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It’s a mark of success that the S&P/TSX Composite Index is no longer dominated by a sectoral Big Three.

Financials, energy and materials combined used to account for two-thirds of the index. Financials still rule the index, with a weighting of about one-third. But energy and materials now account for about 12.7 and 11.3 per cent, respectively. Industrials and information technology are right in that second tier as well, with weightings of 12.3 and almost 11 per cent.

The last couple of years have rounded out the S&P/TSX Composite nicely. In fact, it’s starting to look a little like the S&P 500 in terms of diversification. One or two dominant sectors, four or so secondary sectors and then a bunch of smaller sectors with a weighting of roughly 5 per cent or more.

For index investors using exchange-traded funds or mutual funds, this shift in the composition of the S&P/TSX means a better diversified core for your portfolio’s stock market exposure. Cyclical commodities will still drive the index to some extent, but not nearly as much as in previous eras. We may lose some upside for the index in a hot market for commodities, but we make up for that with less exposure to commodity busts and more exposure to attractive sectors such as technology.

As much as the diversification of the S&P/TSX Composite has improved, index investors still benefit hugely from exposure to stock markets in the United States and elsewhere. The S&P 500 has a weighting of almost 30 per cent in tech, and 13 per cent in health care. The S&P/TSX weighting in health care is still a puny 0.8 per cent. The S&P 500 weighting for consumer discretionary stocks is 12.5 per cent, compared with 3.5 per cent for the S&P/TSX.

One sector where the two markets are aligned is real estate – the S&P 500 is at 2.7 per cent and the S&P/TSX is just above 3 per cent.

Index investors still face one diversification challenge in the Canadian market. Financials dominate not only the stock market, but also the corporate bond and preferred share markets. Financials are a pillar of the Canadian market; harnessing a big chunk of your portfolio to one sector could be risky.

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