The S&P/ASX 200 index has been one of the best ways to invest and grow your wealth in Australia. With long term returns of about 8.7% per year including market growth and dividends, understanding your options for the best way to invest in the ASX 200 is important.
In this article we explain what the S&P/ASX 200 index is, what’s inside it, the best strategies to invest in it, and how it’s performed over different time periods.
- What is the ASX 200?
- How do I invest in the S&P/ASX 200?
- Benefits of investing in the S&P/ASX 200
- When is the best time to invest into the S&P/ASX 200?
- Should I invest in the index or pick shares?
- Which is the best ASX index?
- What companies and shares are inside the S&P/ASX 200?
- What sectors are inside the S&P/ASX 200?
- What returns has the S&P/ASX 200 earned?
- How Stockspot helps you invest
What is the S&P/ASX 200 index?
The S&P/ASX 200 is a stock market index of the largest 200 or so companies listed on the Australian Securities Exchange (ASX), including companies you may use every day like Telstra and Woolworths.
The index is managed by Standard & Poor’s (a ratings agency and index provider) and is often mentioned on TV and in the newspaper to show how the share market has performed.
What is a share market index?
A share index or stock market index is a way to measure the performance of a certain part of the share market over time. It is calculated based on the total market size of selected companies. In the case of the S&P/ASX 200 it’s the largest 200 companies by market size.
How do I invest in the S&P/ASX 200?
Instead of buying and selling individual shares, you can invest in the S&P/ASX 200 index and own a variety of shares that track the performance of the entire share market index.
Exchange Traded Funds (ETFs) are the easiest way to invest in a share market index like the S&P/ASX 200 index. ETFs invest into a market ‘index’, which is cheaper and less risky than picking individual shares because of the great diversification (spreading your money across lots of companies) they give you.
You can also invest in other popular share market indices around the world using ETFs. For example, you can invest in the largest 500 American companies with an ETF that tracks the S&P 500. When we invest for clients it’s typically into a range of different ETFs that track market indices.
Benefits of investing in the S&P/ASX 200
Investing into the Australian share index has enjoyed great long term returns of around 8.7% per year over 20 years. It also has a few key benefits over active investing (picking individual shares).
- Fees tend to be much lower with index investing.
- Buying the entire market index tends to be more tax efficient than paying someone to actively buy and sell shares since the index does less buying and selling – so realises less taxable capital gains.
- The index tends to be less risky than buying individual shares and isn’t reliant on a fund manager guessing when to buy or sell.
When you invest in the index with ETFs you directly benefit from the market index rising over time, dividends and franking credits from the companies inside the index.
When is the best time to invest into the S&P/ASX 200?
We recommend clients dollar cost average (i.e. top up your investments regularly) when they invest into the index. Dollar cost averaging is one of the most powerful ways to get ahead when you invest. It involves investing your money gradually over a few weeks or months.
If you invest small amounts regularly over a period of time you’ll buy into the market index at an average price over time. That way you get to take advantage of any market dips (and pay a lower price) or gains if markets rise.
Should you invest in the index or pick shares?
Index investing (i.e. passive investing) and actively picking shares are two different ways of investing your money.
Index funds or ETFs track the performance of a particular market benchmark — or “index”— as closely as possible. Index funds generally buy all of the companies in an index, for instance the ASX 200 ETF buys all 200 companies in the ASX 200.
On the other hand, active fund managers or “stock pickers” try to beat their benchmark or index by selecting only a few companies or by trying to time when to be in or out of the market.
Over the past 20 years, active investing has become less popular because fund managers are finding it harder and harder to beat the market index because of higher competition.
As more fund managers have joined the industry, it has become increasingly difficult for them to beat each other. This has led to billions of dollars moving from active funds into passive funds that track the index instead.
Over 20 years, indexing investing has now proven to be the more reliable way of investing.
Which is the best ASX index?
Here are 7 Australian market indices you might consider investing in.
The S&P/ASX 200 is Australia’s most commonly used index. It contains 200 of the largest companies listed on the ASX and covers ~88% of the entire Australian sharemarket by size.
The S&P/ASX 300 is a broader Australian sharemarket index, comprised of the largest 300 companies listed on the ASX. It makes up ~93% of the entire Australian sharemarket.
This is our preferred market index that we invest in for all of our clients. To access it we invest into a Vanguard index fund through an ETF with very low fees that tracks S&P/ASX 300 for its better diversification.
The ASX All Ordinaries Index (commonly referred to as the All Ords) comprises of the largest 500 companies of the ASX. It makes up ~95% of the Australian sharemarket.
Other common Australian share market indices include:
- S&P/ASX 20 – the largest 20 companies of the ASX. We enable clients to invest into this index via Stockspot Themes.
- S&P/ASX 50 – the largest 50 companies of the ASX.
- S&P/ASX 100 – the largest 100 companies of the ASX.
- S&P/ASX Small Ordinaries – companies that are included in the ASX 300 but not included in the ASX 100 (i.e. the next biggest 200 stocks after the top 100). We enable clients to invest into this index via Stockspot Themes.
Learn more: Best Australian share ETFs
What companies are inside the S&P/ASX 200?
The ASX 200 is market-size based which means that a company’s weight within the index is relative to its total market value (i.e. share price multiplied by the number of tradable shares on issue).
The number of companies in the index isn’t always exactly 200 but it’s close. Every quarter new companies come in and out of the index based on their market size. This helps to ensure that ‘poor performing’ companies that get too small are removed.
As at August 2019 these are the largest 10 companies in the S&P/ASX 200 index and their relative size in the index.
|Company||ASX share code||Weight in ASX 200|
|BHP Group Limited||BHP||6.1%|
|National Australia Bank||NAB||4.2%|
What sectors are inside the S&P/ASX 200?
When you invest in the market index you get access to the many different sectors that drive the economy. In Australia, financials and resources dominate the share market index. However, you also get to invest in a range of other sectors like healthcare, technology, property and utilities.
If you invest in a global share market index fund you get a better spread of different sectors since technology and healthcare are a much larger part of other country share markets such as the S&P 500, Dow Jones Industrials Index or Nasdaq in the USA.
Percentages above may not add up to 100 due to rounding
What returns has the S&P/ASX 200 earned?
The Australian share market index has enjoyed strong returns of around 8.7% p.a. over 20 years even with some bumps along the way including the Global Financial Crisis (GFC).
Provided you’re investing for at least a few years, the S&P/ASX 200 is more likely to give you a better return than leaving your money in the bank.
When investing in the Australian share market index we encourage clients to think long term and make sure they’re combining Australian shares with other investments like Australian bonds and global shares.
These other assets can be accessed using index ETFs. Adding other ETFs also improves your diversification, and give you a smoother ride when you invest.
Performance of popular Australian share market indices
(as of 31 July 2019 )
|Index||1 year||3 years (p.a.)||5 years (p.a)||10 years (p.a.)||20 years (p.a)|
How Stockspot helps you invest
Stockspot’s easy-to-use platform for investing gives you access to a portfolio of low cost index funds (known as ETFs) that’s specifically matched to you.
We manage a proven, highly successful wealth strategy based on Nobel Prize winning research and championed by the global investment sages such as Warren Buffett.
Our philosophy is simple: invest in a broad mix of low cost, low-risk products to harness the long-term power of compound growth.
Find out how Stockspot makes it easy to grow your wealth and invest in your future.