Derek, which stock market index should I follow?
When it comes to watching the stock market it’s important to understand the difference and meaning to those numbers reported on the evening news. Not all stock indices are created the same and being aware of what the information means and how it relates to you can be helpful.
When it relates to investing, an index is essentially a collection of securities representing a specific market, or a segment within it. Generally speaking an index is intended to give investors some insight into how a stock market is performing. Think of it as an imaginary portfolio created to give you a benchmark for how your actual portfolio may be performing.
One of the most popular indices that Canadian investors discuss is the S&P TSX Composite, or more commonly known as “the TSX”. The TSX is the main index representing the Canadian stock market. It is comprised of around 250 different companies that trade on the Toronto Stock Exchange (TSE).
The TSX is currently weighted around 30% in financial companies, around 20% in energy companies, and around 10% in materials/mining companies. Said another way, over 60% of the index is based on the performance of just three sectors. The five largest companies in the index, and therefore ones with the most clout, include Royal Bank, TD Bank, Bank of Nova Scotia, Enbridge and Canadian National Railway. These five companies make up nearly 25% of the entire index. So the next time you’re looking at how the TSX did, you can assume these three sectors and five companies played a big role in the performance that day.
Other indexes to consider in Canada include the S&P TSX 60 or “TSX 60” and the S&P TSX Venture Composite, or “the Venture”. The TSX 60 holds the 60 largest companies listed on the TSE, while on the opposite spectrum the Venture includes roughly 500 companies that are too small to be included in the TSX.
The biggest indices are south of the border and carry much more media attention than our local Canadian names. There are three that are often discussed, but what they track is vastly different when compared to each other. These include the Dow Jones Industrial Average (Dow), the S&P 500, and the NASDAQ.
The Dow is often referenced first when looking at the US markets. It is one of the oldest created indices going all the way back to 1885. The Dow only tracks 30 different companies representing a wide swath of different industries. The biggest weightings include Goldman Sachs, 3M, Boeing, UnitedHealth Group, and IBM. This doesn’t mean these are the largest companies in the United States, just the largest weightings in the index. In fact when it comes to the rankings in the Dow, the companies with the highest share price are given more weight than those with smaller share prices.
Compared to the Dow, the S&P 500 is a much broader index that as the name suggests tracks 500 different companies in the United States. This index is considered to be much better gauge of the health of the US economy as it includes many more companies than the Dow. The top names in this index include Apple, Microsoft, Amazon, Facebook, and Exxon. Since this is a much larger index, these top holdings only make up around 11% of the total index.
Lastly, there is the index which tracks the National Association of Securities Dealers Automated Quotations (NASDAQ) which is a stock exchange of over 3,000 different companies. The NASDAQ Composite is heavily weighted towards technology companies. The top holdings include Apple, Alphabet (Google), Microsoft, Amazon and Facebook.
So as an investor, when you’re checking the indexes to see how the market does, it’s important to consider your own portfolio and how it compares. If you’re heavy into technology, you may consider putting more focus on the NASDAQ. If you’re mostly a Canadian investor the TSX may be all you wish to monitor. Whatever the case, the indexes are there to be used as a benchmark and choosing the right one may help guide your investment decisions accordingly.
Senior Wealth Advisor
ScotiaMcLeod®, a division of Scotia Capital Inc.
® Registered trademark of The Bank of Nova Scotia, used under licence. ™ Trademark of The Bank of Nova Scotia, used under licence. Scotia Capital Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. For more information visit www.scotiawealthmanagement.com. This article is intended as a general source of information and should not be considered as personal investment or tax advice. It is recommended that individuals consult with their Wealth Advisor before acting on any information contained in this article.