S&P Dow Jones Indices will add four stocks to the S&P/TSX Composite Index, TXCX-I the broadest measure of the Canadian market.
No stocks will be dropped. Also, no changes are being made to the S&P/TSX 60, TXSX-I a selection of most of the largest companies in the composite. Analysts had speculated Algonquin Power and Utilities Corp. AQN-T could exit the 60, with Fairfax Financial Holdings Ltd. FFH-T the most likely candidate as a replacement.
S&P said it will add construction company Aecon Group Inc. ARE-T; energy-services companies Enerflex Ltd. EFX-T and TerraVest Industries Inc. TVK-T and Ngex Minerals Ltd. NGEX-T, a Vancouver-based miner of precious metals in South America.
The changes will be effective at the open of markets on Dec. 23.
Analyst Jean-Michel Gauthier at Scotiabank correctly predicted the four additions to the Composite, but also forecast Algonquin could be dropped. The Oakville, Ont.-based company sold its renewable energy business for as much as $2.5-billion to pay down debt in August. It’s now half its former size
S&P Dow Jones uses “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public – to judge whether a company should be included in its indexes. The index provider does not release its proprietary float calculations.
To get into the Composite, a company’s float-adjusted market capitalization must be 0.04 per cent, or four-hundredths of a percentage point, of the total value of the index. To stay in the composite, a company’s float must not drop below 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index.
With the growth of index funds and other passive investing strategies, whether a stock is part of a major index can have a meaningful effect on share prices. Fund managers who track an index need to hold shares in the underlying companies. Canadian stocks added to the Composite – which has about 220 to 250 members, depending on the quarter – can see price bumps before and after inclusion. Similarly, companies removed from the index lose a source of demand for their shares.
Research by Morningstar Direct for The Globe and Mail found Canadian mutual funds and exchange-traded funds with assets under management amounting to $395-billion had returns that were 95 per cent or more correlated with the S&P/TSX Composite over the 12 months ended Dec. 31, 2023. This included funds that explicitly say they track the index.
Analysts at ATB Securities Inc. who track the additions and deletions for their clients estimate index-related demand accounts for an average of 5.5 per cent of the float of a S&P/TSX Composite member company