What Is the S&P/TSX Composite Index?
It is the equivalent of the S&P 500 market index in the United States, and as such is closely monitored by Canadian investors. Since the S&P/TSX Composite Index is comprised of Canada's largest and most prominent companies, it is often used as a barometer for the health of the Canadian economy.
- The S&P/TSX Composite Index tracks about 250 of Canada's largest public companies.
- It is viewed as a barometer of the Canadian economy, and is analogous to the S&P 500 Index in the United States.
- Companies must maintain strict liquidity and market capitalization requirements in order to remain part of the index.
Understanding the S&P/TSX Composite Index
The S&P/TSX Composite Index is calculated by Standard and Poor's (S&P) and contains about 250 large Canadian firms. As of Sept. 2019, roughly one third of the index's members were engaged in natural resource sectors, such as mining, forestry, oil, and natural gas. Other notable members include financial services, real estate, and industrial businesses. Together, these firms represent about 70% of the market capitalization of the TSX.
As a capitalization-weighted index, the S&P/TSX Composite Index is more influenced by large member companies than small ones. This is a common method of calculating stock indices, with the S&P 500 and Nasdaq Composite Index both sharing this methodology.
Companies wishing to be included in the S&P/TSX Composite Index must meet a series of eligibility criteria relating to their liquidity and market capitalization. Specifically, member companies will be removed from the index if their share prices remain below $1 for more than a specified period of time. Similarly, members must ensure that their market capitalization remains at least 0.05% of the index; while trading volume for each member's securities must remain at least 0.025% of total volume for the index. Lastly, no one company is permitted to comprise more than 15% of total trading volume.
Real World Example of the S&P/TSX Composite Index
The S&P/TSX Composite Index has grown significantly in recent years, recently achieving an all-time high in Sept. 2019. After collapsing by 35% in 2008, the index rebounded by 45% over the following two years and has more than doubled since the depths of the 2007–2008 financial crisis.
The S&P 500 has had a similar track record. After losing 37% in 2008, it showed positive results in each of the following nine years and has grown by over 250% since Oct. 2008.