What are the top 5 Australian indices?

What are indices?

Broadly speaking, indices or indexes are used to measure the overall performance of a stock market (like the ASX 200) or a specific portion of it (like the S&P/ASX 200 information technology index).

As most are aware, far and away the most popular Australian index is the ASX 200 – which tracks the performance of the top 200 Australian-listed companies, weighted by market capitalisation.

For reference, the All Ordinaries index – which tracks the top 500 Australian-listed companies (by market capitalisation) was previously the most popular, though has fallen out of favour in recent times.

What’s the purpose of indices?

Centrally, indices provide traders, investors and speculators with a broad overview of market performance – or, as the ASX aptly notes, indices:

‘Allow investors to gain an insight into the performance of an asset class or a segment of that asset class.’

Indeed, this is a central manner in which people within the finance industry measure their performance. The ASX further notes that:

‘Indices are used as the underlying for various financial instruments and to benchmark the performance of portfolios designed to replicate the performance of a given asset class.’

Warren Buffet – of Berkshire Hathaway fame – tracks his company’s performance against the S&P 500 index, for example. More locally, reputed fund manager Ron Shamgar, head of the TAMIM Asset Management’s Australian All Cap Portfolio, tracks his portfolio’s performance against the ASX 300 benchmark.

Besides being used to benchmark or gauge sector and market performance, indices themselves can be traded on for potential profit (or loss, for that matter). Specifically, indices, such as the ASX 200 – can be traded both up (long) and down (short) – via CFDs on IG’s online trading platform. Specific subsets of these indexes, like the following sector indices: S&P/ASX 200 resources or the S&P/ASX 200 materials – can also be traded on if investors wish to gain more specific exposure to different parts of the Australian market.

Types of indices

Broadly speaking, there are seven types of indices, these include: capitalisation indices, franking credit adjusted indices, fixed income indices, residential property indices, sector indices, strategy indices and volatility indices.

For investors and traders, the two most relevant of these are capitalisation indices and sector indices. Below we take a brief look at both:

Capitalisation indices

As the name suggests, these indices are determined by the market capitalisation of their constituents, not by a specific set of descriptive criteria.

The ASX 200 index for example is comprised of the 200 largest companies in Australia on a market capitalisation basis. Importantly however, for those thinking that the ASX 200 is a golden ticket to diversification should consider that this blue-chip benchmark is heavily weighted by financials and mining stocks. Indeed, of the top five stocks: Commonwealth Bank, CSL, BHP, Westpac, and National Australia Bank – three of those are ‘big four’ banks.

To round out the top ten we have a little more variance, but not much.

Investors aren’t stuck investing just in the top 200 mind you. Other popular indices include the S&P/ASX 20, 50, 100, and 300 index, the S&P/ASX MidCap 50 index, the S&P/ASX Small Ordinaries index, and even S&P/ASX Emerging Companies index; among others.

Sector indices

Besides market-cap weighted indices, sector indices are probably the second most commonly cited indices, as they capture the individual performance of some of Australia’s most important sectors. Sector indices like the S&P/ASX 200 financial index and the S&P/ASX 200 materials index can give investors, traders and speculators more granular insight around specific areas of the stock market.

Other important sector indices include: the S&P/ASX 200 energy index, the S&P/ASX 200 information technology index and the S&P/ASX 200 materials index, and the S&P/ASX 200 utilities index.

Top 5 Australian indices

With all of this considered, below we take a look at the top five Australian indices:

1. S&P/ASX 200
2. S&P/ASX 200 financials
3. S&P/ASX 200 materials
4. S&P/ASX 200 information technology
5. S&P/ASX Midcap 50 index

The ASX 200 – Australia’s S&P 500

As touched upon throughout this piece, the ASX 200 remains the most widely cited index of overall market performance.

Indeed, the ASX itself describes this index as being:

‘Recognised as the investable benchmark for the Australian equity market, it addresses the needs of investment managers to benchmark against a portfolio characterised by sufficient size and liquidity.’

Centrally, although the ASX 200 contains many large-cap companies such as Commonwealth Bank ($140 billion) and BHP ($102 billion); it also contains smaller but still recognisable companies like Speedcast Int ($240 million) and Bega Cheese ($955 million).

Two points on this front: in one sense trading the ASX 200 index does ensure diversity, given that there are significantly more constituents in it than say the ASX 50. But at the same time it doesn’t necessarily: because the index is weighted by market capitalisation, for Bega Cheese to move the needle of the index, so to speak, its stock would have to rise significantly. Commentators often joke that you’re really just buying the banks, some mining company’s and CSL when you trade the ASX 200.

For investors who don’t simply want broad market exposure, the following sector specific indices may be of more interest.

The S&P/ASX 200 financials

This index provides investors with exposure to Australia’s ever-vital financial sector. Mind you, this index means you won’t just be getting the big four banks, with the ASX pointing out that the S&P/ASX 200 financials index:

‘Contains companies involved in activities such as banking, mortgage finance, consumer finance, specialised finance, investment banking and brokerage, asset management and custody, corporate lending, insurance, and financial investment, and real estate, including real estate investment trusts (REITs).’

Australia 200 materials

If the Hayne Royal Commission soured your view of Australia’s financial sector, materials may be of more interest to you. According to the ASX, the S&P/ASX 200 materials index:

‘Encompasses a wide range of commodity-related manufacturing industries. Included in this sector are companies that manufacture chemicals, construction materials, glass, paper, forest products and related packaging products, and metals, minerals and mining companies, including producers of steel.’

Australia 200 information technology

While the Australia share market hasn’t significantly changed in the last few decades – with the banking and materials sectors remaining dominant – in the last few years tech stocks have risen in prominence (and valuation). In fact, the Australian market has even developed its own FANG equivalent – known as the WAAX cohort – a set of fast-rising, richly-valued technology stocks; made up of Afterpay, WiseTech, Appen, Xero, and Altium.

Mind you, if you’re looking to reduce the volatility of a single tech stock investment, the S&P/ASX 200 information technology index may be a good option. Though of course, trading an index doesn’t necessarily guarantee smooth sailing away from the rocky waves of market volatility.

According to the ASX, the information technology index covers:

‘Software and services, including companies that primarily develop software in various fields such as the internet, applications, systems, databases management and/or home entertainment, and companies that provide information technology consulting and services.

The S&P/ASX Midcap 50 index

Finally, the S&P/ASX Midcap 50 index is made up of ASX-listed companies that are part of the ASX 100, but not a part of the ASX 50. As the ASX notes, this index:

‘Provides a benchmark for large active managers where the emphasis is on having a portfolio with sufficient liquidity.’

Importantly, while there is not an S&P/ASX Midcap 50 index tradable on the IG Platform, investors can take advantage of VanEck Vectors S&P/ASX MidCap ETF (ASX: MVE). This exchange traded product (ETP) aims to track the returns of the S&P/ASX Midcap 50 index, by investing in a ‘diversified portfolio of ASX-listed securities.’

Some of this ETP’s top holdings include: A2 Milk, Magellan Financial Group, Xero and Afterpay. These companies, for example, have performed well in recent times, though of course that doesn’t ensure they will perform comparably in the future.

How to trade indices

An individual can benefit from fluctuations in the price of the indices we’ve discussed today by utilising CFDs – on IG’s online trading platform.

Unlike buying shares directly – as you would say of Woolworths stock –trading CFD’s allows an individual to speculate on higher (long) or lower (short) price movements of one or more indices. This means you can benefit from an index rising and falling. Of course, this doesn’t preclude you from buying individual shares on IG’s online trading platform; if that is also part of your trading strategy.

IG offers the following indices to trade on (all of which are easily searchable once you’ve logged into your preferred trading platform).

• Australia 200

• Australia 200 Communications

• Australia 200 Consumer Disc

• Australia 200 Consumer Staples

• Australia 200 Energy

• Australia 200 Health Care

• Australia 200 Industrials

• Australia 200 Information Tech

• Australia 200 Materials

• Australia 200 Utilities

Importantly, you should understand that because trading CFDs includes the use of leverage, you can gain greater exposure to changes in the underlying index than if you say, purchased the top 20 ASX-listed stocks physically (physical exposure to the ASX 20 index). This means that greater profits can be achieved with a smaller financial outlay; but, of course, at a much higher risk.

If you don’t already have an IG trading account, but are interested in trading the top 5 indices that we have discussed today (as well as others) click here now to quickly set up a demo or a live account right now.