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:

'Total return, when measuring performance, is the actual rate of return of an investment or a pool of investments over a given evaluation period. Total return includes interest, capital gains, dividends and distributions realized over a given period of time. Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions or dividends and capital appreciation, representing the change in the market price of an asset.'

Using this definition on our asset we see for example:
  • Looking at the total return, or increase in value of 181.5% in the last 5 years of Maximum Yield Strategy, we see it is relatively higher, thus better in comparison to the benchmark SPY (91.7%)
  • Looking at total return, or performance in of 34.8% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (47.9%).

CAGR:

'The compound annual growth rate isn't a true return rate, but rather a representational figure. It is essentially a number that describes the rate at which an investment would have grown if it had grown the same rate every year and the profits were reinvested at the end of each year. In reality, this sort of performance is unlikely. However, CAGR can be used to smooth returns so that they may be more easily understood when compared to alternative investments.'

Using this definition on our asset we see for example:
  • The annual return (CAGR) over 5 years of Maximum Yield Strategy is 23%, which is higher, thus better compared to the benchmark SPY (13.9%) in the same period.
  • Looking at annual performance (CAGR) in of 10.5% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (13.9%).

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.'

Which means for our asset as example:
  • Looking at the 30 days standard deviation of 23.4% in the last 5 years of Maximum Yield Strategy, we see it is relatively higher, thus worse in comparison to the benchmark SPY (19%)
  • During the last 3 years, the 30 days standard deviation is 26.3%, which is larger, thus worse than the value of 22.8% from the benchmark.

DownVol:

'Downside risk is the financial risk associated with losses. That is, it is the risk of the actual return being below the expected return, or the uncertainty about the magnitude of that difference. Risk measures typically quantify the downside risk, whereas the standard deviation (an example of a deviation risk measure) measures both the upside and downside risk. Specifically, downside risk in our definition is the semi-deviation, that is the standard deviation of all negative returns.'

Using this definition on our asset we see for example:
  • Compared with the benchmark SPY (13.8%) in the period of the last 5 years, the downside deviation of 16.5% of Maximum Yield Strategy is greater, thus worse.
  • During the last 3 years, the downside deviation is 19%, which is greater, thus worse than the value of 16.7% from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • The Sharpe Ratio over 5 years of Maximum Yield Strategy is 0.88, which is higher, thus better compared to the benchmark SPY (0.6) in the same period.
  • During the last 3 years, the Sharpe Ratio is 0.3, which is smaller, thus worse than the value of 0.5 from the benchmark.

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.'

Applying this definition to our asset in some examples:
  • Looking at the ratio of annual return and downside deviation of 1.24 in the last 5 years of Maximum Yield Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.82)
  • Compared with SPY (0.68) in the period of the last 3 years, the downside risk / excess return profile of 0.42 is lower, thus worse.

Ulcer:

'The Ulcer Index is a technical indicator that measures downside risk, in terms of both the depth and duration of price declines. The index increases in value as the price moves farther away from a recent high and falls as the price rises to new highs. The indicator is usually calculated over a 14-day period, with the Ulcer Index showing the percentage drawdown a trader can expect from the high over that period. The greater the value of the Ulcer Index, the longer it takes for a stock to get back to the former high.'

Which means for our asset as example:
  • Looking at the Ulcer Ratio of 8.91 in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (5.82 )
  • Looking at Downside risk index in of 10 in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (7.14 ).

MaxDD:

'Maximum drawdown measures the loss in any losing period during a fund’s investment record. It is defined as the percent retrenchment from a fund’s peak value to the fund’s valley value. The drawdown is in effect from the time the fund’s retrenchment begins until a new fund high is reached. The maximum drawdown encompasses both the period from the fund’s peak to the fund’s valley (length), and the time from the fund’s valley to a new fund high (recovery). It measures the largest percentage drawdown that has occurred in any fund’s data record.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (-33.7 days) in the period of the last 5 years, the maximum DrawDown of -35.7 days of Maximum Yield Strategy is lower, thus worse.
  • 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 Maximum 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. It is the length of time the account was in the Max Drawdown. A Max Drawdown measures a retrenchment from when an equity curve reaches a new high. It’s the maximum an account lost during that retrenchment. This method is applied because a valley can’t be measured until a new high occurs. Once the new high is reached, the percentage change from the old high to the bottom of the largest trough is recorded.'

Using this definition on our asset we see for example:
  • Looking at the maximum days below previous high of 199 days in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (139 days)
  • Looking at maximum days below previous high in of 199 days in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (139 days).

AveDuration:

'The Drawdown Duration is the length of any peak to peak period, or the time between new equity highs. 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.'

Applying this definition to our asset in some examples:
  • The average days below previous high over 5 years of Maximum Yield Strategy is 49 days, which is higher, thus worse compared to the benchmark SPY (36 days) in the same period.
  • During the last 3 years, the average time in days below previous high water mark is 57 days, which is higher, thus worse than the value of 45 days from the benchmark.

Performance (YTD)

Historical returns have been extended using synthetic data.

Allocations
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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.