Market participants are continuously seeking innovative tools to better understand market dynamics and manage risk. This week marks the launch of the S&P 500^® Realized Dispersion Indices. These indices are designed to measure the historical dispersion of The 500™ over various time periods, providing valuable insights into market volatility and the performance of individual stocks relative to the broader market. They also serve as an analytical complement to the Cboe S&P 500 Dispersion Index (DSPX), which measures implied dispersion over the next 30 days.

Understanding Dispersion and Its Importance

Dispersion is an important statistical measure that quantifies the range of outcomes among the components of an index during a specific period. By evaluating how individual stocks perform in relation to the overall index, it’s possible to gain insights into individual patterns and underlying risks.

The S&P 500 Realized Dispersion Indices offer two primary measures: the S&P 500 1-Day Realized Dispersion Index, which reflects historical dispersion over a single trading day; and the S&P 500 30-Day Realized Dispersion Index, which provides insights over a rolling 30-calendar day period. The full universe is used for the S&P 500 1-Day Realized Dispersion Index, while the 30-day version is limited to stocks that remain in the index for the entire rolling period and maintain non-zero weights; corporate actions like spin-offs are excluded to avoid distortions. These indices utilize daily and monthly returns, as well as adjusted close weights of each S&P 500 constituent, alongside the daily and monthly returns of The 500 itself. This comprehensive approach makes it possible for market participants to gain a nuanced understanding of market behavior and the performance of individual stocks.

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Exhibits 1a & 1b show the historical hypothetical levels of the index over the period for which data is available. The spikes highlight volatile market conditions where individual stocks experienced varying degrees of price movements, which often resulted in greater differences in performance. This divergence in stock returns relative to one another typically manifested as increased dispersion, making patterns and underlying risks across the market easier to observe.

It’s useful to highlight the difference between macro volatility and dispersion, particularly through the lens of historical market events. Dispersion reflects how differently individual stocks move from one another, while volatility captures the overall intensity of market movement. Correlation measures the degree to which two securities move in relation to each other. During the Black Monday crash of 1987 and the Dot-Com burst of March 2000, dispersion reached an all-time high as stock performance diverged significantly—some soared while some crashed, driven by lower correlations. In contrast, events like the Global Financial Crisis of 2008 and COVID in 2020 were marked by high volatility and high correlations, where most stocks moved in the same direction. Recognizing these patterns could provide insights into the fundamental drivers of equity market risk and return.

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Exhibit 2 compares the S&P 500 30-Day Realized Dispersion Index with the DSPX, highlighting the relationship between historical and implied dispersion over time. Realized dispersion reflects the variability of individual stock returns over the past 30 days, while DSPX reflects the market’s expectation for dispersion over the next 30 days. The two series generally moved together but there were notable gaps during periods of heightened uncertainty. These divergences can offer insights into shifts in market sentiment and can help identify when the market overestimated or underestimated future stock return differences.

Conclusion: A Practical Addition to the Investment Analytics Toolkit

The launch of the S&P 500 Realized Dispersion Indices marks a notable development in the tools available to investors seeking to navigate market volatility. By providing a transparent measure of realized dispersion, these indices may help investors better understand the underlying dynamics of risk and return in the U.S. equity market.

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