Investors with funds tracking the S&P/TSX Composite Index have some exposure to all of the benchmark’s 240 members, but in a sense, this is misleading. Because index returns are market capitalization weighted – stock price changes in Royal Bank of Canada, for example, affect index returns 100 times more than equal moves in the shares of Cronos Group Inc. – benchmark performance has become increasingly dominated by the 10 largest stocks.
The 10 largest stocks in the S&P/TSX Composite (Royal Bank, Shopify Inc., Toronto-Dominion Bank, Brookfield Asset Management Inc., Bank of Nova Scotia, Canadian National Railway Co., Enbridge Inc., Bank of Montreal, Canadian Pacific Railway Ltd. and Thomson Reuters Corp. – in descending order) now make up 37 per cent of total market capitalization.
The last time the index was this concentrated was the end of the technology bubble, when Nortel Networks helped dominate benchmark performance, noted Scotiabank strategist Hugo Ste-Marie in a research report Wednesday. As things stand, index investors have an automatic 20 per cent allocation to the five biggest bank stocks.
In many countries, this would represent a large overweight position relative to national benchmarks, and a significant sector bet. Bank stocks, for instance, make up only 4.1 per cent of the S&P 500.
The U.S. equity market as a whole, however, offers no respite from market concentration. The five largest technology stocks make up between 20 per cent and 25 per cent of the S&P 500.
Domestically, the stability and dominance of the major banks means that index investors are likely not taking inappropriate risk. It also remains the case that the index outperforms the vast majority of actively managed funds, whether it’s concentrated or not.
Still, domestic index investors remain vulnerable to sector and stock specific downdrafts; not just banks, but also the railways and Shopify Inc. The index may have well over 200 constituents, but only a chosen few really matter to returns.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
Pfizer Inc. (PFE-N) and Sabre Corp. (SABR-Q) There’s a lot of uncertainty ahead in 2022. But there are also opportunities for informed investors to buy stocks with the potential to outperform the broad market, whatever it does. Gordon Pape thinks these are two to consider. The first is for conservative investors, the second for those who are prepared to accept more risk for a high potential return - maybe even a doubling of your invested capital.
The Rundown
A scorecard of Gordon Pape’s 2021 market predictions - and what he’s expecting in 2022
A year ago, Gordon Pape wrote that he expected 2021 to be a modestly profitable year for stocks, and a bad one for bonds. He was right on the latter but not bullish enough on the former. What about 2022? Here’s his fearless forecasts, and how investors should position their portfolios.
Investors must be ready to change their minds in 2022
The best advice for investors in 2022? Be prepared to change your mind, writes Ian McGugan. In the past, periods of exuberant share prices or rising inflation always reverted to more humdrum levels, often because central banks hiked interest rates to force them back into line. But getting back to normality will be particularly challenging this time around because it is not at all clear how the coronavirus will evolve in 2022 or how policy makers should proceed in restoring the usual order of things.
Also see:
Rob Carrick’s six ideas for tuning up a portfolio to thrive in a challenging 2022
David Rosenberg on what investors should expect in 2022
BMO’s Brian Belski on why the bull market will be alive and well in 2022
Citigroup sees S&P 500 breaching 5,000-mark by year-end on robust earnings
ETFs that track carbon prices are offering tantalizing returns
Betting on carbon-dioxide emissions paid off handsomely in 2021, as the price of carbon soared in some parts of the world amid renewed efforts to limit climate change. But if you missed out on the gains of this new asset class, don’t worry: The case for adding carbon to portfolios remains strong, especially for environmentally conscious investors. And as David Berman tell us, several exchange-traded funds have sprung up within the past couple of years to satisfy investor demand.
The best REITs to use as an inflation hedge for 2022
According to Hazelview Investment’s 2022 Global Public Real Estate Outlook Report, publicly traded global REITs are well positioned to serve as an inflation hedging asset class. The report suggests that while real estate investment trusts are currently trading at a discount compared with global equities on an historical basis, the potential for sustained inflation will drive earnings growth higher and ultimately real estate valuations. It estimates annual total return for this asset class at between 12 per cent and 15 per cent. For those looking for some REITs to add to portfolios, Gordon Pape has some suggestions.
Canadian depositary receipts are a hit. Are more coming?
Investors have embraced Canadian depositary receipts linked to U.S. stocks since Canadian Imperial Bank of Commerce launched the new securities in July, and their success could pave the way for access to more U.S. companies. David Berman reports.
How SPACs can tone down your risk in these frothy markets
Special-purpose acquisition companies (SPACs) list on stock markets to raise capital and acquire private companies. The acquisitions made by SPACs since 2020 are mostly underperforming, according to studies. But buying and selling pre-acquisition SPACs can be a virtually riskless way to earn positive returns in bear and bull markets. Larry MacDonald explains.
A finance professor’s advice on investing in bitcoin: Just say no
With inflation reaching 30-plus-year highs, investors are looking to alternative investments to protect their capital from its erosion in case inflation is not “transitory,” but “permanent.” One popular alternative in recent years that has gained some currency is digital coins, such as bitcoin. But be warned: Dr. George Athanassakos, a professor of finance who holds the Ben Graham Chair in Value Investing at the Ivey Business School, University of Western Ontario, thinks it’s little more than a fad.
Also see: Goldman Sachs says bitcoin will compete with gold as ‘store of value’
Asset bubbles? Champagne outfizzes Big Tech and bitcoin in 2021
You might be tempted to pop corks if you’ve invested in vintage Champagne this year – the most coveted bottles have outperformed all major financial market assets, from Big Tech to bitcoin. Marc Jones of Reuters reports.
Record global IPO binge in 2021 leaves investors hung over
Initial public offerings (IPOs) around the world raised a record $594 billion in 2021, riding the coattails of stock market rallies, yet often disappointing investors with their subsequent stock performance. Echo Wang and Abhinav Ramnarayan of Reuters report.
ETFs for investors who want preferred shares, but understand how tricky they are
Rob Carrick has a thought for investors who value the reliable dividend income produced by preferred shares but dread their unpredictability: Try an actively managed preferred share exchange-traded fund. In fact, prefs may be one of a select few asset classes where there’s an argument for investors to consider active management over passive indexing, he says.
Others (for subscribers)
Seven TSX stocks named to RBC’s ‘Top 30 Global Ideas for 2022′
From the best to the worst, here’s how every TSX Composite stock performed in 2021
Analysts’ forecast returns and recommendations for all stocks in the S&P/TSX Composite Index
Test your investing smarts with our New Year’s quiz
Attention, nervous investors. Five-year GIC rates are starting to pop
John Heinzl’s model dividend growth portfolio as of Dec. 31, 2021
Wednesday’s analyst upgrades and downgrades
Tuesday’s analyst upgrades and downgrades
Wednesday’s Insider Report: CEO is a buyer of this high-flying REIT with a unanimous buy recommendation
Tuesday’s Insider Report: Chair is a buyer of this tech stock that’s rallied nearly 500% since mid-2020
Globe Advisor
How top advisors are positioning clients’ portfolios for 2022
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What’s up in the days ahead
Jennifer Dowty speaks to Benjamin Tal, deputy chief economist of CIBC World Markets, for his take on what’s in store for investors this coming year.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff