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.

'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.'

Which means for our asset as example:- Compared with the benchmark SPY (81.5%) in the period of the last 5 years, the total return, or increase in value of 79.7% of Maximum Yield Strategy is smaller, thus worse.
- Looking at total return in of 24.5% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (48.1%).

'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.'

Which means for our asset as example:- Compared with the benchmark SPY (12.7%) in the period of the last 5 years, the annual return (CAGR) of 12.5% of Maximum Yield Strategy is smaller, thus worse.
- Compared with SPY (14%) in the period of the last 3 years, the compounded annual growth rate (CAGR) of 7.6% is lower, thus worse.

'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:- The historical 30 days volatility over 5 years of Maximum Yield Strategy is 24.7%, which is larger, thus worse compared to the benchmark SPY (20.5%) in the same period.
- Looking at volatility in of 28.5% in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (23.8%).

'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.'

Which means for our asset as example:- Looking at the downside volatility of 17.9% in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (15%)
- Compared with SPY (17.3%) in the period of the last 3 years, the downside risk of 20.8% is higher, thus worse.

'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 Sharpe Ratio of 0.4 in the last 5 years of Maximum Yield Strategy, we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.5)
- Compared with SPY (0.48) in the period of the last 3 years, the risk / return profile (Sharpe) of 0.18 is smaller, thus worse.

'The Sortino ratio measures the risk-adjusted return of an investment asset, portfolio, or strategy. It is a modification of the Sharpe ratio but penalizes only those returns falling below a user-specified target or required rate of return, while the Sharpe ratio penalizes both upside and downside volatility equally. Though both ratios measure an investment's risk-adjusted return, they do so in significantly different ways that will frequently lead to differing conclusions as to the true nature of the investment's return-generating efficiency. The Sortino ratio is used as a way to compare the risk-adjusted performance of programs with differing risk and return profiles. In general, risk-adjusted returns seek to normalize the risk across programs and then see which has the higher return unit per risk.'

Applying this definition to our asset in some examples:- The ratio of annual return and downside deviation over 5 years of Maximum Yield Strategy is 0.56, which is lower, thus worse compared to the benchmark SPY (0.68) in the same period.
- Looking at excess return divided by the downside deviation in of 0.24 in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (0.66).

'Ulcer Index is a method for measuring investment risk that addresses the real concerns of investors, unlike the widely used standard deviation of return. UI is a measure of the depth and duration of drawdowns in prices from earlier highs. Using Ulcer Index instead of standard deviation can lead to very different conclusions about investment risk and risk-adjusted return, especially when evaluating strategies that seek to avoid major declines in portfolio value (market timing, dynamic asset allocation, hedge funds, etc.). The Ulcer Index was originally developed in 1987. Since then, it has been widely recognized and adopted by the investment community. According to Nelson Freeburg, editor of Formula Research, Ulcer Index is “perhaps the most fully realized statistical portrait of risk there is.'

Applying this definition to our asset in some examples:- Looking at the Ulcer Index of 12 in the last 5 years of Maximum Yield Strategy, we see it is relatively higher, thus worse in comparison to the benchmark SPY (7.13 )
- Compared with SPY (8.25 ) in the period of the last 3 years, the Downside risk index of 15 is larger, thus worse.

'Maximum drawdown is defined as the peak-to-trough decline of an investment during a specific period. It is usually quoted as a percentage of the peak value. The maximum drawdown can be calculated based on absolute returns, in order to identify strategies that suffer less during market downturns, such as low-volatility strategies. However, the maximum drawdown can also be calculated based on returns relative to a benchmark index, for identifying strategies that show steady outperformance over time.'

Applying this definition to our asset in some examples:- Looking at the maximum reduction from previous high of -35.7 days in the last 5 years of Maximum Yield Strategy, we see it is relatively lower, thus worse in comparison to the benchmark SPY (-33.7 days)
- Looking at maximum DrawDown in of -35.7 days in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (-33.7 days).

'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.'

Applying this definition to our asset in some examples:- Looking at the maximum days below previous high of 516 days in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (150 days)
- Looking at maximum days below previous high in of 516 days in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (150 days).

'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.'

Which means for our asset as example:- The average days under water over 5 years of Maximum Yield Strategy is 136 days, which is greater, thus worse compared to the benchmark SPY (41 days) in the same period.
- Compared with SPY (36 days) in the period of the last 3 years, the average time in days below previous high water mark of 193 days is higher, thus worse.

Historical returns have been extended using synthetic data.
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- 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.