Capital Markets: Observations & Insights

The Trouble With Passive ​ Searching For Yield

• Weightings in bond-like equities have been rising recently

• The vast majority of passive investing allows relative performance to drive relative weighting changes, irrespective of fundamentals ‒ This can exacerbate bubbles, such as in tech in the late 1990s

‒ These increased weightings along with high—and rising—valuations may elevate the risk of passive investments

S&P 500 Technology Sector

S&P 500 Bond-Like Equities

Weight

Rel Perf

Weight

Rel Perf

40%

300

22%

120

115

30%

200

20%

110

20%

105

100

18%

100

10%

95

0%

-

16%

90

Jul-96

Jul-03

Apr-98

Oct-01

Apr-05

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Jun-99

Jan-00

Jun-14

Jun-15

Jun-16

Feb-97

Mar-01

Feb-04

Feb-14

Feb-15

Feb-16

Dec-95

Nov-98

Dec-02

Nov-05

Sep-97

Aug-00

Sep-04

Dec-13

Dec-14

Dec-15

Aug-14

Aug-15

May-02

Source: FactSet. Bond like equities include consumer staples, telecommunications, utilities, and real estate.

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