A Look At Nearly 15 Years of TSX Composite Index History

The S&P/TSX Composite Index is about break-even for the year. That’s an incredible feat, considering that nearly 5 million Canadians are receiving the Canadian Emergency Response Benefit (CERB) brought on by the COVID-19 pandemic, Canada’s Minister of Finance has just resigned, and the country’s deficit forecast has jumped to $343 billion for the 2020-2021 fiscal year.

Look no further than the Technology sector for the better-than-should-be performance. Shopify, in particular, has increased its weight in the Index from 2.22% at the start of the year to 6.13% as of August 17, 2020 - leapfrogging Royal Bank as the country’s most valuable publicly traded company. I can’t help but think to compare it to Nortel Networks of the 2000’s; just, you know, without the accounting fraud part. I’m pretty sure their index dominance at the time was what spurred the current 10% maximum rule on stock weightings which fund managers were adjusting for anyways - even then, there was a sense that something wasn’t right and that investors shouldn’t be exposed so much to a single stock. At 6.13% though, we’re still nowhere near that.

The question I had asked myself earlier this week was at have we ever, in any sector, seen such a sharp increase in a sector weighting in such a short period of time? Thankfully this was pretty easy to find out, courtesy of BlackRock’s publishing of monthly holdings of its ETF’s. For their S&P/TSX Capped Composite Index ETF (XIC) the data went back to November, 2006 and I’ve compiled it all into a single file. So let’s dive in:

Financial Services, Energy & Materials

A quick look at the chart and it’s perhaps unsurprising to see Financial Services is pretty steady. It was 30% in November, 2006 and 28% today, and has averaged about 32% for the periods studied. Energy has been trending downward, going from about 28% in November, 2006 to just under 19% today.

Materials have been true to form in my view, showing lots of monthly volatility but still ultimately owning the same weight percentage as they did 14 years ago. Interestingly, exactly 9 years ago the Materials sector commanded a 24% Index weighting. Barrick Gold, Potash Corp., GoldCorp, Teck Resources, and Kinross Gold accounted for 12% of the entire S&P/TSX - those were the days. Maybe that’s what Buffett is counting on?

Industrials, Communication Services & Consumer Discretionary

The obvious story in this chart is the upward secular trend Industrials have been on since about 2012. After spending half of a decade stuck between 5 and 6%, they’ve doubled their representation in the S&P/TSX Composite. Holders of Canadian National Railway (4.17%) and Canadian Pacific Railway (2.28%) have been rewarded, as has been Bill Gates who is CNR’s largest shareholder.

Communication Services has been a pretty low volatile sector but it also hasn’t done much. Not showing off, not falling behind. Maybe do just as well buying the Index ETF?

Consumer Discretionary has also had its ups and downs and unlike the recent performance of this sector in the U.S., it’s actually been getting less and less representation in the S&P/TSX for the last five years or so. Secular trend or primed for a reversal?

Information Technology, Consumer Staples & Utilities

Information Technology, obviously, is the one to note here. It was down on their luck in 2011-2012 and I’ve ironically categorized this growth sector alongside the classic defensive sectors of Consumer Staples and Utilities. Not on purpose though - I’ve just gone in order by historical average weightings and it worked out like this.

A number of people have suggested that COVID-19 has simply put the Information Technology sector in a time machine and sent them several years into the future. They’re right. The upward trend since 2012 has been undeniable. It looks like it should be 2025 by now. Too long for a bull market without a correction? Perhaps, perhaps not. At least there was that small dip last month.

Next we have Consumer Staples - my favourite sector and subject of one of my very first blog posts. Very slow, but very steady growth. Back in 2006, Shoppers Drug Mart and Loblaw Companies (traded separately at the time) comprised just over 1% of the Index while Metro, Empire Company (then Sobeys) and Alimentation Couche-Tard were mere afterthoughts. At 2.5% of the Index at the time, it’s now up to 4.23% and although its representation is down from its 2016 highs, I’m sure most investors would take the growth without the volatility. If only I could convince dividend investors to forget about the typical low yields!

Utilities have also done quite well, going from 1.5% in 2006 to nearly 5% today and also, notably, with very little volatility in between. I guess that’s what you get for operating a bunch of regulated businesses with guaranteed returns. You’ll notice the March, 2020 peak at 6.43% though, likely due to COVID-19. I’m not panicking just yet.

Health Care & Real Estate

Alas, finally a comparison to Tech - Health Care and more specifically, the rise and fall of Valeant Pharmaceuticals (now Bausch Health Companies). I remember watching BNN; the talking heads felt this stock could do no wrong, and later it turned out that the talking heads could only do wrong in recommending this stock week in and week out. While never an investor, it scared me straight. It still scares me to have Constellation Software and Boyd Group Services in my Canadian Equity Portfolio, but I’ve been dropping its weighting each year and plan to continue that into 2021 as well. If nothing else, this should serve as a reminder for all of you Shopify fans out there - stocks can fall as quickly as they’ve risen. While there’s no indication of any fraud or anything like that, you should still be careful with Canada’s most valuable company, no matter what one it is.

And finally, Real Estate. REITs are relatively new to the TSX but they’ve also grown fairly steady. Many call them a high-yield bond substitute (i.e. junk bond) and in times when interest rates are so low, why not turn to an asset class with built-in inflation protection? They’ve taken their bumps from the current pandemic, but if you believe in the economy then REITs should do just fine.

Final Words

Going through this exercise was a nice stroll down memory lane for me. While there have been a number of companies who have departed the index, there are some constants. Canadians will always have their banks. They’ll always have their grocery stores, their telcos, and their railways. We’ve managed to survive without Nortel Networks but can you say the same about Royal Bank? Did we really need Valeant Pharmaceuticals playing Moneyball to grow its share price, or would we rather just have our wireless internet? Take the time to think about what companies the masses need rather than the nice-to-have ones. It’s fine to take some chances, but just make sure you’re not risking anything you can’t afford to lose.

Good luck!