Why I’m NOT buying an S&P/ASX 200 index tracker

How big is the Australian share market, or S&P/ASX 200 (Index: ^AXJO)(ASX: XJO)?

Is it:

  1. 1% of the global total,
  2. 10%,
  3. The 7th largest in the world, or
  4. The 16th largest

Read on to find the answer.

The best-performing share market

The Australian share market is often touted as the best-performing share market in the world, over the ultra-long term.

According to Vanguard Investments, Australian shares returned an average of 9.8% per year between 1970 and the end of 2015. The down-under up-and-comer out did international shares by 0.1% per year (on average), but underperformed US shares by an average annual amount of 1.5%.


“It’s a close second,” I hear you say. “Nevermind ‘bout that”.

Well, actually, it’s NOT a close second. $10,000 invested in Australian shares in 1970 would’ve been worth $727,380 at 31 December 2015. The same money invested in US shares (and reinvested – of course!) would be worth $1,377,140.

Not for long?

You’ve probably heard this all before — I’m not saying anything new. And 9.8% per year is a great return over 30 years, don’t get me wrong.

However, there is no guarantee our market will perform as well as it did, over the next 10 years. None. Zilch. Nada.

In fact, I think the S&P/ASX 200 (which is slightly different to the index used by Vanguard) will perform worse than its international peers — especially the US.

Indeed, we’ve got some great long-term demographics playing out: An aging population, net population growth, rising wealth… the list goes on. However, right now, our market is heavily concentrated towards two sectors which I believe will struggle to perform as well in coming years.

You can make your own mind up by looking at the following charts.

How big is the S&P/ASX 200?

image (2)

Data sourced from the World Federation of Exchanges, January 2016

The Australian share market made up just 1.81% of all share exchanges globally, measured in US dollars in January 2016. It ranked as the 16th largest, according to data sourced from the World Federation of Exchanges’ website. Consolidation, driven by globalisation, and the ubiquitousness of technology could make Australia prime real estate for the largest (foreign) companies to dislodge (note currency movements below).

How diverse is the S&P/ASX 200?


Source: Standard & Poor’s Website

The ASX had 2,209 companies listed in February 2016. However, of the top 200, 46% of the total market is made up by those from the financial sector, especially the major banks. Commonwealth Bank of Australia (ASX: CBA) makes up almost 10% by itself! Financials also include Real Estate Investment Trusts or REITs.

Plunging commodity prices have resulted in the Materials sector falling to below 13% of the ASX 200’s total, consequently increasing the market’s dependence on the financial sector.

Compare that to International markets

image (1)

Source: FTSE Global All Cap Index, February 2016

There are many stark comparisons to be made here. Financials are a much smaller contributor to the global share market than they are for our market (possibly a result of the Global Financial Crisis?). Technology exposure is another big one. IT makes up just 1% of our market but 11.3% of global markets, according to the FTSE Global All Cap Index.

Currency movements

Source: Google Finance

Source: Google Finance

Currencies can move against or with you. However, that shouldn’t deter you from investing globally, especially over the long term. Investing in a different currency removes your dependence on the local Australian dollar thereby reducing your exposure to downside macroeconomic or ‘country risk’.

Foolish takeaway

I may be completely off the mark insinuating that the recent mining and housing booms resulted in our sharemarket being overexposed to property, banks and the resources sector. However, investors should be mindful that our market may NOT be among the best performing over the next decade and, therefore, investors should position their wealth accordingly.

I know I am.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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