Description

IMPORTANT: This strategy can use a short VXZ position which may cause the total allocation of the strategy to 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 three ETFs: short VXZ (iPath Series B S&P 500 VIX Mid-Term Futures ETN), UBT (ProShares Ultra 20+ Year Treasury) and UGL (ProShares Ultra Gold).

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.'

Applying this definition to our asset in some examples:
  • The total return, or increase in value over 5 years of Maximum Yield Strategy is 152.3%, which is higher, thus better compared to the benchmark SPY (110.9%) in the same period.
  • Compared with SPY (69.3%) in the period of the last 3 years, the total return of 110.9% is higher, thus better.

CAGR:

'The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (16.1%) in the period of the last 5 years, the compounded annual growth rate (CAGR) of 20.4% of Maximum Yield Strategy is greater, thus better.
  • Compared with SPY (19.3%) in the period of the last 3 years, the annual performance (CAGR) of 28.4% is greater, thus better.

Volatility:

'Volatility is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease. Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period of time.'

Using this definition on our asset we see for example:
  • The 30 days standard deviation over 5 years of Maximum Yield Strategy is 25.4%, which is higher, thus worse compared to the benchmark SPY (17.5%) in the same period.
  • Compared with SPY (17.5%) in the period of the last 3 years, the volatility of 26.6% is larger, thus worse.

DownVol:

'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.'

Applying this definition to our asset in some examples:
  • Compared with the benchmark SPY (12.1%) in the period of the last 5 years, the downside risk of 18.5% of Maximum Yield Strategy is larger, thus worse.
  • Compared with SPY (11.5%) in the period of the last 3 years, the downside deviation of 19.1% is larger, thus worse.

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.'

Which means for our asset as example:
  • Compared with the benchmark SPY (0.78) in the period of the last 5 years, the Sharpe Ratio of 0.7 of Maximum Yield Strategy is smaller, thus worse.
  • Looking at ratio of return and volatility (Sharpe) in of 0.97 in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (0.96).

Sortino:

'The Sortino ratio, a variation of the Sharpe ratio only factors in the downside, or negative volatility, rather than the total volatility used in calculating the Sharpe ratio. The theory behind the Sortino variation is that upside volatility is a plus for the investment, and it, therefore, should not be included in the risk calculation. Therefore, the Sortino ratio takes upside volatility out of the equation and uses only the downside standard deviation in its calculation instead of the total standard deviation that is used in calculating the Sharpe ratio.'

Applying this definition to our asset in some examples:
  • Looking at the ratio of annual return and downside deviation of 0.97 in the last 5 years of Maximum Yield Strategy, we see it is relatively lower, thus worse in comparison to the benchmark SPY (1.13)
  • Looking at downside risk / excess return profile in of 1.35 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (1.46).

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:
  • Compared with the benchmark SPY (8.48 ) in the period of the last 5 years, the Ulcer Index of 8.32 of Maximum Yield Strategy is smaller, thus better.
  • Compared with SPY (5.3 ) in the period of the last 3 years, the Ulcer Ratio of 7.47 is higher, thus worse.

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.'

Using this definition on our asset we see for example:
  • The maximum DrawDown over 5 years of Maximum Yield Strategy is -23.5 days, which is higher, thus better compared to the benchmark SPY (-24.5 days) in the same period.
  • Looking at maximum drop from peak to valley in of -23.5 days in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (-18.8 days).

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). Many assume Max DD Duration is the length of time between new highs during which the Max DD (magnitude) occurred. But that isn’t always the case. The Max DD duration is the longest time between peaks, period. So it could be the time when the program also had its biggest peak to valley loss (and usually is, because the program needs a long time to recover from the largest loss), but it doesn’t have to be'

Which means for our asset as example:
  • Compared with the benchmark SPY (488 days) in the period of the last 5 years, the maximum time in days below previous high water mark of 331 days of Maximum Yield Strategy is lower, thus better.
  • Compared with SPY (199 days) in the period of the last 3 years, the maximum time in days below previous high water mark of 126 days is smaller, thus better.

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 time in days below previous high water mark over 5 years of Maximum Yield Strategy is 70 days, which is lower, thus better compared to the benchmark SPY (120 days) in the same period.
  • During the last 3 years, the average days under water is 29 days, which is lower, thus better than the value of 47 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 and do not account for slippage, fees or taxes.
  • Results may be based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.