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 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.

 

10 Responses to A Bold New Venture

  1. Simon March 28, 2011 at 9:46 am #

    Another fine article Dan. Can you share your thoughts about these funds and their role in a portfolio aside from the other SmallCap/Value funds you’ve advocated before (like in the Uber-Tuber): the S&P/TSX SmallCap Index Fund (XCS.TO) and Dow Jones Canada Select Value Index Fund (XCV.TO)?

    Considering that more options are available, how would TSXV play a role, especially with its higher MER?

  2. Canadian Couch Potato March 28, 2011 at 9:53 am #

    @Simon: Thanks for the comment. Stay tuned: my Wednesday post will discuss the idea of using TSX Venture stocks for the small-cap part of a portfolio.

  3. Miss T @ Prairie Eco-Thrifter March 28, 2011 at 11:37 am #

    Thanks for the great article. I was wondering if you know of any green index funds. I believe in ethical investing and I would really like to invest using index funds but I have had a hard time finding possible opportunities. Any suggestions?

  4. Canadian Couch Potato March 28, 2011 at 11:46 am #

    @Miss T: Great question: there are few opportunities to combine socially responsible investing (SRI) with indexing. But there are a few. See this previous post:
    http://canadiancouchpotato.com/2010/02/28/the-ethical-couch-potato/

  5. Patrick March 28, 2011 at 4:11 pm #

    How do these index funds plan to deal with the liquidity problem? Couldn’t they end up trying to own 100% of some of these companies?

  6. Canadian Couch Potato March 28, 2011 at 4:22 pm #

    @Patrick: This won’t be a problem with something like TSXV: it specifically selects the largest and most liquid companies, which have market caps in the hundreds of millions. Yes, there is a theoretical limit to how large such an ETF can grow, but in practical terms, they will never get anywhere near that limit.

  7. gibor March 29, 2011 at 1:09 pm #

    @CCP; Do S&P/TSX SmallCap Index Fund (XCS.TO) or any MF (like CIBC CANADIAN SMALL CAP FUND (485)) hold any of TSXV stocks?
    I undestand that Global X S&P/TSX Venture 30 Canada ETF is in $US… is future S&P/TSX Venture Index Fund (XVX) gonna be ib CAD?

  8. Canadian Couch Potato March 29, 2011 at 1:25 pm #

    @Gibor: No, XCS does not include any Venture stocks. Popular small-cap mutual funds would not include them either.

    Yes, the forthcoming iShares XVX fund will be bought and sold in Canadian dollars.

  9. gibor March 29, 2011 at 2:17 pm #

    Thanks!

    Just for general knowledge… can specific stock move from TSXV to TSX and vise verca?

  10. Canadian Couch Potato March 29, 2011 at 2:21 pm #

    @Gibor: Yes, when a Venture company grows large enough to meet the listing requirements, it can graduate to the TSX. However, I’m not sure how common it is for a stock to get delisted from the TSX and then appear on the Venture exchange. I would think that would be very rare.

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