comparision of TSX Composite and S&P 500

International Equity Markets

Performance The TSX Composite is the benchmark index for the Toronto Stock Exchange, the main stock market in Canada. The composition of the TSX is quite different from that of the S&P 500, reflecting the distinct nature of Canada\\\\\\\'s economy. One of the major benefits of investing internationally is to gain access to markets that specialize, or that behave differently from American markets. The TSX is dominated by mining, energy and financial stocks, with relatively few large industrial stocks (Top Foreign Stocks, 2013). Thus, energy and commodity prices are often the main drivers for the TSX, rather than overall economic performance. The following chart illustrates the returns on the TSX Composite over the past five years:

Source: Infomine (2017) Returns on this index are solid, but relatively modest in relation to those on American markets over the same time frame. Where the TSX has gained 23.83% over that time period, the S&P 500 has gained 72.23%. This is not to say that the US economy has outperformed so much, but that American companies are tapping into global growth more than Canadian companies seem to be. The divergence in market performance came in 2013 and the gap between the two exchanges has widened. So while the TSX has returned well, those returns are nowhere near as good as has been the case on the US markets during the same time period.

Risk If one looks further back than 5 years, it becomes clear – American markets are more volatile in general . The TSX returns during boom times tend to be lower than US markets, but Canadian stocks do not fall as far during downtimes such as the recession of 2008-2009. The divergence really only started in the late 1980s, which probably speaks to the US starting to really drive the information economy – Canada has participated in tech gains, too, but nowhere near on the level as the US, and tech makes up a much smaller part of the Canadian economy. There are a couple of figures that go into determining the riskiness of a market. First is the legal environment. As a general rule, developed nations have robust legal environments, with transparent laws and reporting requirements. Indeed, many large Canadian companies cross-list on US exchanges so are subject to SEC listing requirements. There is low risk in that sense. However, Canada\\\\\\\'s market is more narrow in terms of scope – the US has greater diversity in its markets. As diversification reduces systematic risk, Canada\\\\\\\'s lower level of diversification makes it slightly riskier than US markets. That said, the Canadian market as a whole is generally quite robust in the sense that financial controls are stronger, and swings are not as great as is the case in the US. Canada remains a low risk market. When looking at portfolio design, Canada fits more within the context of a global portfolio than one that simply uses Canada as a foreign complement to the US; the foreign component of such a theoretical portfolio should be an economy more different. What Canada offers is stability, and more direct access to resource and energy markets, should an investor want to lend their portfolio some stability at the expense of high-growth tech stocks.