Adjustments to the S&P ASX Indicies

S&P has recently announced adjustments to the methodology, timing and changes to the ASX Indices

1. Reduce calculation period. Currently, the S&P/ASX 200 and S&P/ASX 300 consider companies for index inclusion based on a six-month average of their float-adjusted market capitalization and daily liquidity. This calculation period will be reduced to three months.
2. Apply two-way turnover. Currently, stocks are added to an index once an existing constituent has exited the index due to a sufficiently low rank below an exit buffer. Going forward, once a company ranks above an index entry buffer, it can be added regardless of the ranking of other existing index constituents.
3. Lower Investable Weight Factor (IWF). The IWF is the ratio of available free float shares to total shares outstanding. It reflects the proportion of shares available for trading in the market. The current minimum IWF for index inclusion is 0.3 and will be reduced to 0.15.

so, its a moveable feast.... of instant gratification.

Hardly a long term anchor

I found this to be interesting ...

Regal Partners' Phil King is effectively betting he can overcome super’s inflows at the top of the market by picking the eyes out of small caps – that the up-and-comers can outperform the ASX’s big, expensive war horses....

The pitch always sounds good and there are always charts to back it up, but that hasn’t stopped our superannuation funds and big global investors from buying more of the household names like Commonwealth Bank of Australia, Wesfarmers and Origin Energy, while small managers shut up shop.

What has changed though – and this is also something King is all over – is the way Standard & Poor’s considers stocks for its Australian indices. It could rocket stocks through the small caps into large caps even quicker, helping fast-thinking fund managers like Regal and small-cap specialists profit from the passive buying at the big end of the market.

S&P now considers daily liquidity over the past three months (not six), is adding rising stocks based on their metrics rather than just replacing exiting underperformers, and has halved the free float required to 15 per cent from 30 per cent.

Why? To keep with the times; the market’s now much faster in terms of information flow, trading execution, holding periods and settlement, and S&P wants its indices to be faster, too. It’s playing to the market’s casino elements, which will probably result in more stocks entering and exiting indices than ever before.

At the methodology changes’ first time out (the September quarter), an eye-popping nine stocks will enter/exit the S&P/ASX 200 next week, which is more than twice last year’s biggest quarter (March, four). September was the biggest quarter in 2023 with five.

These index changes, which come out at beer o’clock on a Friday once a quarter are serious market-moving announcements.

These indices are now a big part of the small caps playbook – and King was reeling off index changes and performance into index changes off the top of his head on stage on Tuesday. He said three of the nine ASX 200 entrants were offshore companies, while the other six had gained 111 per cent in the prior 12 months (on average).

If King’s all over it, you can bet other big investors are too. There’s a liquidity arbitrage there for small-cap investors – a money-making scheme in plain sight.

The opportunity is to identify the next graduates early, buy them and then sell later to price-insensitive index investors as these stocks are added to an index or have their weights upgraded, in a liquidity arbitrage. Hedge funds are very alive to the trade, index changes are now happening more frequently, and there’s a bit of a self-fulfilling prophecy to the whole thing....