Historically, the US S&P 500 index has outperformed the Canadian S&P TSX Composite, but investors have seen a shift in 2025, largely due to increased tariffs affecting industrial metal prices (steel, aluminum, copper) and rising demand for select precious metals like gold. This development highlights why it’s important for investors to understand the differences between these market indexes, including sector compositions and economic exposures and how these factors ultimately impact portfolio performance.

Index sectors and performance

The S&P 500 index represents 500 of the largest US companies and serves as a key benchmark for US stock market performance, while the S&P/TSX Composite index encompasses a majority of Canadian equity market value.  

To understand how companies are grouped within these indexes, it's helpful to consider the different sectors they operate in, such as technology, health care, and financials. Analyzing these sectors allows investors to better understand their portfolio exposures, which is vital for managing risks and finding growth opportunities. 

Let’s start with the S&P 500. More than 30% of the S&P 500 is concentrated in the technology sector, with major players like Apple, Nvidia and Microsoft making it one of the largest stock indexes in the world. This concentration means that the performance of these tech giants significantly influences the S&P 500 total returns. 

Conversely, the TSX Composite has a higher weighting in the financial services (Canadian banks), energy and materials sectors, making it more sensitive to the performance of these industries. For example, the rising demand for gold has bolstered the materials sector and contributed to overall TSX performance. 

Not all investment sectors are equal

Despite using standardized sector names like financial services and health care, the companies within these sectors and their sensitivity to various economic exposures differ significantly across indexes. For instance, the S&P 500's financial sector is diverse, encompassing global investment banks and fintech, with extensive global exposure to international markets and various economic cycles. In contrast, the TSX Composite's financial services are primarily concentrated in Canadian banks, with greater exposure to the Canadian housing market and domestic lending, making it susceptible to Canadian interest rates and domestic economic conditions.

The sector weighting divergence between indexes is particularly striking in the health care sector. The US health care sector, with its numerous large pharmaceutical and biotechnology companies, accounts for approximately 9% of the S&P 500. In sharp contrast, the Canadian health care sector in the S&P TSX Composite holds a minimal 0.3% weight, primarily due to the smaller market value of most of these companies and Canada's predominantly publicly funded health care system, which results in fewer large, publicly traded pharmaceutical or biotechnology firms compared to the US.

Because of this divergence, combining US and Canadian sectors could potentially offer investors a more diversified portfolio. This diversification reduces reliance on the performance of select global or domestic markets and provides a wider array of business exposures. Additionally, here are a few important considerations:

• Investors need to consider the weights assigned to specific sectors within an index, the underlying companies, and economic exposures.
  
  
• Sector weightings significantly impact index performance. For example, the Canadian health care sector is down around 1.5% year to date, yet the impact is marginal on TSX Composite total returns. 

Diversifying across US and Canadian sectors can enhance portfolio resilience and provide a broader range of business exposures.   

Year-to-date performance and sector breakdowns below: