New GICS category a curve ball for iShares ETF

A report this Friday may well see Canada’s largest ETF dumping shares such as Bombardier and Blackberry

Index overseers S&P and MSCI initiated the creation of a new Real Estate Sector under the Global Industry Classification Standard (GICS) on August 31. As that new category is added on top of the current 10 recognized sectors, an index tracking Canada’s biggest stocks – and, consequently, the country’s biggest ETF – may undergo a shakeup.

According to a report on Bloomberg, the new industry classification may result in companies such as Bombardier Inc. and Blackberry Ltd. being ousted from the S&P/TSX 60, an index that tracks Canada’s 60 biggest stocks. Should that happen, the iShares S&P/TSX 60 Index ETF, Canada’s largest ETF with a market capitalization of $12.7 billion, will also be affected.

It all depends on S&P’s quarterly review, the results of which will be announced on Sept. 9. “If there were no changes in our review, we would create an 11th sector that would have no constituents in the 60,” said Tony North, director of Canadian index operations at S&P. “If we choose to put a real estate company into the 60, we have to take somebody else out as it’s a fixed constituency.”

The five smallest companies in the S&P/TSX 60, whose reported average market capitalization is about $4.6 billion, are Eldorado Gold Corp., Cameco Corp., Bombardier, Yamana Gold Inc. and BlackBerry.

The largest real estate firms on the S&P/TSX, on the other hand, include Brookfield Property Partners and RioCan REIT, with market capitalizations of $21.6 billion and $8.78 billion, respectively. The two were included in a report from ITG Canada Corp. listing candidates for additions and deletions.

“TSX 60 additions and deletions are notorious for driving volatility,” noted Doug Clark, managing director at ITG Canada, in the May report following an S&P advisory panel meeting on the changes.

A low-interest rate climate has out REITs on the rise for several years, according to Eric Bachulnas, an ETF analyst with Bloomberg Intelligence. As real estate companies have about a 3% weighting in the S&P/TSX Composite Index – which consists of 240 listings with which the S&P/TSX 60 is populated – Balchunas reckons that one or two stocks will be swapped out of the 60-listing index.

“From an investor perspective, they’ll get a bit more yield, plus a touch more diversification in a sector that wasn’t represented before,” He noted. “And it should mean a little more money into the one or two stocks that get picked.”

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