The Venture Index Tells A Story (It Just Might Not Be What You Think)

Down nearly 75% over the last 20 years. Annualized returns of -4% over the last decade. Sounds like a real winner. Right?

Well it is. But the winners come in a different way.

The S&P/TSX Venture Composite Index* ("Venture Index"), like many small and microcap indices, can be quite misunderstood. So let's take a step back and see how it is constructed and what happens to the best companies in it. Launched in December 2001, the Venture Index is a broad market indicator of Canadian microcap securities in Canada. Its constituents are listed on TSX Venture Exchange (TSXV). The index is market capitalization weighted. Stocks are subject to a 10% single stock weight cap, and there is a 50% sector weight cap.

Great. So you got it?

Sounds simple enough, but here is where the issue lies in quoting the long term performance of the Venture Index. It is a public venture index, which means the constituents are composed of earlier stage companies - some will fail and some will succeed. Some of these companies may graduate to Toronto Stock Exchange (TSX), following which they will be removed from the Venture Index and their future performance will no longer be captured by the Venture Index.

Since the time of the creation of the Venture Index, there have been close to 800 companies that have graduated to TSX. If we take a look at this year's TSX30^Ⓡ list, which represents the top 30 performing companies on TSX based on dividend-adjusted share performance over a three-year period, nine companies on this list were TSXV graduates. The average return of these nine companies over the last three years was 164%. Two of the companies on this year's list, VitalHub Corp. (TSX:VHI) and Spartan Delta Corp. (TSX:SDE), graduated from TSXV to TSX in September 2021. Prior to graduation, both had been members of the Venture Index. Their share price return of 136% and 135% respectively has mainly been attributed to their time on TSX and these returns were not captured by the Venture Index.

And now the big "Did you Know That" moment

20% of the the S&P/TSX Composite Index*, which represents the 200+ largest TSX-listed companies, are companies that graduated from TSXV. Woah! A lot of earlier stage companies whose returns have not been captured in the Venture Index once they graduated from TSXV to TSX.

Wait, so why have this index at all?

The point of the Venture Index is to be a gauge on the day-to-day, week-to-week performance of the microcap market in Canada. When you want a short-term gauge on this market, this can be a helpful index. Long-term? No. This is not an index used by asset managers to benchmark against over years.

So why did you tell me all of this?

When you are hearing people quote the fact that the Venture Index is down 75% since inception, then I would say they may not clearly understand the Venture Index. Let's collectively call out this error.

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