A Bold New Venture

When most of us consider the Canadian equity market, we think of the companies listed on the Toronto Stock Exchange. Anyone can get exposure to this market with a plain vanilla index fund that tracks the S&P/TSX Composite Index. Although this benchmark includes only about 240 of the 1,500-odd stocks traded on the TSX, those […]

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When most of us consider the Canadian equity market, we think of the companies listed on the Toronto Stock Exchange. Anyone can get exposure to this market with a plain vanilla index fund that tracks the S&P/TSX Composite Index. Although this benchmark includes only about 240 of the 1,500-odd stocks traded on the TSX, those companies represent about 95% of the Canadian market.

Fewer investors are familiar the TSX’s little brother, the TSX Venture Exchange, which is headquartered in Calgary. There are close to 2,400 companies traded on this exchange: the vast majority are involved in energy or mining, although there is a growing number of tech start-ups among the listings.

The standard benchmark for the junior exchange is the S&P/TSX Venture Composite Index, which you’ll often see flashing across the screen on BNN. This index includes about 450 stocks and is a good proxy for the Venture market, but it’s not investable. Many of the stocks are extremely small and illiquid, so any fund or ETF that tried to replicate the index would suffer from huge tracking error. This is why Venture stocks have never been an option for Couch Potato investors.

However, Canadians can now dip a toe into the Venture market thanks to a new ETF launched on March 17: the Global X S&P/TSX Venture 30 Canada ETF. Surprisingly, the fund was created by an American firm and is listed on the NYSE Arca under the ticker symbol TSXV. This fund holds 30 of the most liquid companies on the Venture exchange and carries an MER of 0.75%.

And there’s more to come: iShares has filed a preliminary prospectus for the S&P/TSX Venture Index Fund (XVX), which is set to launch this year. It will track a somewhat broader index that will include about 75 to 100 stocks.

Sophisticated index investors know that small-cap stocks have historically delivered higher long-term returns than the broad market. That’s why many academics—as well as investment firms such as Dimensional Fund Advisors—recommend tilting a portfolio toward small company stocks. Index investors may be wondering whether these new Venture-tracking ETFs are a good way to add Canadian small caps to their asset mix.

In my next post, I’ll examine the risks involved in the Venture exchange and help you decide whether you should dive into this space.

Congratulations to John K., who won the draw for the copy of Rick Ferri’s new book, The Power of Passive Investing. Many thanks to everyone who entered the draw.

 

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