The measure looks at the distribution of returns among a set of equities – the S&P 500 in this case – over a given period. Higher volatility in one period relative to another suggests lower correlation among the observed stocks and presents a better environment for active management.
The dirt underneath
While volatility among index constituents has been healthy, the volatility of the index as measured by the CBOE Volatility index has been historically low and moving counter to that of its underlying returns. During 2017, the cross-sectional volatility of the 10 largest index positions (about 22% of the total index market cap) was 4.1%, 2.4 percentage points below the rest of the index, implying that the low volatility of a relatively few stocks could be muting the volatility of the index as a whole.