Software company Shopify Inc. and Brookfield Infrastructure Partners LP are set to join the big club of corporate Canada – the S&P/TSX 60 Index – while Hudson’s Bay Co. managed to keep its place in the broader index of Canadian equities.
S&P Dow Jones Indices, manager of those two major Canadian stock indexes, announced its quarterly changes to their memberships late Friday. The additions and deletions will go into effect on March 18, before trading opens.
With the growth of index funds and other passive investing strategies, whether a stock is in or out of a major index can have a meaningful impact on share prices, because many fund managers who track an index need to hold shares in the companies.
The composite index, with 239 stocks, is the broader measure of the market and is tracked by more funds. The 60 is a more elite group, but it’s not the biggest 60 Canadian public companies – its industry composition needs to be similar to the composite. Also, S&P uses “float,” the value of shares that aren’t held by insiders and therefore trade frequently and are easily available to the public, to judge whether a company should be included.
In addition, the S&P Index Committee has discretion in making changes beyond its set formulas.
To make room for Shopify and Brookfield Infrastructure Partners in the 60, S&P dropped ARC Resources Ltd. and Crescent Point Energy Corp., two energy companies whose shares have tumbled as the oil industry has hit a rough patch.
Two cannabis companies, CannTrust Holdings Inc. and Hexo Corp., are among the eight new members of the Composite. Other additions: Ag Growth International Inc.; Cargojet Inc.; Dream Industrial REIT; Ero Copper Corp.; NorthWest Healthcare Properties REIT; and Summit Industrial Income REIT.
Just three companies were dropped: Computer Modelling Group Ltd., Kinder Morgan Canada Limited and Lucara Diamond Corp.
In a recent study of potential additions and deletions to the index, Chris Murray, the managing director of institutional research at AltaCorp Capital, flagged HBC as a possible deletion. HBC shares have fallen as the company has posted disappointing results.
While HBC’s market capitalization – common shares outstanding times share price – is still about $1.5-billion, only about a third of HBC’s 235 million shares are in the float. So the company’s “float-adjusted market capitalization” is about $500-million.
To stay in the composite, a company’s float-adjusted market capitalization must be 0.025 per cent, or 2.5 hundredths of a percentage point, of the total value of the index. Mr. Murray says recent HBC trades put it below that threshold.
S&P generally does not comment on why specific companies are added or deleted from an index.
All eight of the additions announced Friday were on Mr. Murray’s list. He’d also flagged Green Organic Dutchman Holdings and North American Palladium as possible additions.
Mr. Murray correctly identified Lucara Diamond and Computer Modelling as deletions. S&P did not delete Sierra Wireless or Uni-Select, two others on Mr. Murray’s list.
For this quarter, S&P quietly made an important methodology change that could expand membership in the composite over time. Until this quarter, a company’s float-adjusted market capitalization needed to be at least 0.05 per cent, or five hundredths of a percentage point. The new minimum to get into the composite index is 0.04 per cent, or four hundredths of a percentage point, effectively cutting the minimum size of float-adjusted market cap for inclusion by more than $200-million, to just more than $900-million.