Trailing Benchmarks

The S&P 500 rose 1.6 percent last week, joining a global equity rally after European Central Bank President Mario Draghi expanded stimulus to combat slowing growth and the threat of deflation. The index is down 0.3 percent in 2015, after jumping more than 10 percent in each of the previous three years.

In 2014, investors pulled money out of mutual funds, where the challenge to find bigger gains in a monolithic market contributed to the industry’s worst year in at least a decade. Among equity funds with at least $500 million, about 73 percent trailed their benchmarks, the most since 2004, data compiled by Bloomberg show.

ETFs, which invest in a basket of shares without regard to the individual companies, have seen their popularity rise amid uninterrupted equity gains. Investors poured $140 billion into the securities last year while withdrawing $55 billion from mutual funds, data compiled by Bloomberg and the Investment Company Institute show.

Higher Volatility

The dominance of ETFs and the increased influence from central banks caused stocks to move in unison last year, according to Dubravko Lakos-Bujas, head of U.S. equity and quantitative strategy at JPMorgan in New York. Three rounds of monetary easing from the Federal Reserve lifted almost every stock, fueling the bull market that has tripled in prices in almost six years.

As the Fed prepares to raise interest rates for the first time since 2006, investors will start to discern winners and losers, he said.

“The gap between elevated levels of correlation and low levels of volatility resulted in a very unfavorable environment,” Lakos-Bujas said. “Dispersion may pick up on the back of higher volatility levels in 2015 and it should open up the opportunity set for stock pickers.”

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