The S&P/TSX Composite Index is the Canadian equivalent of the S&P 500. The index tracks approximately 250 of the largest Canadian companies that are listed on the Canadian Stock Exchange (TSX). It is a market capitalization-weighted index which means that the companies that have the largest market cap have a greater effect on the price movement of the index. Like other national indexes, the S&P/TSX is an indicator of the health of Canada’s economy. Like most global indices, the S&P TSX plummeted during the global financial crisis however, in September 2019, it reached an all-time high and it is well above those levels now.
Like the S&P 500 in the United States, many of the major countries that impact the global economy have their own stock exchanges. In Canada, that exchange is the S&P/TSX Index. Originally named the TSE300 Index at its debut in 1977, the index became part of Standard & Poors in 2002. At that time the name was changed. In this article, we take a close look at what the S&P/TSX Index is, what sectors are represented, and at what weighting, and we’ll list a few of the popular ETFs that investors can use to trade the index.
What is the S&P/TSX Index Used For?
The S&P/TSX Index is essentially Canada’s version of the S&P 500, the index tracks the performance of approximately 250 of the largest and most prominent Canadian companies. It is a market capitalization-weighted index so the largest companies, by market cap, carry a larger weight in terms of the index.
TSX stands for the Toronto Stock Exchange which is Canada’s primary exchange and the exchange that the index tries to approximate. The TSX is the ninth largest stock exchange in the world by market cap.
Like all index funds, the S&P TSX serves three important purposes:
- To give investors an easy-to-understand overview of how a country’s public companies are performing.
- To give fund managers a benchmark with which they can compare their results and assess their success.
- To give low-cost ETFs and index funds a formalized structure to follow
The Brief History of the S&P/TSX Index
The S&P/TSX Index originated in 1977 as the TSE300. Standard & Poor’s, the American financial services company, took over the index in 2002 and changed the name to the S&P/TSX Index.
As its name suggests, the TSE300 tracked the performance of exactly 300 companies. The S&P/TSX is more fluid and dynamic. Currently, the index tracks 250 of the approximately 1,500 companies listed on the TSX. However, those companies make up approximately 70% of the market cap of the exchange so the change makes sense.
What Companies Are In The S&P/TSX Index?
To be listed on the S&P/TSX Index, a company must represent at least 0.5% of the entire index, a company that has a higher market cap is more heavily weighted in the movement of the index. Companies can, and do, move off the index based on a number of factors, and they are replaced by other companies.
The market cap is a key consideration but companies can also be listed or delisted from the index based on the volume of trading of their stock. The S&P/TSX also looks at how many liquid assets a company possesses. Also, 250 companies is an approximate number. In any year the S&P/TSX may have more or fewer companies.
The Sectors Represented In The S&P/TSX Are …
The sectors that make up the S&P/TSX Index are not as dominated by natural resource companies as in years past. However, the index can be disproportionately affected by oil price fluctuations because there are a lot of energy companies in Canada. Here is an overview of the top 11 sectors ranked by the weighting they carry in the index as of September 2019.
- Financial – This sector makes up the largest percentage of the index at roughly 30%. It also contains the index’s top constituent by weight, the Royal Bank of Canada (NYSE:RY).
- Energy – This sector makes up approximately 18.5% of the index. One of the leading components in this sector is Suncor Energy (TSX:SU).
- Industrial – This sector comprises 12% of the index. The leading component in this sector by weight is the Canadian Railway Company (TSX:CNR).
- Materials – This sector makes up 11.5 percent of the index. The companies most heavily represented in this sector are mining and agriculture companies. One of the largest components in the index is Nutrien (TSX:NTR).
- Information Technology – This sector makes up roughly 5.5 percent of the index. No stocks in this sector are in the top ten holdings.
This Is How To Invest In The S&P/TSX Index
There are many index funds and ETFs using the S&P/TSX as their baseline index. One of the most well-known is the iShares S&P/TSX 60 Index Tracking Fund. This is the largest ETF in Canada and trades over 4 million shares per day on average.
As its name implies, the S&P/TSX 60 (TSE: XIU) fund tracks a subset of the underlying TSX index. However, those 60 stocks comprise the bulk of Canada’s equity market capitalization. Other popular options include the iShares S&P/TSX Capped Energy ETF (TSE: XEG) and the Betapro S&P/TSX 2X Bull ETF (TSE: HXU).
The final word on the S&P/TSX Index
The S&P/TSX index is the Canadian equivalent of the S&P 500 in the United States. Like the S&P 500, and other major indices, the S&P/TSX is a market-cap-weighted index which means the larger companies have a more significant effect on the upward or downward movement of the index. The financial sector makes up the largest percentage of the index. This sector includes the largest component in the index, the Royal Bank of Canada.
