Standard & Poor’s today announced that it intends to include income trusts in the S&P/TSX composite index, the broad benchmark index for the Toronto Stock Exchange.

According to S&P, trusts will likely be added to the composite index by mid-year.

The decision follows a study of income trusts by the S&P/TSX Canadian index committee, as well as consultation with S&P’s Canadian Index advisory panel and other interested groups.

The trust sector is the fastest growing segment of the Canadian equity marketplace. There were 175 income trusts listed on the TSX at Dec. 31, 2004, with a market capitalization of over $118 billion. Trusts now represent 8% of the total market capitalization of the TSX.

In the coming months, S&P says it intends to identify and confirm any new rules that will be required to govern the inclusion of income trusts in the composite index, in consultation with market participants.

S&P says it will continue to provide a parallel index that will be identical to the current composite, but that will exclude income trusts.

S&P will not include income trusts in the large-cap S&P/TSX 60 Index.

“The decision to include income trusts in the composite, while continuing to offer a version of the index that excludes trusts, reflects Standard & Poor’s ongoing adaptation to the marketplace as it changes, as well as our commitment to providing quality products that reflect the diverse needs of Canadian investors,” said Steve Rive, vp of Canadian index services at Standard & Poor’s, in a release.

In a conference call with analysts and the media, Rive explained that the purpose of maintaining two versions of the composite index is designed to maximize the flagship index’s investability and its representativeness. While S&P has decided that it’s necessary to include income trusts in the composite to accurately reflect the current state of the Canadian market, the firm also recognizes that some investors would prefer to use an index that doesn’t include income trusts, for a variety of reasons — for those investors, it is maintaining the non-income trust version.

Rive said that the old version of the index will receive the same level of support from S&P, including real-time availability. It will be coming up with a new name for the non-trust version. He added that the old version of the index will be maintained as long as investors require it – it does not plan to eventually phase it out.

Rive said he could not estimate how many investors will use the new version of the index, versus how many will stick with the old one.

Rive clarified that listed limited partnerships will not be included in the new index, but said that other concerns – for example whether trust-like vehicles such as income depository securities should be included – will be part of an ongoing consultation into how to introduce trusts to the index.

Other issues for discussion include whether the inclusion of trusts will be done in phases in, or all trusts will be added at once. Rive said that back in October, when an S&P panel was studying this issue, it estimated that 56 trusts would have been added to the index based on data at the time – boosting the index’s market cap by about $60 billion and adding 50 basis points in dividend yield.

S&P will treat the inclusion of trusts simply as a large addition to the index. It will not be constructing a historical version of the index for comparability.

The Canadian Association of Income Funds (CAIF) applauded today’s announcement. “This announcement is a recognition and acknowledgement of the importance of the income fund sector in Canadian capital markets”, said Margaret Lefebvre, executive director of CAIF.