Description

IMPORTANT

Due to announced delisting of ZIV as of July 12, 2020, with last trading day July 2, 2020, we're replacing ZIV by a short VXZ (iPath Series B S&P 500 VIX Mid-Term Futures ETN) position.

In addition due to the delisting of UGLD we've replaced this ticker now by UGL, the 3x leveraged GDL ETF.

Due to the changes, especially the shorting of VXZ, the total allocation of the strategy can be less than 100%. See more information in this article.


The Maximum Yield Rotation Strategy is a high-performing, high-risk investment strategy that rebalances twice a month. It trades one of the most profitable asset classes, volatility, by rebalancing a portfolio between two ETFs: ZIV (VelocityShares Inverse VIX Medium-Term ETF) and TMF (Direxion Daily 20+ Yr Treasury 3X ETF).

When you trade inverse volatility, which means going short VIX, you play the role of an insurer who sells worried investors an insurance policy to protect them from falling stock markets. Investing in inverse volatility means nothing more than taking over the risk and collecting this insurance premium from worried investors. This obviously needs to be done carefully by following a rules-based strategy.

This strategy is a good way to profit from VIX contango while minimizing heavy losses during volatility spikes. Since treasury bonds and inverse volatility have shown significant negative correlation to each other, the strategy reduces losses during financial crisis by switching early into treasuries. It is still a risky strategy and large drawdown are to be expected, so we recommend allocating no more than 15% of your overall portfolio.

For more information on trading "short volatility", read our original whitepaper on the topic.

Statistics (YTD)

What do these metrics mean? [Read More] [Hide]

TotalReturn:

'The total return on a portfolio of investments takes into account not only the capital appreciation on the portfolio, but also the income received on the portfolio. The income typically consists of interest, dividends, and securities lending fees. This contrasts with the price return, which takes into account only the capital gain on an investment.'

Using this definition on our asset we see for example:
  • The total return, or increase in value over 5 years of Maximum Yield Strategy is 100.7%, which is lower, thus worse compared to the benchmark SPY (106.8%) in the same period.
  • Compared with SPY (71.9%) in the period of the last 3 years, the total return, or increase in value of 31.7% is smaller, thus worse.

CAGR:

'Compound annual growth rate (CAGR) is a business and investing specific term for the geometric progression ratio that provides a constant rate of return over the time period. CAGR is not an accounting term, but it is often used to describe some element of the business, for example revenue, units delivered, registered users, etc. CAGR dampens the effect of volatility of periodic returns that can render arithmetic means irrelevant. It is particularly useful to compare growth rates from various data sets of common domain such as revenue growth of companies in the same industry.'

Using this definition on our asset we see for example:
  • The compounded annual growth rate (CAGR) over 5 years of Maximum Yield Strategy is 15%, which is lower, thus worse compared to the benchmark SPY (15.7%) in the same period.
  • Looking at compounded annual growth rate (CAGR) in of 9.6% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (19.8%).

Volatility:

'In finance, volatility (symbol σ) is the degree of variation of a trading price series over time as measured by the standard deviation of logarithmic returns. Historic volatility measures a time series of past market prices. Implied volatility looks forward in time, being derived from the market price of a market-traded derivative (in particular, an option). Commonly, the higher the volatility, the riskier the security.'

Applying this definition to our asset in some examples:
  • Looking at the volatility of 23.3% in the last 5 years of Maximum Yield Strategy, we see it is relatively higher, thus worse in comparison to the benchmark SPY (18.9%)
  • Compared with SPY (21.9%) in the period of the last 3 years, the historical 30 days volatility of 27% is higher, thus worse.

DownVol:

'The downside volatility is similar to the volatility, or standard deviation, but only takes losing/negative periods into account.'

Using this definition on our asset we see for example:
  • Looking at the downside deviation of 16.7% in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (13.8%)
  • Looking at downside risk in of 19.4% in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (15.9%).

Sharpe:

'The Sharpe ratio was developed by Nobel laureate William F. Sharpe, and is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. One intuition of this calculation is that a portfolio engaging in 'zero risk' investments, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.'

Using this definition on our asset we see for example:
  • Looking at the ratio of return and volatility (Sharpe) of 0.54 in the last 5 years of Maximum Yield Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (0.69)
  • Compared with SPY (0.79) in the period of the last 3 years, the Sharpe Ratio of 0.26 is lower, thus worse.

Sortino:

'The Sortino ratio improves upon the Sharpe ratio by isolating downside volatility from total volatility by dividing excess return by the downside deviation. The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative asset returns, called downside deviation. The Sortino ratio takes the asset's return and subtracts the risk-free rate, and then divides that amount by the asset's downside deviation. The ratio was named after Frank A. Sortino.'

Which means for our asset as example:
  • The excess return divided by the downside deviation over 5 years of Maximum Yield Strategy is 0.75, which is smaller, thus worse compared to the benchmark SPY (0.95) in the same period.
  • Looking at excess return divided by the downside deviation in of 0.37 in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (1.09).

Ulcer:

'The ulcer index is a stock market risk measure or technical analysis indicator devised by Peter Martin in 1987, and published by him and Byron McCann in their 1989 book The Investors Guide to Fidelity Funds. It's designed as a measure of volatility, but only volatility in the downward direction, i.e. the amount of drawdown or retracement occurring over a period. Other volatility measures like standard deviation treat up and down movement equally, but a trader doesn't mind upward movement, it's the downside that causes stress and stomach ulcers that the index's name suggests.'

Which means for our asset as example:
  • Compared with the benchmark SPY (5.61 ) in the period of the last 5 years, the Ulcer Index of 11 of Maximum Yield Strategy is higher, thus worse.
  • Compared with SPY (6.08 ) in the period of the last 3 years, the Ulcer Ratio of 13 is larger, thus worse.

MaxDD:

'A maximum drawdown is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown is an indicator of downside risk over a specified time period. It can be used both as a stand-alone measure or as an input into other metrics such as 'Return over Maximum Drawdown' and the Calmar Ratio. Maximum Drawdown is expressed in percentage terms.'

Applying this definition to our asset in some examples:
  • The maximum drop from peak to valley over 5 years of Maximum Yield Strategy is -35.7 days, which is lower, thus worse compared to the benchmark SPY (-33.7 days) in the same period.
  • During the last 3 years, the maximum reduction from previous high is -35.7 days, which is lower, thus worse than the value of -33.7 days from the benchmark.

MaxDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. The Max Drawdown Duration is the worst (the maximum/longest) amount of time an investment has seen between peaks (equity highs) in days.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (139 days) in the period of the last 5 years, the maximum time in days below previous high water mark of 471 days of Maximum Yield Strategy is larger, thus worse.
  • During the last 3 years, the maximum days under water is 471 days, which is larger, thus worse than the value of 119 days from the benchmark.

AveDuration:

'The Average Drawdown Duration is an extension of the Maximum Drawdown. However, this metric does not explain the drawdown in dollars or percentages, rather in days, weeks, or months. The Avg Drawdown Duration is the average amount of time an investment has seen between peaks (equity highs), or in other terms the average of time under water of all drawdowns. So in contrast to the Maximum duration it does not measure only one drawdown event but calculates the average of all.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (32 days) in the period of the last 5 years, the average days below previous high of 118 days of Maximum Yield Strategy is larger, thus worse.
  • During the last 3 years, the average days under water is 164 days, which is greater, thus worse than the value of 22 days from the benchmark.

Performance (YTD)

Historical returns have been extended using synthetic data.

Allocations ()

Allocations

Returns (%)

  • Note that yearly returns do not equal the sum of monthly returns due to compounding.
  • Performance results of Maximum Yield Strategy are hypothetical, do not account for slippage, fees or taxes, and are based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.