What Is the All Ordinaries Index?
The All Ordinaries Index (XAO), commonly known as the "All Ords," serves as a key indicator of the Australian stock market's performance. It tracks the 500 largest companies listed on the Australian Securities Exchange (ASX) by market capitalization, representing approximately 90% of the entire value of the ASX.
Established as Australia's first share market index, the All Ords has become the benchmark for measuring the overall performance of the Australian equity market. Its comprehensive coverage makes it an essential tool for investors seeking to understand market dynamics.
History and Significance
Launched in January 1980 with a base value of 500 points, the All Ordinaries Index has witnessed Australia's economic evolution over more than four decades. The index's name derives from "ordinary shares," reflecting its focus on common equity securities rather than preference shares or other securities.
The All Ords reached its first major milestone of 1,000 points in 1985, took 12 years to reach 2,000 points in 1997, and subsequently climbed to 3,000 points by 2000 during the dot-com boom. After experiencing significant volatility during the Global Financial Crisis, dropping nearly 55% from its 2007 peak, the index has demonstrated remarkable resilience.
Since inception, the All Ords has delivered an average annual return of approximately 9.5%, making it a strong performer among global indices when accounting for both capital growth and dividend income.
How Market Capitalization Is Calculated
Market capitalization, the key determinant for inclusion in the All Ordinaries Index, is calculated by multiplying a company's current share price by its total number of outstanding shares:
Market Cap = Current Share Price × Total Outstanding Shares
This methodology ensures that the index reflects the true economic significance of each company. For example, a company with a share price of $20 and 500 million outstanding shares has a market capitalization of $10 billion.
Companies with larger market capitalizations have proportionally greater influence on the index's movements, reflecting their more significant role in the Australian economy. This weighting mechanism automatically adjusts as companies grow or contract in market value.
How Does the All Ordinaries Index Work?
The All Ordinaries Index operates as a real-time barometer of Australian market performance, offering investors immediate feedback on overall market direction and sentiment.
Capitalization Weighted Structure
As a capitalization-weighted index, the All Ords assigns greater importance to companies with higher market values. This means that price movements in large companies like BHP Group, Commonwealth Bank, and CSL Limited have substantially more impact on the index than similar percentage changes in smaller constituents.
For instance, a 2% share price increase in Commonwealth Bank (with a market cap of approximately $170 billion) would move the index more significantly than a 10% jump in a company with a $5 billion market cap.
This weighting mechanism dynamically adjusts to reflect changing market realities. As companies grow or shrink in size, their influence on the index naturally increases or decreases, ensuring the index remains representative of the current market structure without requiring constant manual adjustments.
Index Calculation Methodology
The All Ordinaries Index is calculated continuously during ASX trading hours (10:00 AM to 4:00 PM AEST/AEDT), with values updated every second. The calculation uses a proprietary formula that accounts for all price movements in constituent securities:
Index Value = (Sum of Constituent Market Capitalizations ÷ Divisor) × 500
The divisor is a technical adjustment figure that ensures continuity during corporate actions such as stock splits, rights issues, or when companies enter or exit the index. This maintains the integrity of historical comparisons despite changes in the index composition.
The real-time calculation provides investors with instant feedback on market sentiment, enabling them to gauge overall market direction at any point during the trading day.
All Ordinaries vs. ASX 200: What's the Difference?
While both track the Australian equity market, the All Ordinaries and S&P/ASX 200 indices serve different purposes and investor segments.
ASX 200 Characteristics
The S&P/ASX 200 was launched on March 31, 2000, with a base value of 3,133.3 points. As its name suggests, it tracks Australia's 200 largest companies by float-adjusted market capitalization.
Unlike the All Ords, the ASX 200 is maintained by Standard & Poor's according to a published methodology that includes liquidity screens and sector representation requirements. This standardized approach has helped it become Australia's most widely followed benchmark.
The ASX 200 represents approximately 82% of the Australian equity market capitalization, making it slightly less comprehensive than the All Ords but offering enhanced tradability. Its composition is reviewed quarterly to ensure it continues to represent the most significant companies in the market.
Key Differences
The primary distinction between these indices lies in their coverage breadth. The All Ords includes 500 companies, while the ASX 200 tracks only the largest 200. This means the All Ords captures an additional 300 mid and smaller-cap companies, providing broader market exposure.
The ASX 200 has become the preferred benchmark for institutional investors and fund managers for several practical reasons. It offers a complete ecosystem of derivative products, including futures and options, making it valuable for hedging and risk management. Additionally, many investment mandates specifically reference the ASX 200 rather than the All Ords.
Historical performance patterns between the two indices show high correlation (typically exceeding 0.95), but the All Ords occasionally demonstrates higher volatility due to its inclusion of smaller companies. During periods of market stress, such as the 2020 COVID-19 crash, the performance divergence can widen, with the All Ords often experiencing sharper drawdowns.
Fund flows also differ significantly, with an estimated $120 billion directly tracking the ASX 200 compared to approximately $15 billion following the All Ordinaries.
What Is the All Ordinaries Total Return Index?
While the standard All Ordinaries Index (price index) tracks only share price movements, the All Ordinaries Total Return Index provides a more comprehensive measure of investor returns.
Total Return Calculation
The All Ordinaries Total Return Index (designated by the code XAOA) incorporates both price movements and dividend reinvestment, offering a more accurate picture of actual investor outcomes.
The calculation automatically accounts for all cash dividends paid by constituent companies, reinvesting them into the index on their respective ex-dividend dates. This methodology simulates the experience of an investor who reinvests all received dividends back into the market.
Importantly, the Total Return Index excludes franking credits from its calculations. Franking credits, a feature of Australia's dividend imputation system that reduces double taxation on corporate profits, can add approximately 1.2% to annual returns for eligible Australian investors but are not factored into the index.
The compounding effect of reinvested dividends becomes increasingly significant over longer timeframes. For example, while the price-only All Ords index might show a 9% annualized return over 20 years, the Total Return Index would typically display returns of 12-13% when including reinvested dividends.
Benefits for Investors
The Total Return Index provides several advantages for investors seeking to evaluate their portfolio performance:
It serves as a more realistic benchmark for long-term investors who typically reinvest dividends rather than taking them as income. Studies show that dividends have contributed approximately 45% of total Australian equity returns since 1980, making their inclusion crucial for accurate performance assessment.
Fund managers and superannuation funds use the Total Return Index to provide a more honest representation of their performance against the market. This prevents managers from appearing to outperform by simply including dividend income in their returns while comparing against a price-only benchmark.
The Total Return Index also highlights the power of compounding over time. A $10,000 investment tracking the price-only All Ords from 2000 to 2020 would have grown to approximately $25,000, while the same investment tracking the Total Return Index would have reached nearly $60,000.
Sector Breakdown of the All Ordinaries
The All Ordinaries Index reflects Australia's unique economic composition, with sector weightings that differ significantly from global benchmarks like the S&P 500.
Major Sectors by Weighting
Financial services represent the largest sector component of the All Ordinaries, accounting for approximately 28% of the index. This concentration reflects Australia's robust banking system, with the "Big Four" banks (Commonwealth Bank, Westpac, ANZ, and NAB) alone comprising nearly 20% of the index.
Materials and mining companies form the second-largest sector at approximately 22%, substantially higher than most developed market indices. This weighting underscores Australia's resource-based economy, with major constituents including BHP Group, Rio Tinto, and Fortescue Metals Group. The sector's prominence means the index is particularly sensitive to global commodity price movements, especially iron ore and coal prices.
Healthcare has grown to become the third-largest sector (11%) in recent years, led by biopharmaceutical giant CSL Limited. This represents a significant shift from just a decade ago when healthcare comprised only 4% of the index.
Consumer discretionary and staples companies collectively account for approximately 13% of the index, representing both essential goods providers like Woolworths and Coles, and more cyclical businesses such as JB Hi-Fi and Harvey Norman.
The technology sector remains relatively underrepresented at around 4% compared to global indices like the S&P 500 where it exceeds 25%. However, this sector has more than doubled its representation since 2015, led by companies like Afterpay (before its acquisition), Xero, and WiseTech Global.
Sector Performance Impact
The sector concentration of the All Ordinaries has substantial implications for its overall performance characteristics:
During commodity booms, such as the period from 2003-2007 and 2020-2021, the index typically outperforms global benchmarks due to its heavy materials weighting. Conversely, during commodity downturns, such as 2014-2016, the index tends to underperform.
Banking performance heavily influences index returns, making the All Ords particularly sensitive to interest rate cycles, housing market conditions, and financial regulations. For example, the Royal Commission into Banking in 2018-2019 contributed to significant index underperformance.
The relatively low technology weighting has caused the All Ords to lag during periods of tech outperformance, such as 2017-2020, when global tech giants drove international market returns.
This sector breakdown provides investors with crucial context for interpreting market movements and developing appropriate investment strategies aligned with Australia's economic structure.
How to Invest in the All Ordinaries Index?
Investors have several options for gaining exposure to the All Ordinaries Index, ranging from passive index products to direct share ownership.
Index Funds and ETFs
Exchange-traded funds (ETFs) offer the most straightforward way to track the All Ordinaries performance. While fewer products specifically track the All Ords compared to the ASX 200, options include:
The BetaShares Australia 200 ETF (A200) tracks an index similar to the All Ords and charges one of the lowest management fees at 0.07% annually. With over $1.8 billion in assets under management, it offers high liquidity and tight trading spreads.
The Vanguard Australian Shares Index ETF (VAS) tracks the ASX 300 index, capturing most of the All Ords constituents. With a 0.10% annual fee and over $8 billion in assets, it represents Australia's largest domestic equity ETF.
These funds provide immediate diversification across hundreds of companies, eliminating the need to select individual stocks or monitor corporate actions. For investors with smaller portfolios, ETFs offer a cost-effective way to gain broad market exposure without the transaction costs of building a diversified portfolio directly.
The primary benefits include:
- Low management fees compared to actively managed funds (typically 0.07-0.20% versus 0.80-1.50%)
- Automatic reinvestment of dividends (in accumulation variants)
- Simplified tax reporting through a single annual statement
- Minimal tracking error relative to the index
Direct Share Investment
For investors with larger portfolios or specific tax objectives, directly purchasing shares of key All Ordinaries constituents offers an alternative approach. This strategy involves:
Building a portfolio that mirrors the index by purchasing shares in proportion to their index weightings, focusing particularly on the top 20-50 companies that drive most of the index's movements.
Implementing a systematic rebalancing approach to maintain alignment with the index as company values change over time.
Direct ownership advantages include:
- Control over tax outcomes through strategic timing of buy/sell decisions
- Ability to participate in dividend reinvestment plans with potential discounts
- Direct receipt of franking credits for potential tax benefits
- Opportunity to overweight or underweight specific sectors based on market outlook
However, this approach requires greater capital (ideally $100,000+), increased monitoring, and higher transaction costs. For most retail investors, the ETF approach offers a more practical solution for gaining All Ordinaries exposure.
Historical Performance of the All Ordinaries
The All Ordinaries Index has delivered substantial long-term growth while experiencing several dramatic market cycles since its inception in 1980.
Key Milestones and Market Events
From its 500-point starting value in 1980, the All Ords reached the 1,000-point threshold in September 1985, reflecting Australia's economic reforms and corporate expansion during this period.
The 1987 Black Monday crash saw the index plummet 25% in a single day (October 20, 1987) – its largest one-day percentage decline in history. The index took nearly two years to recover these losses.
During the 1990s recession, the All Ords experienced a prolonged period of sideways movement before accelerating during the late 1990s technology boom, crossing 3,000 points in early 2000.
The 2003-2007 commodity supercycle, driven by China's unprecedented industrialization, propelled the index to nearly 7,000 points by November 2007 – representing a 14-fold increase from its starting value.
The Global Financial Crisis delivered the most severe bear market in the index's history, with the All Ords collapsing from 6,873 in November 2007 to 3,090 in March 2009 – a 55% decline. The index required nearly 12 years to regain its pre-GFC high.
The COVID-19 pandemic triggered the fastest bear market in history, with the All Ords falling 37% in just 22 trading days between February and March 2020. However, unprecedented monetary and fiscal stimulus drove an equally remarkable recovery, with the index regaining its pre-pandemic level within 13 months.
Performance Metrics
The All Ordinaries has delivered an average annual price return of approximately 7.3% since inception, or approximately 11.5% when including reinvested dividends. This compares favorably with international markets when adjusted for risk.
Volatility, as measured by standard deviation of returns, has averaged 14.8% annually, slightly higher than major developed markets like the US (13.9%) but lower than emerging markets (18.2%).
Maximum drawdowns highlight the index's risk profile:
- Global Financial Crisis (2007-2009): -55%
- COVID-19 Pandemic (2020): -37%
- 1987 Black Monday Crash: -50%
- Early 2000s Tech Bubble Burst: -22%
Recovery periods have varied substantially depending on the nature of the crisis. The post-GFC recovery took nearly 12 years, while the post-COVID recovery required just 13 months, highlighting how structural versus cyclical downturns affect recovery trajectories.
Long-term investors have benefited from Australia's strong dividend culture, with the dividend yield of the All Ordinaries averaging 4.1% since inception – substantially higher than many international markets.
Using the All Ordinaries as an Investment Benchmark
The All Ordinaries serves as a critical reference point for evaluating investment performance and developing portfolio strategies within the Australian market context.
Benchmark Applications
As a performance yardstick, the All Ordinaries helps investors determine whether their portfolio or fund manager is delivering value. Research indicates that approximately 75% of active Australian equity funds underperform the All Ords over 10-year periods, making it a challenging hurdle for professional investors.
The index aids in setting realistic expectations by providing historical context for returns. Understanding that the long-term average annual return (including dividends) is approximately 11.5% helps investors avoid both excessive optimism during bull markets and unwarranted pessimism during downturns.
Portfolio beta, a measure of relative volatility compared to the broader market, uses the All Ordinaries as its reference. A portfolio with a beta of 1.2 would be expected to rise 12% when the All Ords increases 10%, but also fall 12% when the index drops 10%. This helps investors align their risk exposure with their tolerance levels.
The All Ords also facilitates the development of investment strategies through its predictable behaviors during different economic conditions:
- During periods of falling interest rates, financial stocks (28% of the index) typically outperform
- When the Australian dollar weakens, exporters and offshore earners (approximately 35% of the index) generally benefit
- Rising commodity prices
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