If you're an investor in, or at least have an abiding interest in, ASX shares, you will have no doubt heard of the S&P/ASX 200 Index (ASX: XJO).
The ASX 200 is the ASX's most prominent share market index, and is frequently quoted alongside the older All Ordinaries Index (ASX: XAO) as an all-encompassing benchmark for the Australian share market.
If someone says, "the ASX was down 2% yesterday", they are probably talking about the ASX 200.
But how exactly are the shares in this list compiled to give us such a good read on the share market as a whole?
It's more complicated than you might think.
So to start off with, let's get the elephant out of the room. Yes, the ASX 200 has… 200 companies within it. These companies represent the 200 largest shares on the ASX boards by market capitalisation. So size does matter when it comes to how this list is compiled.
So apart from market capitalisation, what other requirements need to be filled for a company to appear on the ASX 200?
How does the ASX 200 work?
Well, according to S&P Global, the company which operates the ASX 200 Index, there are a few other considerations as well. These include liquidity and whether the company is domiciled in Australia.
Investment vehicles that primarily invest in other companies' shares, such as exchange-traded funds (ETFs), listed investment companies (LICs) or managed funds, are generally not eligible for inclusion in the ASX 200.
When determining a company's market capitalisation, obviously this can change day to day, sometimes dramatically. As such, S&P Global uses the "daily average market capitalisation of a security over the last six months" to determine a longer-term average.
Every 3 months, the ASX 200 is rebalanced, which means that it is readjusted based on each of its constituents' updated market capitalisations and other eligibility criteria. This inevitably means that every 3 months, some companies are kicked out of the ASX 200 and replaced with new entrants.
For example, the ASX 200's latest rebalance was effective on 21 June 2021. This saw Orocobre Limited (ASX: ORE) added to the ASX 200, whilst Resolute Mining Limited (ASX: RSG) was kicked out.
But of the top 200 companies are selected for the ASX 200, how are they then apportioned? Well, it's not equal. In a market capitalisation-weighted index, each company is assigned a 'weighting' based on its size. Thus, the larger companies (such as the ASX banks or BHP Group Ltd (ASX: BHP) are assigned a larger weighting than the smaller ones, such as Zip Co Ltd (ASX: Z1P).
What do the top ASX 200 shares look like today?
Here is a look at the ASX 200's current 10 largest companies, and their respective ASX 200 weightings (the latter according to BlackRock):
| ASX 200 Share | Current Market Capitalisation | ASX 200 Weighting |
|---|---|---|
| Commonwealth Bank of Australia (ASX: CBA) | $176.02 billion | 8.29% |
| BHP Group Ltd (ASX: BHP) | $131.59 billion | 6.58% |
| CSL Limited (ASX: CSL) | $137.82 billion | 6.26% |
| Westpac Banking Corp (ASX: WBC) | $94.72 billion | 4.44% |
| Australia and New Zealand Bnking GrpLtd (ASX: ANZ) | $80.73 billion | 4.27% |
| National Australia Bank Ltd (ASX: NAB) | $90.71 billion | 3.8% |
| Wesfarmers Ltd (ASX: WES) | $74.82 billion | 3.45% |
| Macquarie Group Ltd (ASX: MQG) | $60.84 billion | 2.61% |
| Woolworths Group Ltd (ASX: WOW) | $52.6 billion | 2.46% |
| Telstra Corproation Ltd (ASX: TLS) | $47.21 billion | 2.21% |
Size does matter…
As you can see, the weightings generally correspond with each company's market cap. Of course, this isn't always perfect. You can see that BHP currently has a larger weighting than CSL, even though it has a smaller market cap as it stands today.
BHP shares have fallen steeply over the past week or so. But as the ASX 200 is only rebalanced every 3 months, we will have to wait until the next rebalance to see this new paradigm reflected in the weighting. That's assuming BHP's market cap remains below CSL's until then, of course.
So now you know how the ASX 200 sausage is made, so to speak. It's a complicated business, but one that ends up giving us an easy and fairly accurate glimpse of how the entire ASX share market is performing at any given time.
