Skip to main content
Complete Olympic Games coverage at your fingertips
Your inside track on the Olympic Games
Enjoy unlimited digital access
$1.99
per week for 24 weeks
Complete Olympic Games coverage at your fingertips
Your inside track onthe Olympics Games
$1.99
per week
for 24 weeks
// //

Trican Well Service employees work around liquid nitrogen storage tanks at a hydraulic fracturing operation near Bowden, Alta., Feb. 14, 2012.

Jeff McIntosh/The Globe and Mail

When one of your stocks is added to a benchmark index, you might get a thrill: Trading volumes spike as index funds catch up with the changes, and share prices tend to rally on the spike in demand.

Sadly, the thrill doesn't last.

Three names were added to the S&P/TSX composite index on Monday – Brookfield Infrastructure Partners LP, Spin Master Corp. and Trican Well Service Ltd. – and all three saw trading volumes spike on Friday, the last day of trading before the changes kicked in.

Story continues below advertisement

In the case of Brookfield Infrastructure, 18.4 million units traded hands in Toronto (the units also trade in New York), or about 10 times the previous day's volume. Spin Master (which also trades in New York and Toronto) also saw a tenfold increase, while Trican saw a threefold increase.

Any mutual fund or exchange-traded fund that tracks the benchmark index is now a shareholder in these three names.

Share prices followed these sudden upswings in trading volume. Most notably, Brookfield's units shot up more than 5 per cent in the closing minutes of trading on Friday.

Spin Master's units rose 1.3 per cent, after upbeat comments from its chief financial officer: "Our inclusion in the index will contribute to increasing Spin Master's visibility in the investment community and further broaden our shareholder base," Mark Segal said in a statement.

Lastly, while Trican shares fell 1.3 per cent on Friday, they had risen about 10 per cent over the previous three trading days.

None of this is unusual. Nor is the fact that all three stocks fell on Monday, by as much as 1.7 per cent in the case of Spin Master.

The impact of index inclusion has been studied far and wide, and a 2004 study by McKinsey & Co. offers a particularly clear conclusion about the investing merits: Yes, shares can rise when a stock is added to an index, but the positive effect of inclusion is short-lived.

Story continues below advertisement

The consultancy looked at the 103 additions to the S&P 500 between 1999 and 2004. It found that while share prices tended to perform well, on average, after the stocks have been tapped for inclusion into the S&P 500, the positive returns disappeared within about 20 days.

"In the end, there was no permanent price premium for new entrants to the S&P 500," McKinsey said in its report. "This underlines the fact that the value of a stock is ultimately determined by its cash-flow potential, unrelated to membership in a major equity index."

Recent changes to the way that S&P Dow Jones Indices calculates which companies deserve membership in the S&P/TSX composite index may be complicating things.

To make the index, companies must meet certain stock price, market capitalization and liquidity thresholds. As of August, though, the liquidity threshold – essentially how many shares trade hands – has been relaxed. Now, companies that are listed in Canada and the United States can include shares traded on U.S. exchanges in their liquidity calculations.

This may have helped Spin Master, whose shares trade in New York as well as Toronto. And it appears to have helped Brookfield Infrastructure as well. Not only does the company's units trade in New York and Toronto, but it announced a $1-billion (U.S.) equity offering last week that increased its unit count by 24 million.

"In our view, the most notable aspect of the timing with Brookfield Infrastructure Partners' offering is [that its] closing roughly coincides with the S&P/TSX composite index inclusion," Andrew Kuske, an analyst at Credit Suisse, said in a note.

Story continues below advertisement

But is Mr. Kuske particularly bullish? Not really. He saw the units as a "tactical trade" in June, when Brookfield Infrastructure's membership into the composite index looked likely, but hadn't been announced. Now, he has a lukewarm "neutral" rating on the units, based on valuation.

There may be good reasons to invest in the S&P/TSX composite index's three new members. But for long-term investors, index inclusion isn't one of them.

While some industry watchers say yes, there’s growing evidence that investors still want that human touch – even while adopting more digital tools.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Tickers mentioned in this story
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies