What this module covers
Listed stocks and bonds make up most investment portfolios. This module describes four features of those markets that bear on diversification: how concentrated the Canadian stock market is by sector, how Canadian and US stocks have moved together in broad sell-offs, what changed for the bond side of the 60/40 portfolio as yields fell and then rose, and why fewer companies are listed than in the late 1990s.
- Sector concentration in the S&P/TSX Composite
- The S&P 500 and correlation in sell-offs
- The 60/40 portfolio and the role of bonds
- A smaller listed market
- What concentration and correlation mean for diversification
Sector concentration in the S&P/TSX Composite
The S&P/TSX Composite is the main index of the Canadian stock market. It weights each company by its market value, so the sectors with the largest companies carry the most weight in the index.
Three sectors dominate. Financials, which are mainly banks and insurers, energy, and materials, which is mainly mining, together make up a large share of the index. The exact weights move with prices, and the index provider, S&P Dow Jones Indices, publishes the current figures.
An index fund that tracks the Composite inherits that weighting. So does a Canadian equity portfolio built to resemble the index. Such a portfolio can hold dozens of companies and still have most of its Canadian equity exposure tied to the same few drivers: interest rates and credit conditions, which move bank earnings, and commodity prices, which move energy and mining earnings.
The number of holdings and the degree of diversification are different measures. A portfolio of many companies in three related sectors is concentrated in those sectors, however many names it contains. Sector concentration is the share of a portfolio's value held in a small number of sectors, and it is a property of the index itself, not only of the funds that track it.