Return dispersion highest for megacaps

Returns dispersion, as measured by cross-sectional volatility, moved higher in 2017 among the 50 largest U.S. equities. Looking at three-year rolling windows ended through Sept. 30, the dispersion among the 50 largest constituents of the S&P 500 was markedly higher than that of the next 150 members. Both groups have had divergent paths since the start of 2016, with cross volatility in the top 50 reaching new heights in 2017 and the next 150 stocks having more muted movement. While less-volatile numbers should be expected out of a larger data set, until 2016 the spread between the two was relatively tight and they typically moved in sync with one another.

The trend should bode well for active management, as a greater dispersion among the investment universe creates opportunity for alpha generation, but as the markets have experienced, active large- and midcap funds have struggled to add alpha in recent years; small cap has performed better as a whole.

The level of the Chicago Board Options Exchange Volatility index was added to give perspective on market volatility as a whole as the market's fear gauge remains at historically low levels, ending the third quarter at 9.51.

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