Canada Gets a Major Elevation in FTSE Global Equity Indices

FTSE Russell (FTSE), the global index subsidiary of LSEG, recently concluded a significant review of its overarching global index methodology. Based on results from the review, FTSE will segment the North American region into two separate regional views with Canada and the U.S. standing on their own. This change results in Canada being a more elevated region within the FTSE global index sphere and will receive a material increase in demand for its existing Canadian constituents and the promotion of dozens of Canadian companies to these well tracked indices.

Decoupling to Better Reflect Market Realities

Previously, the FTSE Global Equity Index Series (GEIS) combined Canada and the U.S. into a single North American region for determining size-segment eligibility. However, with U.S. companies accounting for approximately 96% of the region's market capitalization, the thresholds for inclusion were heavily skewed, creating a high barrier for many Canadian firms. The new methodology acknowledges the distinct characteristics of the Canadian market, ensuring its companies are measured against country-specific size rankings rather than those dominated by the much larger U.S. market.

Phased Implementation and Market Impact

To mitigate market impact and address potential liquidity concerns, the inclusion of Canadian companies will be implemented in three phases. The transition will begin with the September 2025 semi-annual index review. The implementation schedule is as follows:

• September 2025: 35%
• December 2025: 30% (for a cumulative 65%)
• March 2026: 35% (for a cumulative 100%)

The official rank date for the September rebalance was Monday, June 30, 2025. FTSE is expected to officially publish the initial list of impacted Canadian securities on Friday, August 22, 2025.

Companies and Sectors Poised to Benefit

The implementation of the new methodology will vary depending on the security's status at the time of the September 2025 review:

• Existing Large, Mid, and Small-Cap Securities: These will be transitioned to their new size segment in a single tranche during the September 2025 review.
• Micro-Cap Promotions and New Additions: Existing Canadian Micro-Cap securities that are promoted to Large, Mid, or Small-Cap, along with new additions to the FTSE Canada All-Cap Index, will be transitioned in three tranches to support index users in replicating the benchmark changes.
• New Additions Post-Transition: Any new Canadian securities added to the FTSE GEIS after the September 2025 review will be added in a single tranche at their full investability weight.

Projected Market Impact

The decoupling is expected to have a significant impact on the composition of the FTSE Canada All-Cap Index. Based on a hypothetical review as of September 2024, the changes are projected as follows:

• Number of Constituents: The total number of constituents in the FTSE Canada All-Cap Index is projected to increase from 161 to 220.
• Size Segmentation: The number of large-cap constituents is expected to increase from 13 to 38, mid-caps from 34 to 43, and small-caps from 114 to 139.
• Market Capitalization Thresholds: The thresholds for each size segment will be significantly different. For example, the Large-Cap entry threshold is projected to be approximately $20.4 billion for the standalone FTSE Canada review, compared to $64.9 billion in the combined North America review.

Strategic Benefits of Index Inclusion

Achieving inclusion in prominent global indexes like those offered by FTSE Russell is a pivotal step for issuers, unlocking a range of strategic benefits:

• Enhanced Visibility: Increased and more accurate representation in FTSE Russell's global benchmarks can boost visibility to a wider pool of international and domestic investors, including the many passive funds and ETFs that track these indexes.
• Equitable Evaluation: Canadian companies will be assessed against domestic peers, leading to more appropriate size-segment classifications.
• Increased Trading and Liquidity: The heightened profile often leads to increased trading liquidity and a more diversified shareholder base.
• Improved Access to Capital: Enhanced corporate credibility can collectively improve a company's access to capital and support its long-term growth.

In conclusion, the decision to elevate Canada marks a pivotal development for the nation's public companies. By implementing the change in a transparent and phased manner, FTSE Russell aims to enhance its indexes' integrity while providing a stable and predictable path for a more accurate representation of Canada in the global investment landscape.

Source: Treatment of Canada and the USA within the FTSE Global Equity Index Series FAQ