What Is the All Ords?

What Is the All Ords?

Reading time: 10 minutes

The All Ordinaries Index is one of Australia’s most important stock market indexes, closely followed by traders and investors to gauge the nation’s economic health and performance. In this article, we’ll look closer at the All Ordinaries Index, including its background, composition and history.

Background of the All Ordinaries Index

The All Ordinaries Index, often called ‘All Ords’ and denoted by the ticker XAO, is an integral component of Australia’s financial markets. Comprising approximately 500 (497 constituents to be precise) of the largest companies on the Australian Securities Exchange (ASX), the All Ords is an imperative barometer of the country’s economy.

Companies included in the All Ords are selected based on market capitalisation, allowing it to accurately reflect the performance of large companies in the Australian economy. It captures nearly 97% of the total market value of all shares listed on the ASX, making it Australia’s broadest index. The All Ords offers a one-stop snapshot into various sectors, including financials, healthcare, energy, and telecommunications. This comprehensive coverage makes it an ideal benchmark index to gauge the overall direction and sentiment of Australian shares in real time.

It’s important to note that the All Ords is a price index. This means it reflects the changes in share prices of its components but doesn’t account for dividends. In other words, it doesn’t consider the total return an investor might make by holding the constituent stocks. These returns are reflected in the All Ordinaries Total Return Index, which we’ll touch on shortly.

Understanding Market-Cap Weighting

Market capitalisation, or market cap, is a way of determining a company’s value in the market. It can be calculated by taking a company’s share price and multiplying it by the total number of its outstanding shares; Apple’s market cap, for example, is $2.98 trillion as of June 2023. Many of the world’s most prominent stock indexes are market cap-weighted, including the S&P 500 and Nasdaq 100 in the US, and the All Ords.

In a market-cap-weighted index, companies with the largest market capitalisation have the most influence on the index value. So, if a large company’s stock price changes, it can substantially impact the All Ords’ value more than a similar percentage change in a smaller company’s share price. This system ensures that the All Ords accurately represents the Australian market, since larger companies typically have an outsized economic influence. At the time of writing, the top five components of the All Ords are:

1. BHP Group Ltd
2. Commonwealth Bank of Australia
3. CSL Ltd
4. National Australia Bank Ltd
5. Westpac Banking Corporation

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These five companies comprise 28.26% of the All Ords' total market cap. If the share prices of these companies move significantly, the All Ords will likely follow suit.

Brief History of the All Ords

The All Ords is the oldest index in Australia, established in 1980 with a base level of 500 points. The index reached a milestone of 1,000 points in 1985, reflecting a period of robust economic growth in Australia.

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By the late 1990s and early 2000s, the All Ords witnessed a sizeable increase, driven largely by the dot-com surge and Australia's mining boom. In 2000, the All Ords was restructured by the Australian Stock Exchange to include approximately 500 companies. At the same time, the S&P/ASX 200 was introduced, now widely regarded as a leading Australian equity benchmark.

However, like all stock indices, the All Ords has its periods of decline. The global Black Monday stock market crash of 1987 sent the All Ords plummeting, but the most notable downturn was in 2008 when the global financial crisis hit. This crash led it to fall by almost 50%.

Most recently, the COVID-19 pandemic led to a significant downturn, although not as severe as in 2008. After rebounding to peak in early 2022, the All Ords is currently weathering the rising interest rates and high inflation. Throughout these challenges, the All Ords remains a reliable measure of the Australian economy, reflecting key events in the nation's economic history.

All Ords vs All Ords Total Return

The All Ords and the All Ords Total Return, known as the Accumulation Index or XAOA, both track the performance of the same companies. However, the All Ords doesn’t factor in dividends.

In contrast, the All Ords Total Return includes both price gains and reinvested dividends, making it a better-rounded measure of investment return. In other words, it simulates a scenario where all dividends received are reinvested into the index.

Investors focusing on the total return of their investment rather than mere share price appreciation might find the XAOA a more relevant benchmark. This is especially true for long-term investors, who often rely heavily on dividends to grow wealth in the long run.

All Ords vs ASX 200

The All Ords and ASX 200 are both prominent equity indexes, but they serve slightly different functions. The All Ords consists of the top 500 companies, giving a broad overview of the Australian economy. The ASX 200 only includes the top 200 companies, making it a more concentrated index. Therefore, the All Ords can be seen as more comprehensive, while the ASX 200 focuses solely on the most prominent players.

The Bottom Line

In summary, understanding All Ords is vital for any investor or trader interested in the Australian market. Its broad scope makes it an excellent bellwether for the Australian economy, offering a comprehensive insight into the nation’s diverse industries and top-performing companies.

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