Sector Momentum in Canada: +11.51% Annual Excess vs TSX Composite (2000-2025)
Canada ranked second for excess return in our 13-exchange sector momentum study: +11.51% annually over 26 years vs the TSX Composite, driven by Basic Materials (38q) and Energy (37q) in the top two. It also posts the study's highest Sharpe ratio at 0.591. C$10K grew to C$562,372.
Canada delivered the second-best excess return in our 13-exchange sector momentum study. +11.51% annually over 26 years vs the TSX Composite, behind only Korea. It also produced the highest Sharpe ratio in the study, at 0.591. Nobody writes about Canadian sector momentum. They should.
Contents
- The Strategy
- What We Found
- Why Canada Works
- When It Worked and When It Didn't
- Full Annual Returns
- Limitations
The portfolio grew from C$10,000 to C$562,372 over 26 years, driven by a mechanical strategy that simply held the two strongest sectors each quarter. Canada's commodity-heavy market created exactly the conditions where sector momentum thrives: multi-year trending cycles in Basic Materials and Energy that the strategy captured almost perfectly.
Data: FMP financial data warehouse, 2000-2025. Updated August 2026.
The Strategy
The Toronto Stock Exchange is structurally different from US markets. Energy and Basic Materials are the dominant economic forces. When commodities run, they run hard and they run long. When they crash, they crash sharply. A strategy designed to capture sector momentum will behave very differently in Canada than in markets where Technology or Healthcare dominate.
The mechanics:
| Parameter | Value |
|---|---|
| Universe | TSX (Toronto Stock Exchange) |
| Signal | Top 2 sectors by trailing 12-month equal-weighted return |
| Selection | All qualifying stocks in those sectors |
| Rebalancing | Quarterly |
| Period | 2000-2025 (26 years, 104 quarters) |
| Execution | Next-day close after each rebalance date |
| Cash rule | Cash if fewer than 5 sectors qualify or fewer than 10 stocks pass |
| Cash periods | 0 of 104 |
| Avg stocks held | 64.3 |
| Benchmark | TSX Composite (CAD) |
| Transaction costs | Size-tiered by market cap, 0.1% to 0.5% one-way |
| Data source | Ceta Research (FMP financial data warehouse) |
The tier is a one-way rate and the model charges a full round trip every quarter, on every holding, even when a sector stays in the top 2 and the position carries over untouched. That's deliberately conservative: real turnover is lower than the cost model assumes.
Returns are in CAD. The TSX Composite is also CAD-denominated, so this is an apples-to-apples comparison. Full methodology: backtests/METHODOLOGY.md
What We Found
The headline metrics are strong across the board:
| Metric | Portfolio | TSX Composite (CAD) |
|---|---|---|
| CAGR (2000-2025) | 16.76% | 5.26% |
| Excess CAGR | +11.51% | |
| Alpha (Jensen) | +11.06% | |
| Total return | 5,525% | 279% |
| C$10K grows to | C$562,372 | C$37,894 |
| Max drawdown | -49.01% | -41.58% |
| Annualized volatility | 24.14% | 15.50% |
| Sharpe ratio | 0.591 | |
| Sortino ratio | 1.081 | |
| Calmar ratio | 0.342 | |
| Beta | 1.162 | |
| Up capture | 166.37% | |
| Down capture | 81.73% | |
| Win rate vs TSX (quarterly) | 61.54% |
The Sharpe of 0.591 is the highest of the 13 markets in this study, which is not what you'd expect from a strategy this concentrated in commodity sectors. Canada's commodity cycles are volatile but structured. The quarterly rebalancing captures the trend phases and rotates before the worst of the collapses.
The up capture of 166.37% vs TSX is the headline number. The strategy delivered roughly 1.7x the TSX's upside on average in up periods. Down capture of 81.73% means it fell less than the index in down periods, not more, though a beta of 1.162 and a deeper maximum drawdown than the index (-49.01% vs -41.58%) show where the risk actually sits: in the size of individual bad years, not in the average down quarter.
Worth separating excess from alpha here. Canada's +11.51% excess comes with a beta of 1.162, so some of it is compensation for extra market risk. Jensen alpha is +11.06%. The gap is small, so the edge is close to genuine, but the risk-adjusted number is the one to compare across markets.
Why Canada Works
The sector frequency table tells the real story:
| Sector | Quarters in Top 2 |
|---|---|
| Basic Materials | 38 |
| Energy | 37 |
| Technology | 32 |
| Consumer Cyclical | 22 |
| Real Estate | 15 |
| Consumer Defensive | 13 |
| Industrials | 13 |
| Healthcare | 13 |
| Communication Services | 12 |
| Utilities | 11 |
| Financial Services | 2 |
Basic Materials occupied a top-two position for 38 of 104 quarters. Energy for 37. Together, these two sectors were in the top two for more than a third of all quarterly rebalances. Canada's sector momentum strategy is, structurally, a commodity supercycle capture strategy.
That's not a design flaw. It's the market. Canada's TSX is commodity-weighted and always has been. A momentum strategy that ignores that reality would be fighting the market's actual structure.
Financial Services appeared twice in 26 years. That's notable given how dominant Canadian banks are by market cap. Canadian banks moved steadily and consistently rather than producing top-tier momentum signals. The banks delivered the stability but not the signal.
When It Worked and When It Didn't
The dotcom bust years: Canada won three straight (2000-2002)
The early 2000s define this strategy's character. While the S&P 500 fell through a brutal tech bear market, Canadian Materials and Energy were entering a commodity supercycle:
| Year | Portfolio | TSX Composite | Excess |
|---|---|---|---|
| 2000 | +18.86% | +2.35% | +16.51% |
| 2001 | +1.57% | -11.20% | +12.77% |
| 2002 | +23.85% | -11.86% | +35.71% |
Three consecutive positive years while the TSX Composite posted two consecutive losses. The strategy wasn't in tech. It was in the sectors that actually had momentum: Materials and Energy. Commodity demand from China's industrialization was just beginning.
The commodity supercycle peak (2003-2007)
| Year | Portfolio | TSX Composite | Excess |
|---|---|---|---|
| 2003 | +46.06% | +23.05% | +23.01% |
| 2004 | +25.22% | +10.24% | +14.98% |
| 2005 | +62.52% | +25.14% | +37.38% |
| 2006 | +50.43% | +12.95% | +37.48% |
| 2007 | +17.50% | +7.76% | +9.74% |
Five straight years of outperformance, including 2005 (+62.52%) and 2006 (+50.43%). China's demand for iron ore, copper, oil, and potash drove Canadian sector momentum for half a decade. The quarterly rebalancing kept the portfolio in the leading commodity sectors throughout.
2008: Commodity crash
Canada was not protected when global demand collapsed:
| Year | Portfolio | TSX Composite | Excess |
|---|---|---|---|
| 2008 | -42.17% | -33.70% | -8.48% |
| 2009 | +35.43% | +28.51% | +6.92% |
| 2010 | +43.77% | +12.94% | +30.84% |
-42.17% in 2008. When commodity prices crashed alongside global equities, the strategy's Materials and Energy holdings fell hard, 8.48 points worse than the TSX Composite itself. This is the honest cost of the commodity momentum approach. The recovery in 2009 and 2010 added back the losses and then some.
2014 and 2016: Oil collapse, then a broad TSX rally
| Year | Portfolio | TSX Composite | Excess |
|---|---|---|---|
| 2014 | -9.43% | +8.53% | -17.95% |
| 2015 | +18.16% | -12.38% | +30.54% |
| 2016 | +0.23% | +19.15% | -18.92% |
2014 was rough: crude collapsed from $100+ to below $60 and Canadian Energy holdings got crushed while the TSX held up elsewhere. 2015 flipped the script as the strategy rotated away from commodity dependence. Then 2016 became the worst relative year in the series: the TSX gained 19.15% in a broad rebound while the portfolio sat flat at +0.23%, an 18.92-point shortfall.
2020: Post-COVID commodity surge
| Year | Portfolio | TSX Composite | Excess |
|---|---|---|---|
| 2020 | +38.82% | +2.50% | +36.32% |
| 2021 | +28.74% | +21.16% | +7.59% |
+38.82% in 2020 vs TSX +2.50%. The commodity recovery after the COVID crash was violent and fast. The strategy captured the surge in Materials and Energy as supply chains rewired and stimulus-driven demand hit commodity prices.
2025: The extraordinary outlier
| Year | Portfolio | TSX Composite | Excess |
|---|---|---|---|
| 2025 | +103.14% | +28.06% | +75.08% |
+103.14% is not a typo. Canadian Energy and Materials surged in 2025. The strategy was positioned in the right sectors and captured the full move. The +75.08% spread over the TSX Composite is the largest single-year margin in Canada's series, though not in the study overall: India's 2003 produced a +97.52% spread. That year added enormous terminal value to the 26-year compound.
Full Annual Returns
| Year | Portfolio (CAD) | TSX Composite (CAD) | Excess |
|---|---|---|---|
| 2000 | +18.86% | +2.35% | +16.51% |
| 2001 | +1.57% | -11.20% | +12.77% |
| 2002 | +23.85% | -11.86% | +35.71% |
| 2003 | +46.06% | +23.05% | +23.01% |
| 2004 | +25.22% | +10.24% | +14.98% |
| 2005 | +62.52% | +25.14% | +37.38% |
| 2006 | +50.43% | +12.95% | +37.48% |
| 2007 | +17.50% | +7.76% | +9.74% |
| 2008 | -42.17% | -33.70% | -8.48% |
| 2009 | +35.43% | +28.51% | +6.92% |
| 2010 | +43.77% | +12.94% | +30.84% |
| 2011 | -20.14% | -8.91% | -11.23% |
| 2012 | +19.78% | +2.72% | +17.06% |
| 2013 | +38.29% | +8.40% | +29.89% |
| 2014 | -9.43% | +8.53% | -17.95% |
| 2015 | +18.16% | -12.38% | +30.54% |
| 2016 | +0.23% | +19.15% | -18.92% |
| 2017 | +1.02% | +5.89% | -4.87% |
| 2018 | -5.56% | -12.03% | +6.47% |
| 2019 | +23.63% | +19.19% | +4.44% |
| 2020 | +38.82% | +2.50% | +36.32% |
| 2021 | +28.74% | +21.16% | +7.59% |
| 2022 | -7.63% | -8.44% | +0.81% |
| 2023 | +1.21% | +7.35% | -6.13% |
| 2024 | +11.93% | +19.29% | -7.35% |
| 2025 | +103.14% | +28.06% | +75.08% |
The strategy beat the TSX Composite in 19 of 26 calendar years.
Limitations
Commodity concentration. The strategy is effectively a commodity supercycle timing strategy in Canada. Basic Materials and Energy dominate the top-two positions. Investors taking large concentrated positions in those sectors carry single-commodity risk that diversification doesn't address.
Deeper drawdown than the index. Max drawdown of -49.01% against the TSX Composite's -41.58%. Down capture below 100% describes the average down quarter; it does not mean the strategy suffers less in a real crisis. 2008 proves the point.
Currency exposure. Returns are in CAD. The TSX Composite comparison is apples-to-apples for CAD investors. USD-based investors face additional CAD/USD exchange rate exposure on top of equity volatility. CAD tends to track oil prices, which means currency moves can amplify or dampen returns for USD investors relative to the CAD figures shown.
Oil price dependency. Two of the worst years (2008, 2014) were driven primarily by oil price collapses. The strategy has no oil price signal. It holds energy momentum positions and then rotates out after the quarterly rebalance shows the sector has lost momentum. By then, some of the loss has already occurred.
2025 terminal weight. The +103.14% return in 2025 has an outsized effect on the 26-year CAGR. Remove it, and the CAGR and excess figures are meaningfully lower. A single extraordinary year at the end of a long backtest inflates the compound.
Thin universe. Avg 64.3 stocks per quarter puts Canada eighth of the 13 markets by portfolio size, well below the US at 308 and China at 320. In periods where the strategy holds only Materials or Energy, the portfolio may be concentrated in 20-30 names. Smaller Canadian names carry real liquidity constraints that would reduce live execution returns.
Data coverage. FMP's TSX coverage from 2000 may not fully represent the early-period universe. Results before 2003 should be read with some caution regarding data completeness.
Data: Ceta Research (FMP financial data warehouse). Universe: TSX (Canada). Period: 2000-2025 (26 years), quarterly rebalance, next-day-close execution, returns in CAD. Past performance does not guarantee future results. This is educational content, not investment advice.
Part of the Sector Momentum Rotation series. US flagship blog
