RY - How is the S&P/TSX Composite 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, 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 in the index.

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 liquidity of 0.25. 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 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 out each of the 11 sectors as laid out by S&P Dow Jones Indices, and have listed the main players in each industry.

1. Financial

The financial market represents 28.6 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.

2. Materials

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), 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.

3. Energy

The energy sector, which accounts for about 13.5 percent of the index, features Enbridge (TSX: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.

4. Industrial

Securities in the industrial category comprise 11.7 percent of the index. The Canadian National Railway Company (TSX:CNR) 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 9.3 percent of the index. Ecommerce platform Shopify (TSX:SHOP) is a major component of this sector. The company has had some high-profile partnerships, including one with Kylie Cosmetics. The multimillion dollar cosmetics brand uses Shopify to manage sales and fulfilment, and to host its website.

This partnership has been very fruitful for both parties; Shopify receives 0.15 percent of sales of Kylie Cosmetics products as well as an estimated US$480,000 annually, according to Forbes. Shopify is also used by Budweiser, Tesla (NASDAQ:TSLA) and Nestle (OTC Pink:NSRGF,SWX:NESN).

6. Communication services

Telecommunication services securities comprise 5.8 percent of the index and include notable companies like BCE (TSX:BCE,NYSE:BCE). BCE is best known for its ownership of Canadian telecommunication property Bell.

7. Utilities

Utilities securities register at 5.2 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$8.29 billion market cap.

8. Consumer staples

Consumer staples represent 4.4 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 3.5 percent of the index is held by consumer discretionary securities. Dollarama (TSX:DOL) 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 3 percent of the index. First Capital Realty (TSX:FCR,OTC Pink:FCRGF) is one of the securities involved in this space. The company specializes in hybrid properties combining living space with retail and commercial properties.

11. Healthcare

Healthcare securities make up 1 percent of the index. One of the companies represented is Extendicare (TSX:EXE,OTC Pink:EXETF), 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 118 facilities.

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.