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Passive Strategies Gaining in Popularity

March 11, 2013 | ,

Index-based investment strategies, those that passively invest with the goal of replicating the return pattern of a specific benchmark, were first created and marketed to investors beginning in the early 1970’s. The well-known financial concept known as Efficient Market Hypothesis was developed earlier in the 1960’s and postulated that it was not possible for an investor to consistently beat market returns on a risk-adjusted basis over time since market prices incorporate all available information. The adoption of this hypothesis by the finance community certainly contributed to the proliferation and validation of passive strategies.

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This chart description is for illustrative purposes only and its accuracy cannot be guaranteed. Please see full disclosures at end of PDF document in the web post. General description: Combination line and column chart showing volatility spread and calendar year returns for the CBOE S&P 500 PutWrite Index and S&P 500. Chart subtitle: Over the last few decades, options-based strategies have generated compelling patterns of performance thanks to differences between implied and realized market volatility. Chart source: Source: Bloomberg and eVestment as of September 30, 2023. Volatility spread is calculated as the difference between implied volatility, as measured by the VIX Index, and realized volatility of the S&P 500 Index over the subsequent 1-month period (21 trading days). Realized volatility is calculated as the standard deviation of daily logarithmic returns multiplied by an annualization factor. Chart visual description: Left Y-axis is labeled Spread and ranges from -80% to +40%. X-axis labels span years from 1990 to 2023. Right Y-axis is labeled Cal. Year Return from -40% to +40%. Each data set has its own X-axis, so orange line chart corresponding to Volatility Spread floats above column chart for calendar year returns. Average Volatility Spread line is dotted in dark orange at 4.5%. CBOE S&P 500 PutWrite Index is plotted in green columns and S&P 500 Index is plotted in blue columns. Chart data description: Data for index returns is annual; data for volatility is daily. Please contact us for the full dataset. End chart description. See disclosures at end of document.

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