How is the S&P/TSX Composite Index Weighted?
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.
What are the S&P/TSX Composite Index's eligibility requirements?
The S&P/TSX Composite Index is reviewed each quarter; at that time, additions or removals can be made. To be eligible for addition, 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.
Securities may be removed from the index if they fall beneath the index committee’s buffer criteria. To stay 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 keep a minimum index weight of 0.025 percent three days prior to the review, as well as liquidity of 0.25. Securities may also be removed at the index committee's discretion at any other time.
What sectors are covered in the S&P/TSX Composite Index?
There are 11 categories of securities included in the index: financial, energy, materials, industrial, consumer discretionary, telecommunications services, healthcare, consumer staples, utilities, information technology and real estate. The index has the most financial and energy constituents, followed by the materials and industrial categories. Its 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 down 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 31.7 percent of the index, and its top constituent by weight is the Royal Bank of Canada (TSX:RY,NYSE: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 percent of the index, features Enbridge (TSX:ENB,NYSE:ENB) as one of its top constituents by index weight. Enbridge operates across North America, moving nearly two-thirds of Canada’s crude oil exports to the US and transporting nearly 20 percent of the natural gas consumed in the that country. The company also operates North America’s third largest natural gas utility by consumer count. Enbridge was an early investor in renewable energy, and has a growing offshore wind portfolio.
Materials securities make up 14.1 percent of the index; the sector is heavily populated with mining and agriculture companies. One notable company in this category is Nutrien (TSX:NTR,NYSE:NTR), an agricultural nutrient and equipment provider. It is a new company born out of a merger between Agrium and Potash Corporation of Saskatchewan, which was completed in January 2018.
Securities in the industrial category comprise 11.2 percent of the index. The Canadian National Railway (TSX:CNR,NYSE:CNI) stands tall as one of the top constituents by weight. Its railways span coast to coast in Canada while also extending through Chicago to the Gulf of Mexico.
5. Information technology
Information technology securities comprise 5.4 percent of the index. Ecommerce platform Shopify (TSX:SHOP,NYSE:SHOP) is a major component of this sector. The company has had some high-profile partnerships, including Kylie Cosmetics, Drake and LeBron James. Shopify is also used by Budweiser, Tesla (NASDAQ:TSLA) and Nestle (OTC Pink:NSRGF,SWX:NESN).
6. Communication services
Telecommunications securities comprise 5.1 percent of the S&P/TSX Composite Index and include companies like BCE (TSX:BCE,NYSE:BCE). BCE is best known for its ownership of Canadian telecommunications property Bell.
Utilities securities register at 4.8 percent of the index. Canadian Utilities (TSX:CU,OTC Pink:CDUAF) is a representative of this sector. It 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$10.74 billion market cap.
8. Consumer staples
Consumer staples represent 4 percent of the index. Maple Leaf Foods (TSX:MFI,OTC Pink:MLFNF) is a company 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 certain markets in Asia.
9. Consumer discretionary
Around 3.2 percent of the index is held by consumer discretionary securities. Dollarama (TSX:DOL,OTC Pink:DLMAF) represents one of the top constituents in this category. The Canada-based company operates discount retail stores and provides a broad range of everyday consumer products, general merchandise and seasonal items, with merchandise at low fixed price points.
10. Real estate
The real estate sector occupies 2.7 percent of the S&P/TSX Composite Index. First Capital REIT (TSX:FCR.UN) is one of the securities involved in this space. The company specializes in hybrid properties combining living space with retail and commercial properties.
Healthcare securities make up 0.4 percent of the index. One of the companies represented is Bausch Health (TSX:BHC,NYSE:BHC), a multinational pharmaceutical company that develops, manufactures and markets drugs targeting skin diseases, gastrointestinal disorders, eye health and neurology.
FAQs for the S&P/TSX Composite Index
How to invest in the S&P/TSX Composite Index?
As with most indexes, it's not possible to invest directly in the S&P/TSX Composite Index. Investors can take positions in individual stocks held by the S&P/TSX Composite Index, but there are better options. Several investment vehicles offer exposure to the performance of the index. Exchange-traded funds (ETFs) such as the iShares Core S&P/TSX Capped Composite Index ETF (TSX:XIC) offer one route, as do mutual funds such as the MDPIM S&P/TSX Capped Composite Index Pool.
Is the S&P/TSX Composite Index a good investment?
Canada consistently ranks among the world's top 10 economies, and is expected to close 2022 with a GDP of $1.74 trillion. As the premier indicator of market activity in the Canadian stock market, the S&P/TSX Composite Index provides a stable, diverse portfolio of many of the country’s best blue-chip stocks in key industries, including energy, resources, banking and retail.
What is the combined market cap of all the companies in S&P/TSX Composite Index?
As of November 9, 2022, the S&P/TSX Composite Index had an adjusted market cap of more than C$3.153 trillion.
This is an updated version of an article originally published by the Investing News Network in 2014.
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Securities Disclosure: I, Melissa Pistilli, currently hold no direct investment interest in any company mentioned in this article.
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