8.4.1 Canadian Market Indexes

Introduction

In Canada, the Toronto Stock Exchange (TSX) and the TSX Venture Exchange compile and publish indexes of stock prices for various industry classifications. These indexes, their dividend yields, and the price-to-earnings ratios based on the S&P/TSX Composite Index can be found in the TSX Monthly Review, the Bank of Canada Review, and in financial newspapers in Canada and elsewhere.

The S&P/TSX Composite Index

The Toronto Stock Exchange began its first stock price indexes in 1934. Over the years, many changes and revisions have been made to the index. Below is the index growth representation since 1990, noting a sharp decline in recent years due to the worldwide pandemic at the time of writing.

    graph LR
	    A[Year End Prices #40;1990-202#41;]
	    B[1990: S&P/TSX Composite Index: 4,000]
	    C[2000: S&P/TSX Composite Index: 14,000]
	    D[2010: S&P/TSX Composite Index: 18,000]
	    E[2020: S&P/TSX Composite Index: 18,000]
	    A --> B
	    A --> C
	    A --> D
	    A --> E

The S&P/TSX Composite Index measures changes in the market capitalization of the stocks within the index. A stock’s weight within the index changes if its price or the number of shares outstanding changes. The index has a floating number of stocks.

Inclusion Criteria

To be included in the index, a stock must meet specific criteria based on:

• Price

• Length of time listed on the exchange

• Trading volume

• Capitalization

• Liquidity

The stocks included in the S&P/TSX Composite Index are classified by industry, using the Global Industry Classification Standard (GICS). This standard, developed jointly by S&P and MSCI (Morgan Stanley Capital International Inc.), is accepted worldwide. An index has been created for each sector.

Eleven Sectors of the S&P/TSX Composite Index

• Communication Services
• Consumer Discretionary
• Consumer Staples
• Energy
• Financials
• Health Care
• Industrials
• Information Technology
• Materials
• Real Estate
• Utilities

Based on market capitalization, certain sectors are weighted more heavily in the S&P/TSX Composite Index. For instance, the Financials and Energy sectors account for nearly half of the index. Meanwhile, Health Care, Utilities, and Information Technology sectors collectively account for around 5%.

Interpreting Indexes

When interpreting indexes, it is crucial to differentiate between point changes and percentage changes. For an index starting at 250, a 1% change is equivalent to 2.5 index points:

$$ \text{Change in points} = \text{initial index value} \times 0.01 = 250 \times 0.01 = 2.5 \text{ points} $$

Example Calculations

• A 1% change when Tokyo’s Nikkei 225 is trading at 10,500:

  $$ \text{Change in points} = 10500 \times 0.01 = 105 \text{ points} $$

• A 1% change when the S&P 500 is trading at 1,000:

  $$ \text{Change in points} = 1000 \times 0.01 = 10 \text{ points} $$

Thus, percentage changes are a more accurate reflection of market performance than net point changes. Also, when comparing percentages of S&P 500 to S&P/TSX, one should account for currency differences—S&P 500 is in USD, whereas S&P/TSX is in CAD.

The S&P/TSX 60 Index

Overview

The S&P/TSX 60 Index includes the 60 largest companies trading on the TSX, measured by market capitalization. This index is broken down into 11 sectors covering all S&P/TSX Index sub-groups. All stocks listed in this index must also be part of the S&P/TSX Composite Index.

The S&P/TSX Venture Composite Index

Overview

The S&P/TSX Venture Composite Index is a Canadian benchmark for the public venture capital market. Managed by Standard & Poor’s, it is a market capitalization-based index that provides insights into companies listed on the TSX Venture Exchange.

Criteria and Composition

The index does not have a fixed number of companies and is updated quarterly based on specific inclusion and maintenance policies. Companies listed on the TSX Venture Exchange are eligible if they:

• Are incorporated under Canadian federal, provincial, or territorial law
• Represent at least 0.05% of the total index market capitalization
• Are listed for at least 12 full calendar months by the revision date

Key Takeaways

• Toronto Stock Exchange (TSX) and TSX Venture Exchange are principal entities compiling Canadian stock indexes.
• S&P/TSX Composite Index oversees set criteria for industry classification and floating number of stocks.
• Important indexes include S&P/TSX 60 Index and S&P/TSX Venture Composite Index.

Frequently Asked Questions (FAQs)

1. What does the S&P/TSX Composite Index represent?

The S&P/TSX Composite Index measures the changes in the market capitalization of stocks within the index. A stock’s index weight changes as its price or the number of shares outstanding changes.

2. How is the S&P/TSX 60 Index different from the S&P/TSX Composite Index?

The S&P/TSX 60 Index comprises the 60 largest companies on the TSX by market capitalization and covers all major industry sectors within the larger S&P/TSX Composite Index.

3. What criteria are used for a stock to be included in the S&P/TSX indices?

Criteria include price, length of listing, trading volume, capitalization, and liquidity.

4. What is the primary difference in point and percentage changes in indexes?

Percentage changes provide a more accurate reflection of market performance than point changes, as the nominal point changes can be misleading when comparing different indexes.

Glossary

• Market Capitalization: Total market value of a company’s outstanding shares of stock.
• Liquidity: The ability of an asset to be quickly converted into cash without significantly affecting its price.
• Global Industry Classification Standard (GICS): A standard developed to organize stocks into industry sectors.

References

• TSX Monthly Review
• Bank of Canada Review
• Financial newspapers like Globe and Mail and Financial Post
• Bloomberg Database