Morningstar Investor users sign in here.

Video

Q&A, your way: Episode 5

Morningstar's director of product management, Mark LaMonica, answers a question about investing in an ASX200 index fund.


Mark Lamonica: Thank you, Nicola. See if you asked a very hard one here.

So, would investing solely in an ASX 200 Index fund be a bad idea? Beginner investor here. So, just to clarify, I'm using the CommSec Pocket app, which allows me to invest in the ASX 200. It is called the Aussie Top 200. My understanding is that the ASX 200 Index fund allows me to invest in the top 200 largest or most successful companies in Australia, and what reason might someone choose a different strategy?

All right. So, good question. Here you go. See how I go. A couple of things. First of all, to clarify what the ASX 200 is – so, that is the 200 largest companies in Australia. And when we talk about largest companies, we measure that by market cap or market capitalization. So, what that means is we multiply the share price, times the number of shares out there. So, they are the companies that are worth the most in Australia. So, that's the first thing.

The second thing – is this a good idea and what are the alternatives? Well, it depends. So, there are no good and bad investments, but there are good and bad investments for you based on what you're trying to accomplish. So, if we think about the ASX 200, let's look at what that actually means. Because there's a market capitalization weight in that index, it means the largest companies are going to get the highest allocation. So, if we think about Australia, what the largest companies are, they're generally miners and banks. So, most of your money is going to go into miners and banks. Those banks are very domestically focused. They're focused just on Australia, primarily. The miners are very much focused on China because that is who buys the vast majority of what's mined here in Australia. So, just understand that if this is what you choose to invest in, those are the primary exposures you're going to get.

Why might somebody not want to do that? Well, they might not want to do that because they want to be more diversified. They want to be more diversified into different industries. Things like technology aren't represented a lot in Australia. You're not going to get much exposure to that. You might be interested in bonds or cash if you want to lower the volatility in your portfolio. So, think holistically about what you're trying to accomplish, what your goals are, and then the returns and exposures you need in order to achieve those goals.



© 2024 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This report has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or New Zealand wholesale clients of Morningstar Research Ltd, subsidiaries of Morningstar, Inc. Any general advice has been provided without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide at www.morningstar.com.au/s/fsg.pdf. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782.

More from Morningstar
ANZ Group and Suncorp
Video
ANZ Group and Suncorp
Our view of the potential acquisition of Suncorp’s banking arm by ANZ.
Our view of CBA earnings
Video
Our view of CBA earnings
Results were strong but are they enough to make the shares attractive? 
Earnings season wrap for retailers
Video
Earnings season wrap for retailers
Two retailers look expensive to our analysts. 
Why we like this misunderstood ASX retailer
Video
Why we like this misunderstood ASX retailer
Most of Bapcor’s earnings aren’t exposed to slowing discretionary spending.
What’s in store for ASX retail stocks in 2024?
Video
What’s in store for ASX retail stocks in 2024?
Morningstar’s Director of Equity Research, Johannes Faul, outlines his views.
Opportunities among ASX miners
Video
Opportunities among ASX miners
Morningstar has updated its commodity price forecasts and stock recommendations.