What Is All Ordinaries Index?
The All Ordinaries Index is a prominent stock market index that serves as a key indicator of the performance of the Australian share market. Colloquially known as the "All Ords," it is the oldest index of shares in Australia, established in January 1980. This benchmark index is composed of the 500 largest companies listed on the Australian Securities Exchange (ASX), based on their market capitalization47. The companies included in the All Ordinaries Index collectively represent over 95% of the total value of all listed shares on the ASX, offering a broad view of the Australian equities landscape.
History and Origin
The All Ordinaries Index was launched in January 1980 with a base value of 500 points46. Its creation aimed to unify and replace the various regional exchange indices, providing a single, comprehensive national view for calculating market-wide returns across Australia45. The index was designed to include the 500 largest firms by market capitalization, representing approximately 87% of the total equities market value at its inception44. For nearly two decades, the All Ordinaries Index was Australia's primary stock market benchmark. However, by the year 2000, concerns regarding the liquidity of some of the smaller companies within the index led to a shift in its primary use for financial products42, 43. A partnership formed between the ASX and S&P Global in 1999 led to the development of alternative indices, such as the S&P/ASX 200, which addressed these liquidity requirements for institutional investors and derivative products41. Despite this, the All Ordinaries Index has continued to serve as a broad market-wide benchmark.
Key Takeaways
- The All Ordinaries Index (XAO) is Australia's oldest and broadest share market index, established in 1980.
- It tracks the performance of the 500 largest companies listed on the Australian Securities Exchange (ASX) by market capitalization40.
- The index is market capitalization-weighted, meaning larger companies have a greater influence on its value38, 39.
- While not the primary benchmark for derivative products, the All Ordinaries Index remains a key indicator for overall Australian market performance36, 37.
- Its base value of 500 points was set in January 1980, allowing for long-term comparisons of market growth35.
Formula and Calculation
The All Ordinaries Index is a market capitalization-weighted index. This means that the influence of each company on the index's value is proportional to its market capitalization. Unlike some other indices, the All Ordinaries is based on total market capitalization rather than float-adjusted market capitalization33, 34.
The general formula for a market capitalization-weighted index is:
Where:
- (\text{Price}_i) = Current share price of company (i)
- (\text{Shares Outstanding}_i) = Total number of outstanding shares for company (i)
- (\sum (\text{Price}_i \times \text{Shares Outstanding}_i)) = The aggregate market capitalization of all constituent companies in the index
- (\text{Divisor}) = A numerical value adjusted to maintain index continuity despite corporate actions (such as stock splits, mergers, or changes in constituents).
The weighted average calculation ensures that companies with larger market values have a more significant impact on the index's movements. Rebalancing of the All Ordinaries Index components typically occurs annually in March31, 32.
Interpreting the All Ordinaries Index
Interpreting the All Ordinaries Index involves understanding its movements as a reflection of the broader Australian financial markets. An increase in the index value indicates that the collective market capitalization of the 500 largest companies on the ASX has risen, suggesting positive sentiment and growth in the Australian equity market. Conversely, a decline suggests a decrease in the aggregate market capitalization.
Investors and analysts often monitor the All Ordinaries Index as an economic indicator, providing insights into the overall health and direction of the Australian economy. It helps assess general market trends, although it does not account for dividends paid out by companies, meaning it primarily reflects capital growth. For a more complete picture of investor returns, one might consider the All Ordinaries Total Return Index (XAOA), which incorporates both price movements and dividend reinvestment29, 30.
Hypothetical Example
Consider a simplified hypothetical market with only three companies, ABC Ltd., DEF Corp., and GHI Pty, that constitute a theoretical "Mini All Ords" index.
Initial Day (Day 1):
- ABC Ltd.: Share Price = $10, Shares Outstanding = 100 million. Market Cap = $10 * 100 million = $1 billion.
- DEF Corp.: Share Price = $5, Shares Outstanding = 200 million. Market Cap = $5 * 200 million = $1 billion.
- GHI Pty: Share Price = $20, Shares Outstanding = 50 million. Market Cap = $20 * 50 million = $1 billion.
Total Market Capitalization = $1 billion (ABC) + $1 billion (DEF) + $1 billion (GHI) = $3 billion.
If the initial "Mini All Ords" index value was arbitrarily set at 500 points (similar to the real All Ords' base value), the initial divisor would be:
Divisor = Total Market Capitalization / Index Value = $3,000,000,000 / 500 = 6,000,000
Next Day (Day 2):
- ABC Ltd. share price rises to $11. Market Cap = $11 * 100 million = $1.1 billion.
- DEF Corp. share price remains at $5. Market Cap = $5 * 200 million = $1 billion.
- GHI Pty share price falls to $19. Market Cap = $19 * 50 million = $0.95 billion.
New Total Market Capitalization = $1.1 billion (ABC) + $1 billion (DEF) + $0.95 billion (GHI) = $3.05 billion.
Using the same divisor, the new "Mini All Ords" index value would be:
New Index Value = New Total Market Capitalization / Divisor = $3,050,000,000 / 6,000,000 (\approx) 508.33 points.
This hypothetical example illustrates how the All Ordinaries Index rises when the collective market capitalization of its constituents increases, reflecting overall market gains. This movement can be a factor when considering an investment strategy.
Practical Applications
The All Ordinaries Index serves several practical applications within Australian financial markets. It is widely used by investors, analysts, and financial institutions as a comprehensive measure of the overall performance of the Australian stock market28. While its direct use in structured financial products like Exchange-Traded Funds (ETFs) has become less prevalent compared to other S&P/ASX indices, it continues to be a crucial reference point for understanding broad market movements26, 27.
Fund managers may use the All Ordinaries as a historical benchmark to evaluate the performance of their Australian equity portfolios, even if their specific mandates track other indices. Additionally, economists and policymakers often refer to its performance as an indicator of economic health and sentiment. For instance, the Reserve Bank of Australia (RBA) considers various market indicators, including stock market performance, when assessing financial stability.25 Analyzing the historical data of the All Ordinaries Index can help identify long-term trends and cyclical patterns in the Australian economy24. Its broad coverage also makes it relevant for discussions around general portfolio diversification within the Australian market context.
Limitations and Criticisms
Despite its long-standing presence and broad coverage, the All Ordinaries Index has certain limitations and has faced criticisms. One significant limitation is that, unlike many modern indices, the All Ordinaries Index is not float-adjusted22, 23. This means it includes all outstanding shares of a company, even those held by long-term shareholders or strategic investors who are unlikely to trade them. This can potentially misrepresent the actual tradable value or liquidity available in the market21.
Another point of criticism is its infrequent rebalancing, which occurs annually in March19, 20. In contrast, other major indices like the S&P/ASX 200 rebalance quarterly, allowing for more timely adjustments to reflect changes in market capitalization and company performance. This less frequent adjustment means that the All Ordinaries Index might not always reflect current market conditions as precisely as more frequently updated benchmarks. Furthermore, the All Ordinaries Index does not incorporate any liquidity screens for its constituents, a feature common in more investable indices like the S&P/ASX 200, which requires a minimum relative liquidity of 50% for inclusion17, 18. This lack of liquidity filtering can make it challenging for institutions to create products that directly track the All Ordinaries Index, leading to its diminished use in certain financial products15, 16.
All Ordinaries Index vs. S&P/ASX 200
The All Ordinaries Index and the S&P/ASX 200 are both key benchmarks for the Australian equity market, but they differ in their scope and primary applications. The All Ordinaries Index, as Australia's oldest share market index, includes the 500 largest companies listed on the ASX by market capitalization14. It aims to provide a broad, comprehensive overview of the entire Australian share market, representing a vast majority of its total value13.
In contrast, the S&P/ASX 200 focuses on the 200 largest and most liquid companies listed on the ASX12. While narrower in scope, the S&P/ASX 200 has become the preferred benchmark for institutional investors, fund managers, and for the creation of derivative products, including futures and options10, 11. This is largely due to its stricter liquidity requirements and more frequent quarterly rebalancing, which ensure that the index is more investable and reflective of the actively traded market8, 9. Therefore, while the All Ordinaries provides a wider market snapshot, the S&P/ASX 200 is generally considered the more operational benchmark for active trading and risk management strategies in Australia.
FAQs
What does the All Ordinaries Index measure?
The All Ordinaries Index measures the overall performance of the Australian stock market by tracking the share prices of the 500 largest companies listed on the Australian Securities Exchange (ASX), weighted by their market capitalization7.
Is the All Ordinaries Index the most important index in Australia?
While it is Australia's oldest and broadest index, representing nearly all the market's value, the S&P/ASX 200 is more frequently used as the primary benchmark for institutional investment products and derivatives due to its focus on liquidity and regular rebalancing5, 6.
How is the All Ordinaries Index calculated?
The All Ordinaries Index is calculated based on the total market capitalization of its 500 constituent companies. This means that companies with larger market values have a greater impact on the index's movements4. The formula involves summing the market capitalizations of all companies and dividing by a specific divisor3.
Does the All Ordinaries Index include dividends?
No, the standard All Ordinaries Index (XAO) reflects only capital growth, meaning changes in share prices. It does not include dividends. However, the All Ordinaries Total Return Index (XAOA) does account for dividend reinvestment, providing a more comprehensive measure of total return for investors1, 2.