Nothing Ordinary About It: The Big Surprises in the Small Ordinaries
Transparency is one of the key benefits often held up for index investing. So when investors looking for Australian small-cap exposure look under the hood of one of the most widely followed benchmarks in this space, the S&P/ASX Small Ordinaries Index, they might be surprised by what they find. Many of the largest companies in the index aren’t Australian, and don’t fit the common understanding of “small cap”.
Take News Corp. The global media and publishing company has a primary listing in the US, with a total market capitalisation of $25.6 billion, which compared to companies with ASX primary listings would see it ranked the 25th largest. This well and truly makes News Corp a large-cap, after all, S&P includes it within the S&P 500 Index of the largest US companies. So why is it included in the Small Ordinaries Index? Because S&P considers News Corp’s relatively small ASX secondary listing when determining its large-cap/small-cap delineation rather than the total size of the company.
This isn’t an isolated case. A closer look at the index reveals that seven of the ten largest companies in the S&P/ASX Small Ordinaries Index are foreign-listed companies. Each of them is larger in market capitalisation than the 100th largest company on the ASX—the threshold that typically separates large and small companies under ASX conventions.
Understanding what’s in an index requires looking beyond the label. Taking a closer look at the specific index construction is critical to knowing what you’re actually getting.
Largest 10 companies (by market capitalisation) in the S&P/ASX Small Ordinaries Index1
This article originally appeared in Short N Sweet, a newsletter for Dimensional clients.
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