Investors previously content to set it and forget it in an S&P 500 index fund are now aggressively speculating in individual stocks more than they have in about 13 years.

This is resulting in an exuberance and investor confidence not seen in decades, according to Bloomberg.


In other times, a no-headache portfolio that tracks the S&P 500 Index and gained 80% in 11 months would be everything an investor could ask for.

But not this year, when a hunt for excess returns is feral and makes an already stellar index performance not good enough.

By one measure, investors’ preference for a “one-decision” index over individual stocks just fell to the lowest level since May 2007.

That’s according to strategists at Leuthold Group, who looked at daily volume in the largest exchange-traded fund tracking the S&P 500 Index as a percentage of volume in the underlying stocks.

The measure, already low in late 2020, has dropped by another 20% this year.

Historically, the gauge has risen when the stock market declined, as investors used the broader index for indiscriminate selling, and fell when the stock market was doing fine.

To some, this decline in the so-called liquidity premium to a pre-crisis level is a sign active stock picking is gaining steam.

To others, it means investors are more comfortable betting on individual firms that are more predictable than the broader S&P.

To Leuthold Group’s Doug Ramsey, it’s screaming investor confidence has become extreme.

It’s “a sign of exuberance, since investors are no longer content with index returns that have been fantastic,” Ramsey said by email. “They turn increasingly to speculation in individual stocks.

Speculation has been in abundance over the past few months, with dramatic gains and painful falls in stocks like GameStop Corp. still fresh in investors’ minds.

The somewhat similar trend has been pronounced in the options market as well, where traders loaded up on calls in individual stocks from Tesla Inc. to AMC Entertainment Holdings Inc. and Sundial Growers Inc., while institutional investors, the so-called smart money, ramped up index-wide protection against losses via puts.

That has widened the spread between bullish options positioning in individual stocks and indexes on the CBOE to the most in more than two decades.

Image source: