The provider of Canada’s major stock indexes is considering a significant change that would allow some companies to appear in multiple countries’ indexes, paving the way for companies such as Brookfield Asset Management Ltd. BAM-T -3.08%decrease, Shopify Inc. SHOP-T -6.90%decrease and the former Ritchie Bros. Auctioneers Inc. RBA-T -1.35%decrease to be both Canadian and American.
S&P Dow Jones Indices, which runs the S&P/TSX Composite Index, the S&P/TSX 60 Index and others, says it could allow companies “with significant ties to Canada” to stay in a Canadian index even if it normally would consider the company “domiciled” in another country. The company would need to be incorporated in Canada to be eligible.
Until now, S&P Dow Jones has said a company can have just one country of domicile – and that country’s stock indexes are where it needs to be. The new Canadian proposal would be a significant move away from that.
In a statement this week, S&P Dow Jones said the proposal is in response to trends and “market inquiries” around its domicile and listing policies. The changes “are intended to enhance the representativeness of S&P/TSX Indices by expanding eligibility to a broader range of companies.”
The changes would allow British Columbia-incorporated Brookfield Asset Management, which recently changed its principal executive office to New York, to remain in S&P/TSX indexes even as it joins American ones. (S&P has not yet designated Brookfield as a U.S.-domiciled company and removed it from Canadian indexes.)
B.C.-incorporated RB Global Inc., formerly known as Ritchie Bros., RBA-T -1.35%decrease after it formally changed its headquarters to a Chicago suburb, but would be able to return.
Federally incorporated Shopify has not made any public statement about its index plans, but it recently introduced a New York executive office, in addition to its Ottawa headquarters, in its securities filings. It makes those securities filings with the U.S. regulators and has the bulk of its business there. Currently, it’s in the Canadian indexes, but would have to exit them if S&P Dow Jones decided it was a U.S. company. The change would mean it could be in both countries’ indexes.
The former Encana, which moved its incorporation and headquarters to the U.S. from Calgary and renamed itself Ovintiv OVV-T -1.35%decrease, would not be eligible. Neither would Vancouver-based Lululemon LULU-Q -3.08%decrease, which has been incorporated in Delaware since it went public in 2007.
In a presentation released Wednesday accompanying a call for consultation on the change, S&P Dow Jones said there are four companies with Canadian incorporations it currently considers domiciled elsewhere, including the U.S., China and the United Kingdom, that could join the Canadian indexes. It does not name them, but provides descriptive information on them.
In addition to RB Global, analyst Jean-Michel Gauthier at Scotia Capital Inc. said China Gold International Resources Corp. Ltd. could be a candidate for inclusion. China Gold operates entirely in that country and is included in the S&P Asian indexes, according to S&P Global Market Intelligence.
RB Global and China Gold match two of the descriptors in the S&P Dow Jones document.
“We count 20 U.S. listed companies with no Canadian listing and a Canadian incorporation that could be tempted to come back home,” Mr. Gauthier wrote in a research note.
Brookfield Asset Management, with a market capitalization of more than $100-billion, “could be the first S&P 500/TSX 60 dual member,” he said.
At stake is the deep pool of investor money chasing U.S. indexes. Any fund that tracks an index needs to buy the shares of a company that joins that index, driving demand, and prices, up.
In the fall of 2023, when The Globe and Mail examined Lululemon’s U.S. index membership, there was US$3.4-trillion in index funds that track the S&P 500, US$118-billion tracking the S&P MidCap 400 and nearly US$97-billion tracking the Russell 2000, according to Morningstar Direct.
Research by Morningstar Direct for The Globe and Mail found Canadian mutual funds and exchange-traded funds with assets under management amounting to $395-billion had returns that were 95 per cent or more correlated with the S&P/TSX Composite over the 12 months ended Dec. 31, 2023. This included funds that explicitly say they track the index.
The core rule in index providers’ domicile rules, historically, has been where the company is incorporated. For many companies, that’s the same country as their headquarters, where they do most of their business and where most of their stock trades. But other companies mix it up in this increasingly globalized world. So all index providers, including the Russell indexes and MSCI Inc., deal with these realities by considering a long list of criteria.
As part of the consultation, S&P Dow Jones is asking whether it is “sufficient that a company be incorporated in Canada and listed on the TSX, or should additional requirements be considered to ensure significant connection to Canada? (e.g., meaningful operational presence in Canada).”
S&P Dow Jones proposes to implement the changes with the June, 2025, rebalancing, which is effective after the close on June 20.
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