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A sign for Bay Street in the Toronto Financial District is displayed in Toronto. (Brent Lewin/Bloomberg)
A sign for Bay Street in the Toronto Financial District is displayed in Toronto. (Brent Lewin/Bloomberg)

exchange-traded funds

Watch for changes to Canada's biggest ETF as classification changes take hold Add to ...

Canada’s biggest exchange-traded fund will be shaken up should a new industry classification result in companies such as Bombardier Inc. and BlackBerry Ltd. being booted out of an index tracking the country’s 60 biggest stocks.

That’s because the iShares S&P/TSX 60 Index ETF, Canada’s largest with a market capitalization of $12.8-billion, lists no real estate stocks among its 60 members - a reflection of its benchmark, the S&P/TSX 60.

Index overseers S&P and MSCI are set to add real estate to the 10 current industries in the Global Industry Classification Standard, or GICS, with the process beginning Aug. 31 and rolling out over the next few weeks. This means the benchmark, and by extension the ETF, may see an overhaul to include the new industry when S&P announces the results of its quarterly review on Sept. 9.

“If there were no changes in our review, we would create an 11th sector that would have no constituents in the 60,” Tony North, director of Canadian index operations at S&P, said in a phone interview from Toronto. “If we choose to put a real estate company into the 60, we have to take somebody else out as it’s a fixed constituency.”

The five smallest companies in the S&P/TSX 60, and most susceptible to exclusion, are Eldorado Gold Corp., Cameco Corp., Bombardier, Yamana Gold Inc. and BlackBerry, with an average market capitalization of about $4.6-billion. On the other hand, the largest real estate firms in the S&P/TSX include Brookfield Property Partners, at $21.6-billion, and RioCan REIT, at $8.78-billion. They were included in a list of candidates for additions and deletions in a report from ITG Canada Corp.

“TSX 60 additions and deletions are notorious for driving volatility,” Doug Clark, managing director at ITG Canada, said in the May report after an S&P advisory panel meeting discussing the changes.

Patrick Ghoche, head of investor relations for Bombardier, said the jet manufacturer is a very liquid stock and that its market value has risen almost 10 per cent in two weeks, closing in on $5-billion. A spokeswoman for BlackBerry didn’t immediately return a request for comment.

The S&P/TSX 60 is considered a subset of the larger Canadian equity benchmark S&P/TSX Composite Index of 240 listings. According to documents on the S&P website, the index provider generally populates the S&P/TSX 60 with the 60 largest and most liquid stocks in the S&P/TSX, although there is some leeway for “sector balance” -- such as in this case.

“The process of how they choose them will be interesting,” said Eric Balchunas, an ETF analyst with Bloomberg Intelligence, in a phone interview. “If anything, they should have been added a while ago.”

REITs have been rising for several years as investors hunt for yield in a low-interest rate environment, he said. Balchunas figures the S&P/TSX 60 will see one or two stocks swapped out, given real estate companies have about a 3-per-cent weighting in the broader S&P/TSX.

“From an investor perspective, they’ll get a bit more yield, plus a touch more diversification in a sector that wasn’t represented before,” Balchunas said. “And it should mean a little more money into the one or two stocks that get picked.”

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