S&P Dow Jones Indices announced late Friday that it is dropping two prominent technology companies from the S&P/TSX Composite Index, the broadest measure of the Canadian market.
No changes are being made to the S&P/TSX 60, a selection of most of the largest companies in the composite.
The changes will be effective at the open of markets on Dec. 18.
S&P Dow Jones uses “float” – the value of shares that aren’t held by insiders and that therefore trade frequently and are easily available to the public – to judge whether a company should be included in its indexes. The index provider does not release its proprietary float calculations.
To stay in the composite, a company’s float must not drop below 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index.
Dye & Durham’s shares are down more than 15 per cent this year, while Telus International has dropped more than 60 per cent, according to S&P Global Market Intelligence. Park Lawn has fallen more than 35 per cent, and Endeavour more than 30 per cent.
To get into the composite, a company’s float-adjusted market capitalization must be 0.04 per cent, or four-hundredths of a percentage point, of the total value of the index. Also, companies must be listed on the TSX for at least six full calendar months as of the month-end prior to the quarterly review, meaning recent initial public offerings will have to wait a bit longer to be considered for inclusion.
With the growth of index funds and other passive investing strategies, whether a stock is part of a major index can have a meaningful effect on share prices. Fund managers who track an index need to hold shares in the underlying companies. Canadian stocks added to the composite – which has about 220 to 250 members, depending on the quarter – can see price bumps before and after inclusion. Similarly, companies removed from the index lose a source of demand for their shares.
Research by Morningstar Direct for The Globe and Mail found Canadian mutual funds and exchange-traded funds with assets under management amounting to $252-billion had returns that were 95 per cent or more correlated with the S&P/TSX Composite over the 12 months ended Dec. 31, 2022. This included funds that explicitly say they track the index.