Last week I walked you through a brief history on the Toronto Composite Index on how the TSE300 was fazed out, and the new rules set in place by its predecessor the S&P/TSX Composite Index. This week we’re going to go through the numbers behind it.
Today, the S&P/TSX Composite Index includes 256 companies. In 2009 it included 204 companies, in 2007 it included 269, in 2005 it included 213, and in 2003 it was 223. In other words, there’s quite a change from one period to the next. Here’s a simple graphic illustration of how much the TSX Composite Index has changed over years. Note that the chart lists the number of companies in the index in two-year intervals, since 1993. (Remember, the transition from the TSE300 Index was in December 2002.)
In addition to the constant changes to the number of companies represented in the S&P/TSX Composite Index, the number of companies within each of the 10 stock market sectors also seems to change dramatically each year. As the chart below demonstrates, within the individual stock market sectors, the number of companies appears to also be actively managed.
In 2005, there were 40 companies within the index’s energy sector, but in 2007, the number was increased 85% to 74 companies. Why’s that?
It appears that as the price of crude oil climbed, the S&P/TSX Composite Index manager ramped up the number of oil and gas companies. Is this just a coincidence?
Let’s follow that logic, in 2009 the price of crude oil declined. Now look at the energy sector in 2009, the number of companies in the energy sector dip from 74 to 50 (a 32.4% decrease). In 2011, the price of crude oil began to recover. Again looking at the energy sector in 2011, you see an increase from 50 to 63. Coincidence? I think not.
If one looks at the activity within the other stock market sectors, it’s easy to arrive at the conclusion that the S&P/TSX Composite Index is no longer a representative index, but rather an actively managed index not much different than a mutual fund, or a closet mutual fund.