The Motley Fool

Why it’s a Bad Idea to Invest in the TSX Index

The S&P/TSX Composite Index (TSX:^OSTPX), or TSX index for short, covers about 95% of the Canadian equities market. On initial thought, the index may seem diversified because of that.

However, the devil is in the details. The problem is the TSX index is concentrated in specific sectors, which actually makes it not so diversified and potentially a bad idea to invest in.

The TSX index is not very diversified

Currently, the TSX index’s top four sectors are financials (nearly 36% of its weighting), energy (more than 18%), materials (11%), and industrials (nearly 10%).

It has about 5% or less weighting in each of the remaining sectors, including consumer discretionary, communication services, utilities, consumer staples, information technology (IT), and health care.

That doesn’t seem very balanced, does it?

Financials is a key sector in Canada. So, not surprisingly, four of the top 10 holdings in the TSX index are the largest Canadian banks: Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, and Bank of Montreal.

Many Canadian investors already own Canada’s big banks, which would make them double exposed to the banks if they also hold the TSX index.

think, plan, and act to work towards your financial goals

What the TSX index lacks

The TSX index lacks in the relatively stable sectors of consumer discretionary, communication services, utilities, and consumer staples, which conservative or retired investors might want a higher concentration in.

The index is also poorly exposed to the IT sector with only a puny 3.18% “concentration” in it. In my opinion, this sector is a growth area that investors should highly consider getting a meaningful exposure to. They can gain exposure through a technology ETF or buying specific tech stocks, such as Microsoft, OpenText, or Shopify when they seem to be relatively cheap.

Think about the high-growth areas of artificial intelligence, augmented reality, cyber security, the internet of things, automation, etc. They are all a part of IT.

Investor takeaway

The TSX index is not diversified. It’s highly concentrated in the financials and energy sectors and lacks in the consumer discretionary, communication services, utilities, consumer staples, IT, and health care sectors. However, the index is a good gauge of the Canadian market.

TSX index’s top holdings, including Enbridge, Canadian National Railway, Suncor Energy, TransCanada, Brookfield Asset Management, and BCE are a great place to source for stock ideas, but investors should only consider buying them when they trade at good valuations.

Investors should plan for the ideal allocation for each sector in their portfolios and decide which ETFs or stocks make the best fit for the allocation.

Of course, the sector allocation and what goes in it will likely change over time because the economic and business environments are always changing.

Amazon CEO Shocks Bay Street Investors By Predicting Company "Will Go Bankrupt"

Amazon CEO Jeff Bezos recently warned investors that “Amazon will be disrupted one day” and eventually "will go bankrupt."

What might be even more alarming is that Bezos has been dumping roughly $1 billion worth of Amazon stock every year…

But Bezos isn’t just cashing out, he’s reinvesting his money into a company utilizing a fast-emerging technology that he believes will “improve every business.”

In fact, this tech opportunity could be bigger than bigger than Amazon, Tesla, and Berkshire Hathaway combined.

Get the full scoop on this opportunity that has billionaire investors like Bezos convinced – before it’s too late…

Click here to learn more!

Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Fool contributor Kay Ng owns shares of Bank of Nova Scotia, BROOKFIELD ASSET MANAGEMENT INC. CL.A LV, Enbridge, Open Text, Shopify, Suncor Energy, Toronto-Dominion Bank, and TransCanada. David Gardner owns shares of Canadian National Railway. Tom Gardner owns shares of Shopify. The Motley Fool owns shares of Brookfield Asset Management, BROOKFIELD ASSET MANAGEMENT INC. CL.A LV, Canadian National Railway, Microsoft, and Shopify. Bank of Nova Scotia, Canadian National Railway, Enbridge, Open Text, and Shopify are recommendations of Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.