Key points
- Passive investing now accounts for around 37% of Australia's managed fund and ETF assets, reflecting the growing influence of index funds and ETFs on the sharemarket.
- ‘Creative destruction’ results in new, innovative companies added to the benchmark, replacing companies in decline.
- Index rebalances are an important feature of the Australian equity market, resulting in large trading volumes and potential short term price distortions for the companies most impacted.
- Companies that are added to the S&P/ASX 300 benchmark receive increased market scrutiny, greater research coverage, and are generally held to higher governance standards (board composition, remuneration practices etc) than Ex-300 companies.
The past 30 years has seen a seismic shift from active to passive investing, creating considerable debate over the value each method provides to investors. Arguments aside, the rebalancing required to maintain passive investment strategies can create pricing opportunities for investors.
Passive investing involves investing in a portfolio of stocks weighted by value in a market index, such as the S&P/ASX 200, which captures by market capitalisation of the top 200 listed Australian stocks, or S&P 500 which follows the top 500 US stocks.
As market capitalisations change, companies move in and out of the index, requiring a passive portfolio to rebalance its weighting to maintain its tracking of the index. It is this rebalancing that can create opportunities.
These passive portfolios include mutual funds and ETFs as well as large institutional funds and superannuation funds, which is why rebalancing can have a significant impact as the funds in play are huge.
Active investing, by contrast, does not have a rebalancing effect as it involves a manager selecting stocks based on what the manager thinks the company is worth and if it is undervalued. Portfolio selections can vary significantly and operate on different time horizons. Active funds are typically more expensive in terms of fees and costs, as the manager is trying to achieve better returns than the market.
Identifying the window of opportunity
In Australia, a key benchmark is the S&P/ASX 300, which is the benchmark used by APRA to compare fund performance across superannuation funds.
Every six months, in March and September, the ratings agency and creator of many major market indices, S&P Global Ratings, announces changes to the S&P/ASX 300. Other benchmarks in its suite, including the S&P/ASX 200, are rebalanced quarterly. These changes come in three main forms:
- Additions and Deletions
- Changes to the weighting factor (reflecting any significant long-term owners of the stock)
- Changes to the number of shares on issue (reflecting shares issued in capital raisings and/or bought back by the company)
As a result of these changes, the ‘weight’ of each stock in the benchmark will change, resulting in buying and selling by passive investors to reset portfolio weights to mirror the new benchmark weights. There is typically a one-to-two-week window between the initial announcement and the implementation date, allowing market participants time to prepare for the resulting trading activity.
Of the three changes, the first is generally the most significant. Every six months a new set of companies is added to the S&P/ASX 300, replacing names that are removed from the benchmark. These changes are driven by changes in share price and market capitalisation – companies with higher market capitalisation replace those with falling market capitalisation. This is an example of the economic concept of ‘creative destruction’: New, innovative companies replacing older, underperforming companies.
Tracking new arrivals and departures
In September, S&P announced the changes for the half yearly rebalance, with implementation on 21 September. Examples of stocks added to the S&P/ASX 300 included Artrya (AYA), a healthcare technology company focused on AI-powered coronary artery disease diagnostics; Echo IQ (EIQ), which develops artificial intelligence tools for cardiac screening; and PYC Therapeutics (PYC), a biotechnology company developing RNA-based precision medicines. Cuscal (CCL), a payments and banking infrastructure provider, and Navigator Global Investments (NGI), a diversified alternative asset management business, were also added to the benchmark.
On the resources front, several mining and critical minerals companies joined the index, reflecting renewed investor interest in selected commodity producers and developers. These included Brazilian Rare Earths (BRE), Benz Mining (BNZ), Core Lithium (CXO), Lindian Resources (LIN) and EQ Resources (EQR). Engineering and infrastructure-related companies also featured prominently, with GR Engineering Services (GNG), Southern Cross Electrical Engineering (SXE), GenusPlus Group (GNP) and Tasmea (TEA) all added to the benchmark.
The companies removed from the index included a broad mix of consumer, healthcare, education and industrial businesses. Names exiting the benchmark included Myer (MYR), Bapcor (BAP), G8 Education (GEM), Healius (HLS), Objective Corporation (OCL), Australian Finance Group (AFG) and Propel Funeral Partners (PFP). The changes highlight how shifts in investor sentiment, earnings expectations and market capitalisations can reshape the benchmark over time, with emerging leaders replacing companies whose market influence has diminished.
Rebalancing by passive investors can involve significant trading and short-term price distortions, particularly on the day of the implementation. Investors targeting rebalancing periods try and predict the ‘adds and deletes’ and pre-position their portfolios.
Typically, in the period prior to the rebalance, stocks that are being added will outperform the benchmark, while stocks being deleted will underperform. Once included in a key benchmark, stocks will benefit from ongoing demand from passive investors as money flows into this segment of the market. Every dollar that is invested in a passive strategy theoretically results in buying across all 300 stocks, supporting share prices.
Promotion to the S&P/ASX 300 is often viewed as a source of pride for the added company – a sign that the company has ‘made it’. Executive and Board remuneration often increases, and it can make the company a more attractive option for potential employees and suppliers. However, on the flipside, there is greater market scrutiny and higher governance expectations.
Conclusion
Understanding the mechanics of index rebalances can help investors make more informed choices. For those with a longer-term focus, temporary price distortions following rebalancing implementation may present buying opportunities in stocks that have been de-weighted. Conversely, investors may wish to exercise caution when considering stocks newly added to the benchmark, as prices may reflect short-term buying pressure from passive investors.
Index rebalances highlight the mechanical nature of passive investing, where weight changes drive buying and selling regardless of company fundamentals. At NAB Private Wealth, investors have access to a number of tools to help take advantage of potential changes in the index.
Frequently Asked Questions
What is the S&P/ASX 300 Index?
The S&P/ASX 300 is a benchmark index that tracks 300 of the largest companies listed on the Australian Securities Exchange by market capitalisation. It is widely used by fund managers, superannuation funds and ETFs to measure investment performance.
How often is the S&P/ASX 300 rebalanced?
The index is reviewed every six months, with changes typically announced in March and September. There is usually a one to two week period between the announcement and the implementation date, giving investors time to prepare for the changes.
Why are companies added to or removed from the index?
Additions and deletions are generally driven by changes in market capitalisation and liquidity. Companies whose market value has increased may qualify for inclusion, while those that have fallen in relative size may be removed.
Why do index rebalances affect share prices?
Many passive investment funds seek to replicate the index. When a company is added, these funds may need to buy the shares. When a company is removed, they may need to sell. This can create increased trading activity and short-term price movements around the implementation date.
Do stocks usually rise when they are added to the S&P/ASX 300?
Historically, companies expected to be added often outperform the broader market between the announcement and implementation dates as investors anticipate buying from passive funds. However, this is not guaranteed and the share price may subsequently be driven by company fundamentals rather than index-related trading.
Do stocks always fall after they are removed?
Not necessarily. While deletions can create short-term selling pressure, company fundamentals remain the primary driver of long-term returns. In some cases, much of the expected impact is already reflected in the share price before the rebalance takes effect.
Can investors profit from index rebalances?
Some investors attempt to identify likely additions and deletions before they are officially announced. The objective is to benefit from any subsequent buying or selling by passive investors. However, index changes are only one factor affecting share prices, and investment decisions should always consider the underlying quality and valuation of the company.
Why are index rebalances important for long-term investors?
Index rebalances provide insight into how the Australian share market is evolving over time. They can highlight emerging industries, changing economic trends and shifts in investor preferences, while also creating temporary pricing opportunities for active investors.
What can index rebalances tell investors about market trends?
The latest review in Spetember highlighted growing representation from sectors such as resources, infrastructure, healthcare technology and artificial intelligence, while a number of established consumer and industrial businesses exited the benchmark. This can provide investors with insights into where capital is flowing within the Australian market.
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The information contained in this article is believed to be reliable as at September 2026 and is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. ©2026 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.
