TSX Information Technology Index Continues to Outperform: Here’s Why

Today we’ve taken a deep dive into the components of the S&P/TSX Capped Information Technology Index, which surged 65% in 2019

SmallCapPower | January 28, 2020: The S&P/TSX Capped Information Technology Index closed at an all-time high of 130.54 on January 23, 2020. The index is widely viewed by investors as a proxy for the Canadian technology sector. Today we will look at how the index has performed over the past five years and why investors should consider including the TSX Technology Index as part of their portfolio. The index is currently made up of 16 companies (Figure 1), with Shopify Inc. (TSX:SHOP), Constellation Software Inc. (TSX:CSU), and CGI Inc. (TSX:GIB.A) representing the Top 3 holdings of the index.

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The single-biggest contributor to the index is the cloud-based commerce platform Shopify (TSX:SHOP), whose shares have climbed 58% since the end of September and contributed 16% of the index’s gains (Figure 1). Shopify was added to the technology index back in 2017, when it replaced the financial technology provider DH Corporation. At the time, it represented 15% of the index’s holdings. Fast forward to today and SHOP makes up ~28% of the index (Figure 2).

CGI Inc (TSX:GIB.A) is a Canada-based independent information technology (IT) and business consulting services company. The Company delivers an end-to-end portfolio of capabilities, from IT and business consulting to systems integration, outsourcing services and intellectual property solutions. Constellation Software (TSX:CSU) develops software solution for private and pubic customers and has more than 200 operating units, which compete in over 80 vertical markets.

It is not just Canadian large-cap tech names that are making waves. Lightspeed POS Inc. (TSX:LSPD), which was Canada’s second biggest IPO in 2019, is up 160% since its debut. The Company provides point of sale terminals to small to medium sized business as a SaaS solution. Lightspeed POS was added to the index in November 2019.

The Top 4 components of the TSX Technology index make up 85% of total holdings. Comparatively, the Top 4 holdings of the TSX Global Gold Index and the TSX Financials make up 55% and 57% of total holdings, respectively.

Since 2015, the TSX info tech index has returned an impressive 172%, outperforming the TSX by 152%. However, Shopify has been the biggest contributor to those gains, with SHOP outperforming the other Top 2 holdings of the index (CGI and Constellation Software) by 1,200% (Figure 5).

Additionally, the technology index has outperformed the broader market index every year since 2015, expect for 2016, when the technology index returned 3.4% and the TSX returned 17.5%. Even year-to-date, the tech index has returned 10.3% compared with a return of 2.9% from the TSX Composite.

While the tech index has been on an incredible bull-run over the past five years, it could continue to outperform the broader market as technologies such as blockchain, 5G, Internet of Things (IOT), Artificial Intelligence, and Quantum Computing continue to gain popularity and mass adoption.

Investors can invest in the S&P/TSX Information Technology index through an iShares ETF listed on the Toronto Stock Exchange. The iShares S&P/TSX Capped Information Technology Index ETF (TSX:XIT) mimics the performance of the index, net of expenses.

So, what can we conclude? There are so few quality, large Canadian tech names that 85% of this entire index is composed of just four companies – a properly diversified index should not be so heavily weighted in so few names.  While these four stocks have been top-notch performers because of how their businesses have been run, it also means that there is a lot of investor money, both retail and institutional, flowing into a small pool of stocks. This could, in fact, be fueling the sector’s outperformance. All of which could represent continued opportunity for investors.

Disclosure: Neither the author nor his family own shares in any of the companies mentioned above.

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