When you look up a performance report for the Australian share market, or hear or see one on the radio, television or newspaper, you will typically see the performance of one or two indexes quoted. Those indexes are the S&P/ASX 200 Index (ASX: XJO) and the All Ordinaries Index (ASX: XAO).
Both are widely used as a gauge of the entire Australian stock market.
This is common throughout the world. American investors will often use the S&P 500 Index, for example, whereas in the United Kingdom, the FTSE 100 is used. Japan has the Nikkei 225, while Hong Kong is represented by the Hang Seng.
Each of these indexes basically works in the same way. They aggregate the performance of a set number of companies that are listed on a respective exchange, and weight them according to market capitalisation (or company size). However many points are gained or lost over one day's trading then gives us a useful barometer of how the entire stock market has performed.
Back in Australia, the ASX 200 is fairly self-explanatory. It tracks the performances of the largest 200 stocks listed on the ASX stock exchange. That's everything from BHP Group Ltd (ASX: BHP) and Commonwealth Bank of Australia (ASX: CBA) to Harvey Norman Holdings Ltd (ASX: HVN) and Ampol Ltd (ASX: ALD).
It is common to see index funds that track the ASX 200 Index. The iShares Core S&P/ASX 200 ETF (ASX: IOZ) is one, the SPDR S&P/ASX 200 ETF (ASX: STW) is another.
But what about the All Ords? How easy is it for investors to hitch their wagon to the All Ordinaries Index?
Buying ASX All Ords shares?
The All Ordinaries is Australia's oldest index, predating the ASX 200 by quite some margin. Instead of tracking the largest 200 Australian companies, the All Ords expands its remit to the largest 500 Australian stocks. In this way, it is a truer reflection of the broader Australian market.
Investing in the All Ords might sound easy. But it is not. As it happens, there is no way you can actually invest in the All Ordinaries. The ASX hosts no index fund, whether that be a managed fund or exchange-traded fund (ETF) that follows this particular index.
This is probably due to practical limitations. Many of the companies at the bottom end of the All Ords have a market capitalisation of less than $100 million. There simply isn't enough liquidity in these companies that would make an index fund viable.
As such, investors who really want to gain exposure ot the entire All Ords have to get creative. They could start with the Vanguard Australian Shares Index ETF (ASX: VAS).
VAS is one of the only funds on the ASX that tracks the S&P/ASX 300 Index (ASX: XKO). This index is similar to the ASX 200. But includes an additional 100 holdings on the smaller end to increase diversification. Adding a small-cap focused ETF like the Vanguard MSCI Australian Small Companies Index ETF (ASX: VSO) or the iShares S&P/ASX Small Ordinaries ETF (ASX: ISO) would get an investor pretty close to an ASX All Ords experience.
