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The big banks remain the predominant force in the Canadian stock market, the foundation of a sector accounting for nearly one-third of the benchmark index’s total market value.Cole Burston/The Canadian Press

The U.S. stock market has historically offered up plenty to fuel a Canadian inferiority complex.

Compared with the former’s colossal size and variety, the Toronto Stock Exchange has long been perceived as a marginal play on natural resources.

But the TSX has become considerably more well rounded over the past few years, at the same time as the U.S. market has become more concentrated, especially in the tech sector.

“Simply put, the S&P 500 doesn’t seem that much better diversified than the S&P/TSX if one simply considers [sector composition],” Ian de Verteuil, head of portfolio strategy at CIBC World Markets, wrote in a recent report.

Investors making large bets on either market may need to revisit some long-held assumptions.

For years, the U.S. stock market served many global investors as a one-stop shop – a diversified, global portfolio in a single index.

No other exchange in the world has anything resembling the abundance of U.S. listings in health care, information technology and consumer sectors, which are teeming with dominant global brands.

But the rise of Big Tech as a singular worldwide investment phenomenon – one accelerated by the social isolation of the pandemic – has made the S&P 500 more dependent on a single sector than ever before.

The U.S. IT sector now makes up almost 30 per cent of total market capitalization, and that doesn’t even include companies such as Alphabet Inc. GOOGL-Q or Meta Platforms Inc. FB-Q (formerly known as Facebook), which were reclassified a few years ago to the communications sector, or names such as Tesla Inc. TSLA-Q or Amazon.com Inc. AMZN-Q, which now reside in consumer discretionary.

“If we added back Amazon’s current market capitalization to the IT sector, one would conclude that the S&P 500 is more dependent on one sector than the S&P/TSX!” Mr. de Verteuil wrote.

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Predictability is in short supply in today’s market

The big banks remain the predominant force in the Canadian stock market, the foundation of a sector accounting for nearly one-third of the benchmark index’s total market value.

Aside from financials, the Canadian market has become much more balanced. A decade ago, the materials and energy sectors accounted for a weighting of nearly 50 per cent. That heavy resource tilt has been reduced by half, in part because of a decline of the global commodity complex over the past several years.

Industrials and technology, meanwhile, have risen to become legitimate second-tier sectors, with year-end weightings of 13.2 per cent and 8.3 per cent, respectively.

In fact, before the sell-off in tech stocks took hold through the latter half of last year, and into 2022 with rising inflation and interest rates bearing on investor sentiment, Canada’s emerging IT sector weighting rose as high as 12.4 per cent. That compares with just 1.2 per cent 10 years ago.

Most of that story revolves around Shopify Inc. SHOP-T, which became a global powerhouse in e-commerce over the past two years. Before succumbing to the tech-stock decline itself, Shopify’s market capitalization rose above $250-billion at its peak last August.

But several other earlier-stage tech plays have diversified the TSX in number, if not yet in size. The S&P/TSX Composite Index added six new IT names last year, including Telus International Inc. TIXT-T, Docebo Inc. DCBO-T, Nuvei Corp. NVEI-T and Dye & Durham Ltd. DND-T

While several of those stocks did not perform well through the end of last year, more tech listings are likely on the way, ATB Capital Markets analyst Martin Toner said in a note.

“We view the high number of recent technology IPOs as a fertile ground for future additions to the IT sector of the TSX Composite Index,” Mr. Toner wrote.

The most glaring shortcoming of the TSX remains the consumer sectors, which account for 8.2 per cent of the benchmark index – a paltry weighting compared with consumer spending’s share of the Canadian economy.

It’s worth noting, however, that the addition of Shopify to the consumer discretionary sector would change those numbers considerably, in the same way that Amazon is classified in the U.S. index.

“How Amazon ends up being a consumer discretionary stock but Shopify is an IT stock, I just scratch my head,” Mr. de Verteuil said in an interview.

“We should not lose any sight of the fact that the guys who determine the sector categories are people in the U.S., who don’t want the U.S. to look like a concentrated market.”

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