From yield-bearing option trades to funds packaging bank loans, it’s shaping up to be a bumper year for strategies that purport to bring a professional investing edge to the masses.
Financial firms of all stripes are marketing their creative trades to clients beset with uncertainty about the economy and Federal Reserve policy. Yet virtually no allocation has proved as lucrative as the simplest of them all: Buying and holding the S&P 500.
Money managers have lavished cash on a panoply of would-be diversification strategies. Yet they’ve had to sit and watch as the famous index trounced around three out of every four exchange-traded funds in the past year. That’s the worst drubbing since at least 2010. The favorite picks of mutual fund managers are trailing their least-favorite ones in one of the worst semi-annual showings in years.
“In a low-volatility, high-return environment like 2024, investors should stick to the basics — buying uncomplicated index funds, and active mutual funds with a proven track record of delivering alpha,” said Julian Emanuel, chief equity, derivatives and quant strategist at Evercore ISI. “No need to complicate strategy. In simplicity there is beauty.”
Anyone who dared to deviate from the capitalization-weighted hegemony of the biggest indexes is getting crushed, again and again. Thank the snowballing rallies in the likes of Nvidia Corp. and Microsoft Corp. For investors on the right side, it’s been a boon. The S&P 500 is up about 15% and it’s still only June. The world’s most-watched equity index just touched its 31st record high of 2024 and has now risen in eight of the last nine weeks.
A casualty of the concentrated advance has been diversification. Bonds as an asset class remain down on the year. Raw materials as tracked by the Bloomberg Commodities Index are up just 3%. Only 23% of equity ETFs have managed to beat the S&P 500, according to an analysis by Bloomberg Intelligence’s Athanasios Psarofagis. Performance-chasing strategies like actively managed ETFs, quant-powered smart beta and thematics are among those with the weakest relative performance.
While the ceaseless surge of indexes like the S&P 500 and Nasdaq 100 has lined pockets among the buy-and-hold faithful, it remains a source of anxiety for a chorus of analysts, who note the precariousness of a market where Nvidia alone accounts for more than 30% of the index upside this year. The AI chipmaker slumped about 7% in the week’s last two trading sessions on above-average volume, after briefly claiming the once-unthinkable label as the world’s most-valuable company.
“Diversifying and de-risking is the right course of action going into the second half,” said Micheal O’Rourke, chief market strategist at Jonestrading. “Investors should not be counting on Nvidia to continue to be the nearly solo driver of S&P 500 strength.”
Beyond conventional diversification strategies, the rapidly expanding universe of ETFs that marry cash flow from selling options with a bet on stocks or equity indexes are trailing benchmarks by wide margins, even accounting for their high-yield payouts. The biggest, JPMorgan’s Equity Premium Income ETF (ticker JEPI), has gained about 6% on a total-return basis. Sinking money into cash has also represented a big opportunity cost for defensive investors.
The impulse to find alternatives to the S&P 500 is being fanned not only by the index’s top-heavy advance but by an economic and monetary backdrop that has defied any effort to interpret it.
Just six months after wagering on as many as six interest-rate cuts from the Federal Reserve, traders were forced to capitulate yet again this week on monetary-easing ahead, as data showed US services activity expanded by the most in more than two years. Industrial production also increased.
With uncertainty rampant, investors have stuck with what’s worked — tech stocks. A survey found 41% of fund managers expect large-cap growth stocks to continue to drive the rally, according to Bank of America Corp.
Thanks to their muscle memories cemented over more than a decade now, these money managers have good reason to jump onto high-momentum companies that boast strong revenue growth ahead. But along the way, the more complex trades touted by the Wall Street crowd are struggling to impress a slew of safety- and diversification-minded traders.
“The concept of ‘defense’ has changed for many investors,” said Kevin Gordon, senior investment strategist at Charles Schwab. “In this unique cycle, their knee-jerk reaction has been to jump into large-cap growth areas — notably tech — when skittishness starts to creep in.”
