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Introducing the S&P/TSX SmallCap Select Index

Could incorporating earnings quality and liquidity improve risk/return in Canadian small-cap equities?

1. Why is the S&P/TSX SmallCap Select being introduced now?

Prior research has demonstrated that profitability matters for small-cap companies in the U.S. For example, the S&P SmallCap 600®—which includes earnings eligibility criteria—has outperformed the broader Russell 2000 Index (with lower volatility) throughout its 25-year live track record. Our new S&P/TSX SmallCap Select Index extends this phenomenon to Canadian equity markets, where we have found that a similar effect exists. Simply put, small-cap companies without a track record of generating earnings have performed poorly relative to their profitable peers and have thus been a drag on broad small-cap indices.

2. How does the S&P/TSX SmallCap Select Index work?

The index is a part of the S&P Global SmallCap Select Index Series. In order to be eligible for index inclusion, companies must post two consecutive years of positive earnings per share. As a buffer, companies are dropped from the index after posting two consecutive years of negative earnings. In order to improve replicability of the index, we also eliminate the 20% smallest and 20% least liquid companies. The index is weighted by float market cap and is rebalanced semiannually in June and December.

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