Mind the Gap: Equity Dispersion Remains Pronounced

A surprise to the upside for many mega-cap stocks this earnings season, including Amazon, Meta, Alphabet, and more, resulted in major equity indexes rallying Thursday, with the Dow Jones Industrial Average closing up 500 points and the Nasdaq up 2.43%. Mega cap outperformance in Q1 overshadows the earnings misses that continue to quietly pile up. However, as dispersion between sector returns remains elevated — a marker of uncertainty that strategies like managed futures could potentially capitalize on in the coming months.

The S&P’s dispersion has remained elevated for much of 2023, a measurement of the difference in returns within a market or index. Dispersion has been exacerbated by investors chasing trends and promising stocks while simultaneously dropping under-performers, reflecting a lack of conviction in current markets, market technical analysts told Morningstar.

Dispersion for the S&P climbed to 31% at the end of March and the first quarter, up from 23% in February and above the 75th percentile historically according to S&P Dow Jones Indices data. As of the end of the first quarter, the information technology sector was up 21.62% and financials were down -5.53%.

“The dispersion of returns among sectors and industry groups has been dramatic since most stocks bottomed in September and October of 2022,” Mark Arbeter, president of Arbeter Investments, explained in a note earlier this month. “This is typical in a market that has no direction, whose market participants are confused, in an uncertain economy both here and abroad, with massive disagreements over where market and government rates are going, with OPEC making waves, a war in Ukraine to deal with, etc.”

Comparing the total returns of all of the S&P sector ETFs YTD highlights the dispersion between sectors as well as the pronounced and unique volatility expressed within each sector. The sector spreads have narrowed slightly this month ahead of the big tech earnings wins of the last two days, but if markets continue to rally on the backs of the mega-caps, that dispersion could widen further again.

“A lot of this has to do with so much indecision about the economy, about interest rates, about the war, about oil, that people don’t take long bets. They move very quickly and once something gets hot, momentum can be very strong both to the upside and the downside,” said Arbeter. “It’s just a very muddled picture.”

Invest for Uncertainty With DBMF

The iMGP DBi Managed Futures Strategy ETF (DBMF) allows for the diversification of portfolios across asset classes uncorrelated to traditional equities or bonds and is a strategy that seeks to capitalize on changing trends.

DBMF is an actively managed fund that uses long and short positions within the futures market on several asset classes: domestic equities, fixed income, currencies, and commodities (via its Cayman Islands subsidiary). The fund’s position within domestically managed futures and forward contracts is determined by the Dynamic Beta Engine, which analyzes the trailing 60-day performance of CTA hedge funds and then determines a portfolio of liquid contracts that would mimic the hedge funds’ averaged performance (not the positions).

DBMF is currently down about -9.08% YTD as of 04/26/2023 in the wake of the abrupt reversal of the inflation trade in March. Markets remain muddled for now with no clear trends emerging but as the banking crisis, Fed, and inflation narrative solidifies in the coming months, there is an opportunity for the strategy to capitalize on shifting trends. The current price provides a buying opportunity for advisors and investors looking to add the non-correlated opportunities that managed futures can provide.

For more news, information, and analysis, visit the Managed Futures Channel.