Canadian small caps on a roll

Big gains for this small-cap index-tracking ETF

Canadian small cap stocks are on a roll.

As of Oct. 16, the S&P/TSX Small Cap Index was showing a year-to-date gain of 17.7%. That’s about 25% better than the Composite Index to the same point.

That’s rare. From 2014 to 2023, Canadian large caps performed significantly better than their smaller cousins, posting an annualized return of roughly 8.1% compared with just 2.9% for small-caps over that 10-year period. The TSX Composite almost doubled the cumulative return of the Small Cap index over that time.

There were several reasons for this. Small-cap stocks are considered to be inherently more volatile than large-cap companies, which makes investors nervous. Analysts don’t follow them closely, so there is less credible information about their financial performance and their outlook. Many small-cap companies are money-losers. Some carry a high debt load and face the headwinds of rising interest rates. Then there’s the fact that Canadian small caps are concentrated in the mining and energy sectors, which until recently were out of favour.

But times have changed. The wars in Ukraine and Iran have made energy the top performing sector in Canada this year, with both small- and large-cap stocks benefitting. Despite the pullback in the price of gold this year, the S&P/TSX Global Mining Index is up 12.6% year-to-date.

The U.S. small-cap sector is also doing reasonably well – just not as good as Canada’s.

The numbers tell the story. The iShares S&P/TSX SmallCap Index ETF is up 18.81% year-to-date. The iShares Russell 2000 ETF is ahead about 12.44% and has been falling steadily since mid-August. Its main holdings are in healthcare, financials, industrials, and info technology, which together make up about two thirds of the total portfolio. Energy stocks are only about 7% and materials about 4%.

I have one Canadian small cap ETF on my Internet Wealth Builder newsletter recommended list.

iShares S&P/TSX SmallCap Index ETF (TSX: XCS) aims to replicate the performance of the S&P/TSX Small Cap Index, net of expenses. Canadian small cap stocks have been performing well, and this fund was ahead 32.36% for the year to Sept. 30. For the 10 years to that date, the average annual compound rate of return was 10.71%.

This ETF started trading in May 2007 and has about $250 million in assets under management. The MER is 0.6%. The fund holds 236 positions. Almost one third is invested in the materials sector, especially copper and gold miners. Another 23% is in energy, which has been the hottest sector on the TSX since the start of the Iran war. Other strong holdings include Russel Metals and Bird Construction, both of which have seen their price more than double this year.

The fund’s top holdings include Athabasca Oil, whose stock jumped recently after it announced it is being taken over by Cenovus Energy, Ero Copper, Kinaxis Inc., Russel Metals, and Enerflex. No position represents over 2% of total assets.

Distributions are made quarterly and can vary significantly. For the year to the end of September, investors received a total of $0.568 per unit.

The fund’s focus on energy and materials puts it in the sweet spot at this time. This won’t always be the case. As recently as 2022, the fund was down 9.22% for the year. However, the 10-year average gain of 10.71% suggests this is a fund to hold for the long term.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website. 

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Notes and Disclaimer

Content © 2026 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.

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