.
The index is also used as the basis for the popular Vanguard Australian Shares Index (ASX: VAS) ETF.
The ASX 300 welcomed 14 new companies with notable including Aussie Broadband, PWR Holdings and Judo Bank.
To make room for the new companies, 9 businesses were removed including Marley Spoon and Sezzle.
Shouldn’t another 5 companies be removed so the index remains at 300?
Not necessarily. Sometimes the index remains below 300 companies as there may not be enough to fulfil entry requirements.
Also, companies that have been acquired, such as Sydney Airport, aren’t included.