An indicator of expected stock dispersion published by the CBOE, a leading derivatives exchange, has shown a sudden spike since April 2, 2025 (Liberation Day). The CBOE S&P 500 Dispersion Index (DSPX) measures the expected dispersion in the S&P 500 over the next 30 calendar days. It is derived from the prices of options on the S&P 500 index and its individual stock constituents. More simply put, a rising DSPX implies that the market expects the differences in returns between stocks in the S&P 500 to go up.
Over the 10 years prior to Liberation Day, the median daily value for DSPX was 24.4. Post Liberation Day through April 17, 2025, it has spiked to a median value of 41.5. Through April 17, this is the highest monthly average in the 10-year history of DSPX (although still below the highest single-day value of 58.9 on March 18, 2020, during the COVID-19 pandemic). The spike in DSPX suggests that tariffs have created a new economic regime, which could accentuate the gap between stock winners and losers, sometimes even within industries.
In 2025, investors are making decisions on individual securities based on foreign exposure to imports and exports, primarily to China and other Southeast Asian countries. In addition, large movements in macroeconomic areas, such as currencies, U.S. Treasuries, and commodities (e.g., drop in oil prices) have been catalyzed by tariff policies. Existing sector and factor ETFs do not adequately capture this new tariff-driven Trump 2.0 market regime in a targeted way.
The limitations of using a standard industry ETF are best highlighted by looking at three discount retailers—Dollar General Corporation, Dollar Tree Inc., and Five Below Inc. All three are holdings in the SPDR S&P Retail ETF (XRT) and had similar returns in 2024. However, after tariffs were first announced on February 1, 2025, Dollar General significantly outperformed the other two, since it has much lower imports due to a focus on consumables. CFRA’s fundamental equity analysts estimate that only about 10% to 15% of Dollar General’s products are imported, while the corresponding number for Dollar Tree is 50%. Five Below’s import percentage is also estimated to be 50% to 60%, a majority of which is from China. As seen in Table 1, after tariffs were first officially announced, the dispersion of returns between these very similar businesses increased significantly. XRT holds all three stocks, and there are currently few ETFs that provide targeted access to stocks in a way that distinguishes winners and losers resulting from such tariff-related trends.
It is important to note that the nature of the tariff impact varies by firm and sector. In some sectors, like retail and autos, the dispersion of returns is more directly tariff-driven. In consumer segments, such as soft drinks, it is more indirect. Firms like The Coca-Cola Company, with significant sales outside the U.S., have outperformed due to the drop in the U.S. dollar, which should be a sales and earnings tailwind.
As with sector ETFs, factor ETFs also have limitations in capturing differentials between stocks in this new economic regime. In 2024, growth outperformed value by almost 16.8%, and these ETFs were effective tools to capture the impact of the tech-driven artificial intelligence (AI) trade. However, in 2025, the spread between traditional factor ETFs narrowed since they are not designed to capture the differential impact on stocks due to tariffs and related macroeconomic factors, such as dollar depreciation.
The tariff policy uncertainty and resultant market volatility have created a challenging market environment for investors and fund managers. However, this new economic environment also presents an opportunity. Since current ETFs may not adequately capture the impact of tariffs in a targeted way, it opens the door for new product ideas and portfolio strategies. An example is the recent launch by Global X of the Global X S&P 500 U.S. Revenue Leaders ETF (EGLE) and the Global X S&P 500 U.S. Market Leaders Top 50 ETF (FLAG). These ETFs focus on stocks in the S&P 500 that are more focused on the U.S. domestic market, which the issuer believes are better positioned for onshoring, rising tariffs, and shifting economic dynamics. There are also other targeted reshoring ETFs available to investors like the Tema American Reshoring ETF (RSHO) and iShares U.S. Manufacturing ETF (MADE), although both have underperformed the SPDR S&P 500 Trust ETF (SPY) year-to-date through April 17, 2025.
This new high-dispersion environment could also potentially benefit active managers. An analysis by S&P Global of their past SPIVA reports1 shows a wider spread of active manager returns during periods of high dispersion. If dispersion rises as implied by the current level of DSPX, it may create opportunities for active managers to design strategies to try and beat the broader market. It also gives investors the opportunity to be more creative in designing portfolio strategies for this new economic paradigm.
Going forward, it will be important to monitor whether stock dispersion stays elevated and if stocks within individual industry sectors show differential returns based on the impact of tariffs. This will create opportunities for managers of active and indexed ETFs to create new products that can differentiate between the winners and losers in a new and reconfigured international trade regime.
Footnote: 1 Dispersion: Measuring Market Opportunity; Edwards and Lazzara, December 2013.