The Canadian equity marketplace, previously viewed rather dismissively by overseas investors, has come into its own in the 21st century. In the first decade of this millennium, rampant demand for commodities—fueled by rapid growth in China, India, and other emerging economies—led to unprecedented interest in Canadian equities.
With that, the S&P/TSX Composite Index, which tracks the largest companies trading on the Toronto Stock Exchange (TSX) , soared to a record high in 2008. The subsequent Great Recession did not spare the TSX as it plunged 50% in a matter of months, but the ensuing recovery cemented Canada’s reputation as one of the more resilient economies in the world.
- Canada held up well amid the Great Recession thanks to a stronger economy and less exposure to mortgage-backed securities (MBS).
- The Canadian stock market is about 6% that of the U.S., however, it does include some well-known companies—such as Royal Bank of Canada, Suncor, and Canadian Pacific.
- Many of these top companies are interlisted, meaning they are listed on both the Canadian stock exchange and a U.S. exchange—making them easily accessible to U.S. investors.
- One low-cost option for investing in the broader Canadian market is the iShares MSCI Canada ETF (EWC) .
- Note that the TSX and related ETFs are heavily weighted toward the financial, energy, and materials industries.
The Great Recession
Canada managed to escape the Great Recession relatively unscathed for a couple of reasons. Firstly, the Canadian economy was in much better shape than most nations as the global economy was slipping into recession in 2008—thanks to the commodity boom. Canada was one of only two G-7 nations at that time to enjoy twin budget and current account surpluses.
Secondly, the largest Canadian banks and financial institutions did not hold large amounts of mortgage-backed securities (MBS). As a result, the Canadian financial sector did not witness the cascading bank failures seen in the U.S. and Europe from 2007 to 2009. In the aftermath of the global recession, the Canadian economy also endured a relatively short-lived correction in housing.
Why Invest in TSX Stocks
Canadian stocks collectively had a value of $3.3 trillion as of February 2022. Although only one-tenth of the size of the $53.4-trillion U.S. equity market, Canada has a disproportionate number of world-leading companies clustered in three critical sectors—financials, energy, and materials.
Most of Canada's TSX companies have solid balance sheets, sound management, and long-term records of growth and profitability. While the benchmark TSX Composite index has approximately 240 stocks, a sub-set of this index—the TSX-60—consists of 60 of Canadian best blue chips.
TSX World Leaders
Investors may be familiar with a handful of Canadian companies such as Blackberry (whose mobile devices ruled the roost before it was crushed by Apple and Samsung), TC Energy (the pipeline giant whose Keystone XL project has been the subject of much controversy in the U.S.), and Bausch Health Companies (which initiated a failed takeover of Botox-maker Allergan in 2014).
But the TSX is also home to some of the world’s best run banks—Royal Bank of Canada (RY), Toronto-Dominion Bank (TD), Bank of Nova Scotia (BNS)—and insurers Manulife (MFC) and Sun Life Financial (SLF). On the commodity side is Suncor (SU), Canadian Natural Resources (CNQ), Nutrien (NTR), and Barrick Gold (GOLD), and lest we forget major railways Canadian National Railway (CNR) and Canadian Pacific (CP).
How to Invest in TSX Stocks
Below are two basic avenues of investing in TSX equities.
Interlisted stocks are those that are dually listed on a Canadian exchange like the TSX and on a U.S. exchange such as the New York Stock Exchange (NYSE) or Nasdaq. The major benefit of interlisted stocks to the U.S. investor is that it they can be purchased in U.S. dollars.
Most of the companies listed above are interlisted. In fact, many of these interlisted stocks have the same ticker symbols on Canadian and U.S. exchanges. Altogether, over 300 Canadian stocks are interlisted on U.S. exchanges.
Exchange-Traded Funds (ETFs) and Mutual Funds
Exchange-traded funds (ETFs) and mutual funds are another popular method of investing in a basket of TSX equities. For example, the iShares MSCI Canada ETF (EWC) is a $4.2-billion ETF that has been around since March 1996. This ETF’s investment objective is to track the investment results of an index composed of Canadian equities. The ETF has an expense ratio of about 0.49%, making it an efficient way to invest in TSX stocks.
As of Feb. 18, 2022, the top holdings for the EWC were:
- Royal Bank of Canada (7.7%)
- Toronto Dominion (7.4%)
- Bank of Nova Scotia (4.4%)
- Canadian National Railway (4.2%)
- Enbridge (4.2%)
These stocks and funds can be purchased either through an online brokerage account or full-service brokerage. Note that investing in Canadian stocks may have certain tax implications for investors.
The Bottom Line
One criticism of the TSX is that it is too heavily weighted to cyclical stocks whose fortunes depend on the domestic and global economies. As of February 2022, the three biggest sectors of the S&P/TSX Composite Index were financials (33.5% of the index), energy (14.8%), and industrials (11.7%).
There is merit to the claim that the TSX may be overly susceptible to swings in the economic cycle, but if you believe that the long-term prognosis for the global economy is positive, and economic growth will translate into rising demand for commodities, TSX stocks are certainly worth considering for inclusion in diversified portfolios.