What’s Beyond The Top 60 In Canada?

Canada’s investment landscape is often defined by the S&P/TSX 60, the benchmark that comprises the nation’s largest companies. These larger-cap companies—predominantly Financials and Energy firms—tend to lead headlines for portfolio allocations. Yet beneath the top tier of widely recognized names exists a dynamic segment that focuses on emerging leadership, innovation and diversification in Canada’s public markets.

The group of companies ranked just outside the flagship S&P/TSX 60—referred to here as the “Next 40”—reflect an important segment with the potential to transition to the S&P/TSX 60. This group represents a blend of mid-sized companies and emerging smaller caps with high potential, making the Next 40 a potential signal for the direction of the Canadian economy.

The Next 40 consists of the 40 largest constituents of the S&P/TSX Completion Index. Rebalancing quarterly on the third Friday of March, June, September and December, this basket maintains strict modularity with the flagship S&P/TSX 60. To preserve the distinction, any constituent added to the S&P/TSX 60 is removed from the Next 40 on an intra-quarter basis and replaced, ensuring no overlap between the two tiers.

Over the period studied, the Next 40 tracked most closely to the S&P/TSX Completion Index, while also remaining competitive with the flagship S&P/TSX 60 and the broader S&P/TSX Composite Index (see Exhibit 2). Specifically, the Next 40 maintained a tracking error above 7% against the large-cap flagship, demonstrating that it was measuring a distinct market segment rather than acting as a redundant proxy. By contrast, its lower tracking error against the S&P/TSX Completion Index shows that it has historically been a reliable representation of the market, avoiding the unpredictability often found in smaller, less liquid stocks.

While the Next 40 tracked closely to the S&P/TSX Completion Index, it can act as a strategic filter that narrows the universe down to its most impactful stocks. By omitting smaller constituents that have historically underperformed, the Next 40 could serve as a more efficient version of the S&P/TSX Completion Index, focusing on how specific names tended to perform better than their peers over the 10-year period reflected in Exhibit 2. As shown in Exhibit 3, this refinement allowed the components in this statistic to populate the top-tier brackets—specifically those with a total return exceeding 150%—more consistently than the broader universe.

While the S&P/TSX 60 tends to be characterized by heavy concentration in mega-cap entities, the Next 40 has tended to have more balanced weights, with the largest constituent holding a weight of only 6.39% (see Exhibit 4). This differentiation is further supported by the varied sector contribution over the years (see Exhibit 5). While Financials remained a core pillar, sectors like Industrials and Materials have gained meaningful participation as well.

The Next 40 represents a compromise between size stability and growth dynamism. Over the 10-year period, the S&P/TSX Composite Index and the S&P/TSX 60 had high annualized returns. The Next 40 had only slightly higher volatility than the S&P/TSX 60, which reinforces its focus on the largest, most established firms outside of the traditional top tier.

Conclusion

The Next 40 is more than just an overflow list: it’s an indicator of the more liquid mid-cap segment of Canadian equities. By moving beyond the mega-cap concentration of the S&P/TSX 60, the Next 40 reduces focus on a handful of giants by seeking innovation in sectors that tend to be under-represented in the top tier. For a broader perspective on Canadian equities, incorporating a structured view of these firms may provide a fresh lens into where growth and innovation may emerge.

The author would like to thank Tom Phillips for producing analysis and data underlying this post.