The Canadian stock market is what it is – old-school sectors, such as financials and resources, rule, while new economy sectors, like health care and tech, are nearly insignificant.
This is what passes for big change in the S&P/TSX Composite Index – industrials have edged past materials to become the third-largest sector, after financials and energy. Industrials stood at 11.2 per cent in mid-May, and materials at 9.9 per cent. Add up financials, energy and the materials sector and you still get 60 per cent of the index. Health care was at 2.2 per cent, tech at 4.8 per cent.
The S&P 500 is the complete opposite of the S&P/TSX, and the trend is becoming more pronounced over time. Data collected by Wells Fargo & Co. show that tech accounted for 13.3 per cent of the S&P 500 in 1997, 18.6 per cent in 2013 and 20.1 per cent last year. Health care has gone from 11 per cent in 1997 to 13 per cent in 2013 and 15.5 per cent in 2018.
Financials were 15 per cent of the S&P 500 in 1997, 16.2 per cent in 2013 and 13.3 per cent last year. Energy has declined to 5.3 per cent from 9 per cent from 1997 to 2018.
The Wells Fargo numbers show a similar, but not as dramatic, pattern for the MSCI Europe Australasia Far East (EAFE) Index. Tech has risen to 6 per cent from 4.9 per cent, while health care has risen to 11.2 per cent from 8 per cent. Financials exposure has declined to 19.5 per cent from 26.6 per cent, while energy has edged up a bit to just under 6 per cent.
The S&P/TSX Composite has become less weighted to financials and resource stocks, but not by much. Back in 2013, these sectors accounted for 70 per cent of the market and health care and tech together were about 5 per cent. Our market is not keeping up with what’s happening globally.
The S&P 500 has outperformed the S&P/TSX 15.3 per cent (in U.S. dollars) to 9.1 per cent on an average annual total return basis over the 10 years to April 30. The EAFE index made 9.4 per cent (in local currencies).
The financial sector is a wealth-building pillar of the Canadian stock market and resource stocks have had some great runs in the past. But you’re starving your portfolio of two of the most dynamic sectors in today’s economy – tech and health care – if you don’t diversify globally. Global indexes offer more and more exposure to these sectors, while our index mostly stays the same.
