A Trading Guide to the S&P/TSX Composite Index
Based on data from the TSX (Toronto Stock Exchange), the S&P/TSX Composite Index is the Canadian equity market’s primary index. Measuring the performance of stocks representing ten business sectors in Canada, this index covers the utilities, telecommunications, materials, IT, industrials, healthcare, financials, energy, consumer staples and consumer discretionary industries. The S&P/TSX Composite index is the equivalent in Canada to the USA’s S&P 500 market index and it contains both income trust units and common stock. Since it was first introduced, the S&P/TSX index has been composed of 200-300 top Canadian stocks, however the number of stocks represented in this index varies from time to time. The index’s ticker symbol is SPTSX, and it has over 1,500 companies listed which represent over US$2 trillion in total market capitalisations. The Toronto stock exchange is Canada’s largest in terms of market capitalisation, as well as being the 3rd biggest on the North American continent and the 8th biggest worldwide. The S&P/TSX Composite Index is the broadest of all of the indices in the S&P/TSX family and therefore it forms the basis for numerous sub-indices such as Income Trust Indices, equity indices, Capped Indices, GICS Indices, market cap based indices and Capped Indices. Both historical and real time data for this index is distributed by the Toronto Stock Exchange. The S&P/TSX Composite Index is more closely correlated to fluctuations in commodity pricing than its United States’ counterparts as the Toronto Stock Exchange is heavily dominated by commodity stocks, and especially crude oil because of Canada’s vast natural resources. It covers around 95% of Canada’s equity market, and serves a dual purpose of acting as an investable index as well as a benchmark for the health of the Canadian economy. It is designed to represent a broad benchmark index while at the same time keeping all of the liquidity characteristics found in narrower indices, and this combination allows the S&P/TSX Composite Index to be the ideal choice for index replication and portfolio management.
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Historical Facts About the S&P/TSX Composite Index
The history of Canadian stock trading goes back to the mid 19th century, when the Toronto Stock Exchange was created in 1852. At its conception, there were only 18 stocks being traded on the exchange. CATS (Computer Assisted Trading System) was introduced to the exchange in 1977, and it was in this year that the TSE300 Toronto Stocks index was established. The index at that time included stocks which represented the top 300 companies across 14 sectors in Canada, and its base level at its introduction was 1,000 points. The Toronto Stock Exchange publicly offered its own corporate shares in 2002, and at the same time the S&P/TSX Composite Index replaced the TSE300 index. It was managed by Standard & Poor’s Indices division of the McGraw Hill Financial publishers, and under this management team, ten sectors were covered in this index, with a variable number of stocks. In the year that it was launched, the S&P/TSX index comprised 223 stocks from over 1500 that were listed on the TSX, although this year (2016), the number has increased to 235 stocks. The S&P/TSX Canadian Index Committee are charged with maintaining the S&P/TSX Index, and they are permitted to change policies, rules and the methodology for the composition of the index. There are three members on the committee that represent the Toronto Stock Exchange, and another four members who represent S&P Dow Jones Indices. The chair of the committee is a member who has been chosen by S&P Dow Jones Indices. The committee hold meetings once per month, and although any change to the S&P/TSX Index is generally only made during a quarterly review, it is possible that the committee may instead review, add or remove a security to the indices at any time between quarterly reviews.
Criteria for Listing on the S&P/TSX Composite Index
In order for a security to be eligible to be included in the S&P/TSX Composite index, it must meet several different criteria. These include the following:
- The security must represent a weight of at least 0.05% of the index after the QMV (Quoted Market Value) of the security has been included in the index float capitalisation when based on the VWAP (Volume Weighted Average Price) noted over the last 3 trading days of the end of the month before the quarterly review takes place.
- The security must have at least a VWAP of CA$1 during the prior 3 months and over the final 3 trading days of the month end before the holding of the quarterly review.
- The liquidity of the security must be 0.50 when measured by float turnover (i.e. the total amount of shares that have been traded at all trading venues in Canada over the last year divided by the float adjusted shares remaining outstanding when the period comes to an end).
- The company should be either established, formed or incorporated in Canada, and the Toronto Stock Exchange must be it’s primary stock exchange for its listing.
There are some kinds of securities that are not eligible to be included in the index. These include:
- Preferred shares
- Securities that represent mutual fund corporations
- Exchangeable shares
- Instalment receipts
- Any other securities which have been deemed as inappropriate at a meeting of the index committee
The S&P/TSX Composite Index has a rule which restricts any component’s weighting to a maximum of 10%, whatever its market capitalisation.
Companies Listing on the S&P/TSX Composite Index
Many of Canada’s best known companies are represented on the S&P/TSX Composite Index. Of the 10 sectors represented, the one with the biggest weighting is the financial industry at around 35%, with energy coming in second at about 21%. Currently, the sector with the lowest weighting is the healthcare industry which has a weighting of less than 1%. The top listings of the S&P/TSX index current include:
- The Royal Bank of Canada
- The Toronto Dominion Bank
- The Bank of Nova Scotia
- Suncor Energy Inc
- Canadian National Railway Company
- Bank of Montreal
- Enbridge Inc
- BCE Inc
- TransCanada Corporation
- Canadian Natural Resources Ltd
Other educational materials
- FTSE AIM All-Share Index
- FTSE All-Share Index
- Japanese Exchange Group (JPX)
- LSE – London Stock Exchange
- New York Stock Exchange (NYSE)
Recommended further readings
- The ethical mutual fund performance debate: New evidence from Canada. Bauer, R., Derwall, J. and Otten, R., 2007. Journal of Business Ethics, 70(2), pp.111-124.
- Financial Conditions Indices for Canada. Gauthier, C., Graham, C. and Liu, Y., 2003. Bank of Canada. Photocopy.