New rules are in the works for Canada's benchmark stock index that could benefit dozens of companies listed on domestic and U.S. exchanges and open the door to index membership for Shopify Inc. and Brookfield Infrastructure Partners LP.
Right now, a company only gets invited into the flagship S&P/TSX composite index if the volume of trading in its stock exceeds predetermined thresholds on Canadian exchanges. The team that runs that benchmark, S&P Dow Jones Indices LLC, recently published a proposal that would make it easier for dual-listed companies to meet the threshold by counting buying and selling on U.S. exchanges, in addition to trading on domestic markets.
Investors and corporate executives have until June 9 to comment on the proposal.
Based on the timeline for past changes to its methodology, if S&P Dow Jones decides to adopt a new standard, the rules could be in place as early as September.
There are 223 securities listed on both domestic markets such as the Toronto Stock Exchange and U.S. platforms such as the New York Stock Exchange and Nasdaq. While many of these stocks are already in a Canadian index, a recent report from Scotia Capital Inc. found 68 securities "could see an immediate benefit from adding U.S. volume" to trading on Canadian exchanges.
Scotia crunched the numbers and found that if the rules are changed, dual-listed companies Shopify and Brookfield Infrastructure would immediately qualify for inclusion in the S&P/TSX composite.
Scotia's portfolio trading team, led by Andrew Moffatt, said Shopify's recent stock sales have translated into increased trading on Canadian exchanges. As a result, even without a change in the rules, the software company is likely join the S&P/TSX composite this June. Scotia estimates passive investors such as index funds will buy approximately 5 per cent of Shopify's stock, or 5.4 million shares, if the company joins the S&P/TSX composite.
Ottawa-based Shopify went public in 2015, listing on the TSX and NYSE, and the company sold 5.5 million shares and raised $500-million (U.S.) on Thursday in a transaction led by Morgan Stanley, Credit Suisse and CIBC World Markets Inc.
If Brookfield Infrastructure, a global company with a $14.1-billion (Canadian) market capitalization and a significant U.S. investor following, joins the Canadian benchmark, Scotia projects index funds would need to snap up approximately 13 million of the company's units. Brookfield Infrastructure is also listed on the TSX and NYSE.
Over the long term, making it easier for companies to join the benchmark Canadian index would give investors exposure to a wider variety of securities over time, which should lessen the risks that come with being concentrated in a domestic equity market dominated by resource companies and five banks. Over the past five years, dual-listed Canadian companies in sectors such as pharmaceuticals, food, technology, and commercial and professional services have seen an increasing amount of their stock trade on U.S. exchanges, rather than domestic markets.
The most dramatic split is in the life-sciences sector, where massive trading in stocks such as NYSE and TSX-listed drug company Valeant Pharmaceuticals International Inc., mean volumes on U.S. exchanges are 11.8 times the levels seen in Canada. As part of a report that supported the S&P Dow Jones index proposal, Mr. Moffatt said, "This suggests to us that some of the price discovery process is taking place south of the border, and should not be ignored when determining liquidity metrics."