The S&P/ASX 200 Index (ASX: XJO) is not a static index. At its core, it is supposed to represent the largest 200 companies on the ASX share market by market capitalisation. That sounds simple enough. But companies' market caps change all the time – essentially alongside share prices.
So that makes coming up with a list of the ASX's largest 200 companies at any one time a little fraught.
To get around this reality, the company that administers the ASX 200 Index – S&P Global – conducts what is known as a rebalance every three months. During a rebalance, the index provider notes which companies have lost value and which have gained value. It then reorders the ASX 200 to reflect what are the largest 200 companies at that time.
Inevitably, this leads to some ASX shares joining the Index, taking the place of those that no longer qualify for entry.
It just so happens that the latest quarterly rebalance for the ASX 200 is about to take effect. And one of the unlucky companies that is about to lose its ASX 200 membership is ASX battery technology company Novonix Ltd (ASX: NVX).
As my Fool colleague covered earlier this week, the latest ASX 200 rebalancing is set to come into effect on 20 March later this month. But to prevent any market shenanigans, S&P Global announces the changes well in advance.
Novonix shares are about to get the ASX 200 flick
So we already know that Novonix is about to get the boot from the ASX 200. It will join other soon-to-be former ASX 200 shares which include Adbri Ltd (ASX: ABC), Ramelius Resources Ltd (ASX: RMS) and Smartgroup Corporation Ltd (ASX: SIQ).
In their place, the ASX 200 will welcome Life360 Inc (ASX: 360), NRW Holdings Limited (ASX: NWH), Polynovo Ltd (ASX: PNV), and Syrah Resources Ltd (ASX: SYR).
So what does the loss of ASX 200 membership mean for Novonix investors?
Well, it's hard to put a finger on exactly. In terms of the company itself, nothing will change. ASX 200 inclusion has little impact on the day-to-day operations of a company. However, it could lead to some share price changes.
ASX 200 inclusion can give a company greater access to investment. Any ASX fund managers only have mandates to invest in ASX 200 shares. And the fact that Novonix is leaving the ASX 200 Index means that any index funds that track the ASX 200 (of which there are many) will have to sell out of their Novonix position.
This selling pressure could lead to a lower share price for Novonix as demand for its shares slackens. So if Novonx investors notice a change in the share price movements of this company over the next few weeks (or even months), this could well be why.
But Novonix shareholders shouldn't be too worried. As we mentioned earlier, this will change nothing at the company itself. And Novonix can always be readmitted to the Index at some point in the future if the company becomes more prosperous.
But, at least for now, Novnonix will have to be content as an All Ordinaries Index (ASX: XAO) share, rather than an ASX 200 member.
