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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.

Top 10 companies in the S&P/TSX Composite Index

CompanyTickerMkt. Cap. ($)Index Weighting
ROYAL BANK OF CANADARY-T195,035,192,1815.7%
SHOPIFY INCSHOP-T194,921,524,3985.7%
TORONTO-DOMINION BANKTD-T181,209,991,4435.3%
BROOKFIELD ASSET MGT.BAM-A-T120,694,898,9113.5%
BANK OF NOVA SCOTIABNS-T110,459,537,0563.2%
CANADIAN NATL RAILWAYCNR-T109,203,832,8623.2%
ENBRIDGE INCENB-T100,366,182,4983.0%
BANK OF MONTREALBMO-T91,449,952,8532.7%
CANADIAN PACIFIC RAILWAYCP-T87,210,964,4432.6%
THOMSON REUTERS CORPTRI-T71,668,479,1152.1%

Source: Bloomberg; data as of Jan. 5 midday

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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Compiled by Globe Investor Staff