There will likely be some increased institutional investor activity in a handful of TSX-listed stocks this week due to the latest critical index constituent revisions to the S&P/TSX Canadian Indices announced Friday last week.
Stocks of note include licensed marijuana producer Aphria Inc. (TSX:APH), recently listed premium brand designer Canada Goose Holdings Inc. (TSX:GOOS)(NYSE:GOOS), tech growth stock Shopify Inc. (TSX:SHOP)(NYSE:SHOP), resurgent tech giant BlackBerry Ltd. (TSX:BB)(NYSE:BB), and uranium producer Cameco Corp. (TSX:CCO)(NYSE:CCJ).
The world’s major index provider, S&P Dow Jones Indices, a division of media giant S&P Global is introducing some changes to the constitution of 16 S&P/TSX Canadian Indices effective Monday, December 18, 2017.
The S&P/TSX Composite Index and associated indices are used by Canadian investors to measure and trade the markets.
Several index-following mutual funds and exchange-traded funds (ETFs) do sometimes try to fully replicate an index, if the trading costs are reasonable and stock liquidity allows. This is almost a must for portfolios employing the full passive investment-management strategy.
Hence institutional money managers with a mandate to fully mimic a given S&P/TSX main or sub-index may be busy trying to reconstitute their portfolios this week through buying the newly added stocks and offloading deleted ones.
Even those money managers who employ active portfolio-management strategies are looking closely for any changes to index compositions.
Every investment strategy has to be evaluated at the end of a given period, be it a quarter, a year or a decade. Local investment managers critically watch for any changes to S&P/TSX Canadian Indices, as these indices are the portfolio performance benchmarks and standards against which strategy success or failure can be measured.
There will likely be some increased volatility in the stocks affected and some valuation improvements in newly added stocks, especially for those fresh stocks added to the main index as well as to more than one sub-index as their trading activity increases over the next few weeks.
Index changes of note
The main S&P/TSX Composite Index will see the addition of Aphria Inc., Canada Goose Holdings Inc., Chorus Aviation Inc., Killam Apartment REIT, and Kinder Morgan Canada Limited.
Deletions to the main index will be limited to energy play Bonavista Energy Corp., consumer discretionary stock DHX Media Ltd., and Just Energy Group Inc., a utilities investment option.
The changes to the main Canadian index will also affect several related indices, and the stocks added to or removed from the main index will also be added to or removed from the Global Industry Classification Standard (GICS) sector index too — there are many ripple effects!
Rising star Lithium Americas Corp. will be added to the S&P/TSX Global Mining Index and the related Base Metals Index too, together with Sherritt International Corporation.
Recently risen uranium giant Cameco Corp. will be side by side with Shopify Inc., Sierra Wireless Inc., marijuana leader Canopy Growth Corp., and the resurrecting Valeant Pharmaceuticals Intl Inc., among other volatile stocks as new additions to the S&P/TSX Composite High Beta Index.
The S&P/TSX Composite Low Volatility Index will add recently rebounding Cominar REIT, among other five stocks, while Brookfield Property Partners L.P., Cineplex Inc. and four other stocks will be deleted.
BlackBerry Ltd. will be added to the S&P/TSX Composite Quality Index, and the S&P/TSX 60 Carbon Efficient Select Index.
Volatility may be minimal though
It’s possible that several other money managers may decide not to reconstitute their portfolio holdings if the transaction costs aren’t that reasonable, of if they feel that the indices’ reconstitution will cause no significant characteristic differences to indices, or they already own closely related stocks with almost identical price behaviour.
This is especially the most probable case with enhanced investment strategies which try to but do not perfectly mimic the index.
However, the market may witness marginal price increases on new stocks added to the indices and marginal price declines on stocks totally deleted from the indices altogether (those stocks which have been dropped from an index, and have not been reassigned to any new index).
One thing may be sure though: liquidity may improve in all stocks affected and in their closely related counterparts in respective sectors and industries.
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Fool contributor Brian Paradza has no position in any of the stocks mentioned. David Gardner owns shares of Sierra Wireless. Tom Gardner owns shares of Shopify and Valeant Pharmaceuticals. The Motley Fool owns shares of Blackberry, Shopify, SHOPIFY INC, Sierra Wireless, and Valeant Pharmaceuticals. Shopify is a recommendation of Stock Advisor Canada.