Taking The Long View With Canadian Index Futures
In recent years, the Canadian derivatives market has experienced substantial growth, with index futures trading being a significant contributor to this story. The result is an improvement in market liquidity, with market makers providing tighter bid-ask spreads and deeper order books. As more global investors trade Canadian derivatives, it has further bolstered the market's depth and resilience.
When it comes to derivatives trading in North America, global investors seeking diversified investment portfolios can choose between the United States and Canada. It's not uncommon for portfolio managers to rebalance their exposure to both markets for different reasons. Montréal Exchange (MX) is the main trading platform for index futures, bond futures, options, and other exchange-traded derivatives in Canada. Compared to its counterpart in the US, the Canadian market offers unique investment opportunities for investors that want economic sector diversification.
Canadian index futures, particularly S&P/TSX 60 Index* Standard Futures (SXF™), offer an efficient and cost-effective way to gain exposure to the Canadian equity market while providing ample liquidity for execution and risk management. Furthermore, unlike other global index futures products, which tend to trade at a premium to Fair Value, SXF has traded at a significant discount over the years during quarterly rolls. As a result, investors looking for Canadian exposure via index futures were able to outperform their benchmark.
Canadian Sector Performance
The Canadian banking and energy sectors have long been considered two of the country's economic powerhouses. At the end of 2022, the financial services sector represented 4% of listed issuers on Toronto Stock Exchange (TSX) but 24% of total market capitalization, the highest among all sectors. Similarly, oil and gas was the top-performing sector in 2022, with S&P/TSX Energy Index* gaining 48%, according to TMX Market Intelligence Group.
The Canadian banking sector has consistently ranked among the most stable and profitable in the world. The contributing factors to the sector's success include a focus on risk management and conservative lending practices. Canadian banks also maintain diversified portfolios to reduce their exposure to any one sector or asset class.
Canada's energy sector has also outperformed its global counterparts, particularly in light of geopolitical conditions. Canada is home to one of the world's largest oil and gas reserves and the world's fifth-largest producer of crude oil. The sector has benefited from a relatively stable regulatory environment and the willingness of energy companies to quickly adapt and invest in new technologies to remain competitive in a rapidly changing global marketplace.
Last year, the exchange launched a suite of Futures products on total return indices, including S&P/TSX Composite Energy GICS Sector Total Return Index. A few weeks after the launch, there were multiple trades in excess of $250 million notional. In addition to energy, the exchange introduced futures on other total return indices such as financials, real estate, telecom, media and insurance sectors so that investors can gain exposure to more Canadian sectors.
Exposure to Canada Through Index Futures
Index futures trading at Montréal Exchange has seen solid performance over the last few years, with SXF being the most popular index futures contract. By the end of 2022, total volumes traded for SXF rose by 13.8%. In the first quarter of 2023, SXF year-to-date volumes were up 8.8%, while average daily volumes (ADV) gained by 18.2% compared to March 2022.
SXF provides investors with broad and diversified exposure to Canada's 60 largest companies in leading industries. Financial services and energy represent 40% of the index composition. Investors can acquire long or short exposure to Canada's top-performing sectors in a single, cost-effective transaction.
Available during extended trading hours for Europe and Asia Pacific, portfolio managers around the world can use SXF as an effective tool to hedge their Canadian equity exposure or implement various trading strategies. It offers ample liquidity, with market makers ensuring tight bid-ask spreads and efficient price discovery.
MX offers participants Basis Trade on Close (BTC) functionality to buy and sell S&P/TSX 60 Index futures and Sector Futures using the market end-of-day closing price of the underlying as a reference price. Orders can be posted at any moment during regular market hours, offering investors an efficient way to hedge their market exposure. This is a useful tool for the many managers that are benchmarked to the official closing level or need to rebalance at month's end.
Products such as SXF and Sector Futures allow market participants to gain exposure to Canada's growth sectors and diversify their North American holdings. The growing liquidity in the Canadian derivatives market further strengthens the case for portfolio managers to capitalize on the unique opportunities available in the Canadian market.
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*The S&P/TSX 60 Index and the S&P/TSX Energy Index (the "Indices") are the products of S&P Dow Jones Indices LLC or its affiliates ("SPDJI") and TSX Inc. ("TSX"). Standard & Poor's® and S&P® are registered trademarks of Standard & Poor's Financial Services LLC ("S&P"); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones"); and TSX® is a registered trademark of TSX. SPDJI, Dow Jones, S&P, their respective affiliates and TSX do not sponsor, endorse, sell or promote any products based on the Indices and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions or interruptions of the Indices or any data related thereto.
