The S&P/TSX Composite Index is a strong indicator for the Canadian equities market, but how are securities in the index weighted?
The S&P/TSX Composite Index (INDEXTSI:OSPTX) is the principal market measure for the Canadian equities market, and is calculated and managed by S&P Dow Jones Indices.
The index, which was launched in 1977, includes both common stocks and income trust units.
The weightings of the index’s securities are decided through float-adjusted market capitalization. In this method, market cap is determined by share price and the amount of outstanding shares available to the general public — restricted shares owned by other publicly held companies or company executives are excluded from the calculation.
S&P/TSX Composite Index eligibility
The S&P/TSX Composite Index is reviewed each quarter — at that time, additions or removals can be made. To be eligible for addition to the index, a security must have had a volume-weighted average price of C$1 over the past three months and over the last three trading days of the month end prior to the index committee’s quarterly review. It must also represent a weight of 0.05 percent of the index at a minimum.
Stock liquidity must be 0.5, and is calculated by dividing the total number of shares traded over the past year by float-adjusted shares outstanding. The company needs to be incorporated, formed or established in Canada and must have the TSX as its primary stock exchange listing.
Securities that cannot be included in the S&P/TSX Composite Index include those issued by mutual fund corporations, preferred shares, warrants and all other types of securities that the index committee decides are inappropriate. Securities that have been listed on the TSX for fewer than six months are also ineligible for inclusion.
Securities may be removed from the index if they fall beneath the index committee’s buffer criteria. To remain eligible, securities must maintain a volume-weighted average price above C$1 over the three months leading up to a quarterly review. They must also maintain a minimum index weight of 0.025 percent three days prior to the review, as well as 0.25 liquidity. Securities may also be removed at the discretion of the index committee at any other time.
S&P/TSX Composite Index sectors
There are 11 categories of securities included in the index: financial, energy, materials, industrial, consumer discretionary, telecommunication services, healthcare, consumer staples, utilities, information technology and real estate. The index has many financial and energy constituents, followed by the materials and industrial categories. The index’s performance therefore heavily reflects how those industries are doing, and disturbances in the economy or oil price dips can have a big impact.
Below we’ve broken out each of the 11 sectors as laid out by S&P Dow Jones Indices, and have listed the main players in each industry.
The financial market represents 34.6 percent of the index, and the index’s top constituent by weight is the Royal Bank of Canada (TSX:RY). The bank provides personal and commercial banking, as well as insurance, corporate and investment banking, transaction processing services and wealth management. Its investment banking services are ranked among the best in the world by several organizations.
The energy sector, which accounts for about 19.7 percent of the index, is led by Enbridge (TSX:ENB), its top constituent by index weight. Enbridge is an energy company that generates, transports and distributes multiple forms of energy with a specific focus on oil and gas.
The company posted earnings of C$765 million in its latest quarterly report, and recently became the largest energy infrastructure company in North America by acquiring Spectra Energy (NYSE:SE).
Materials securities make up 11.5 percent of the index. The sector is heavily populated with mining and agriculture companies. One notable company in this category is Nutrien (TSX:NTR), an agricultural nutrient and equipment provider. It is a new company born out of a merger between Agrium and Potash Corporation of Saskatchewan, another major provider of agricultural production materials. The merger was completed in January 2018.
Securities in the industrial category comprise 9.5 percent of the index. One of these securities is ATS Automation Tooling Systems (TSX:ATA), a company that designs, builds and installs manufacturing solutions. ATS Automation Tooling Systems provides vision technology, including camera, lighting, measurement, sorting and robotics control software. It also offers laser processing motion control and material handling platforms.
5. Consumer discretionary
Around 5.4 percent of the index is held by consumer discretionary securities. Theater and film exhibition company Cineplex (TSX:CGX) is a commanding stock in the consumer discretionary sector, with theaters throughout Canada. Cineplex has several businesses that include food services, gaming, alternative programming, home entertainment sales and theatrical exhibitions. It is also a joint venture partner in Canada’s largest entertainment loyalty program, SCENE. The company has 164 theaters with 1,676 screens in Canada, and has a history that stretches back 100 years.
6. Telecommunication services
Telecommunication services securities comprise 4.7 percent of the index and include notable companies like BCE (TSX:BCE). BCE is best known for its ownership of Canadian telecommunication property Bell. The company’s third-quarter report notes a 14.9-percent increase in free cashflow over last year, as well as net earnings of C$817 million, up 2.1 percent.
7. Consumer staples
Consumer staples represent 3.7 percent of the index. Maple Leaf Foods (TSX:MFI) is a company operating in the meat products and agribusiness sectors. It is Canada’s leading consumer packaged meats company, operating several brands and partnering with many sister brands as well. It exports to more than 20 global markets, including the US and markets in Asia.
The company has withstood the volatility of the pork market, reporting a 5.7-percent increase in sales in its most recent quarterly release, plus C$204.2 million in free cashflow.
Utilities securities register at 3.8 percent of the index. Canadian Utilities (TSX:CU) is a representative of this sector. The company works in natural gas and electric transmission as well as energy distribution in Canada and the UK. Canadian Utilities currently holds C$20 billion in assets and has a C$11.2-billion market cap. In Q3 2017, the company reported $96 million in adjusted earnings, and said the amount would have been $103 million if not for a retroactive regulatory decision by the Alberta Utilities Commission.
9. Information technology
Information technology securities comprise 3.2 percent of the index. E-commerce platform Shopify (TSX:SHOP) is a major component of this sector. The company showed strong third-quarter results in 2017, reporting a 72-percent increase in monthly recurring revenue and an 86-percent increase in gross profit dollars from the previous year.
10. Real estate
The real estate sector occupies 2.9 percent of the composite index. First Capital Realty (TSX:FCR) is one of the securities involved in this space. The company specializes in hybrid properties combining living space with retail and commercial properties. Its annual report for 2016 notes that the company has invested roughly C$655 million into acquiring new properties with a special emphasis on the downtown core of Toronto. In Q3 2017, the company reported quarterly results of $73.3 million.
Healthcare securities make up 1 percent of the index. One of the companies represented is Extendicare (TSX:EXE), a company that provides long-term senior care services via a network of senior care centers that it owns and operates. Extendicare has facilities in the US and in Canada, and has been in existence for more than 40 years.
In the US, Extendicare operates through its wholly owned subsidiary, Extendicare Health Services, and has 156 senior care centers in the country. In Canada, Extendicare works through its subsidiary Extendicare (Canada), and has 95 facilities with 12,600 beds. The company reported a 1.9-percent increase in revenue to $273.2 million in its Q3 results for 2017.
This is an updated version of an article originally published by the Investing News Network in 2014.
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Securities Disclosure: I, Amanda Kay, currently hold no direct investment interest in any company mentioned in this article.