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Lululemon: Not right for Canada's benchmark index

A Lululemon outlet in B.C.

RICHARD LAM/The Canadian Press

Lululemon Athletica Inc. is a hot stock, Goldman Sachs loves it, it has a bigger market capitalization than Research In Motion Ltd. and its yoga-wear purports to make every bum look great. But for index investors who think they're getting some exposure to this Canadian success story through the S&P/TSX composite index, here's the disappointing news: They're not.

Even though Lululemon is headquartered in Vancouver, it is incorporated in Delaware – and rules are such that companies listed on Canada's benchmark index must be incorporated in Canada.

Too bad. The stock is up 31 per cent in 2012 alone, and has tripled in value since its debut in 2007 – blowing past the benchmark index over the same respective periods. Inclusion into the index would have helped it, no doubt. It would have also broadened Lululemon's investor base. The stock is a member of the Nasdaq composite index. Calls made to Lululemon were not returned.

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But what's really puzzling here is that the S&P/TSX composite index is desperate for greater diversification, and Lululemon could provide some. Right now, consumer discretionary stocks (where the yoga-wear company would likely reside) have a mere 4 per cent weighting within the index – next to 29 per cent for financials, 27 per cent for energy stocks and 22 per cent for materials.

Let's put it this way: If Lululemon entered the index as a consumer discretionary stock, the market capitalization of the consumer discretionary subindex would instantly jump 12 per cent. This is a good thing for investors who want more diversification in the index funds.

So how rare is it for a Canadian company to be incorporated in the United States? Rare – but there are other cases, Standard & Poor's tells me. Meanwhile, companies that are incorporated in Canada but have operations abroad are fine for inclusion into the benchmark index – which of course granted admission to Sino-Forest Corp.

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About the Author
Investing Reporter

David Berman has been writing about business and investing since 1995. He has written for a number of magazines, including Canadian Business and MoneySense. He worked at the Financial Post as an investing writer and daily columnist before moving to the Globe and Mail in 2008. More

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