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The S&P 500’s PSR multiple was 1.4 in 2013 similar to the other two indices. Over that time, much of the S&P 500’s outperformance came from its relative valuation re-rating.Ĭurrently, the S&P 500 trades at a price-to-sales ratio (PSR) of 2.4 compared to a 1.3 PSR for the S&P 400 and a 1.2 PSR for the Russell 2000 index. Since 2013, the S&P 500 has returned 13.2% annually, compared to a 11.7% return for the S&P 400 midcap index, and a 10.0% return for the Russell 2000 small cap index. In the last decade, while passive went from being 34% of domestic funds to 57%, the S&P 500 large cap index most favored by passive investors outperformed smaller cap indices. Since bigger is generally better in this increasingly passive investing world, it’s probably no coincidence that size has been a key driver of performance trends over recent years. If a stock went up a lot in the past, that’s good enough-we can stop the interview right there. Passive funds don’t typically consider how much profit a company earns, or whether its shares trade at a nosebleed valuation. Most passive funds are market capitalization driven, which means they just automatically buy the biggest, most valuable companies in whatever their coverage universe is. If you stop and really think about it, it’s an incredibly lazy form of analysis. One knock against passive investing is how passive it is. That simple and straightforward value proposition is why passive fund flows have outpaced active for ten years in a row.
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Many investors choose a passive investing approach, because it is low cost and normally outperforms most active funds.
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In 2013, 34% of domestic equity funds were invested passively (mutual funds and ETFs), whereas today that figure stands at 57%. S&P 500 index funds dominate fund flows largely due to a broader shift in how investors allocate capital. The passive bubble is a long-term trend that’s also inflating the S&P 500’s valuation. The torrid start for these ODTE darlings is almost entirely due to a valuation lift-not a positive shift in fundamentals. Year to date, the S&P 500 is up 7.9%, while Tesla and Apple shares are +70% and +18%, respectively. Source: Bloomberg Silverlight Asset Management, LLC
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