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.

'Total return is the amount of value an investor earns from a security over a specific period, typically one year, when all distributions are reinvested. Total return is expressed as a percentage of the amount invested. For example, a total return of 20% means the security increased by 20% of its original value due to a price increase, distribution of dividends (if a stock), coupons (if a bond) or capital gains (if a fund). Total return is a strong measure of an investment’s overall performance.'

Applying this definition to our asset in some examples:- Looking at the total return, or increase in value of 54.7% in the last 5 years of Maximum Yield Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (61.9%)
- Looking at total return in of 56.8% in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (79.4%).

'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.'

Applying this definition to our asset in some examples:- The annual return (CAGR) over 5 years of Maximum Yield Strategy is 9.1%, which is smaller, thus worse compared to the benchmark SPY (10.1%) in the same period.
- Compared with SPY (21.5%) in the period of the last 3 years, the annual performance (CAGR) of 16.2% 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.'

Applying this definition to our asset in some examples:- Compared with the benchmark SPY (21.5%) in the period of the last 5 years, the volatility of 25.8% of Maximum Yield Strategy is higher, thus worse.
- Looking at volatility in of 28.2% in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (21.2%).

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

Which means for our asset as example:- The downside risk over 5 years of Maximum Yield Strategy is 18.6%, which is greater, thus worse compared to the benchmark SPY (15.5%) in the same period.
- Looking at downside risk in of 19.3% in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (14.1%).

'The Sharpe ratio is the measure of risk-adjusted return of a financial portfolio. Sharpe ratio is a measure of excess portfolio return over the risk-free rate relative to its standard deviation. Normally, the 90-day Treasury bill rate is taken as the proxy for risk-free rate. A portfolio with a higher Sharpe ratio is considered superior relative to its peers. The measure was named after William F Sharpe, a Nobel laureate and professor of finance, emeritus at Stanford University.'

Applying this definition to our asset in some examples:- Compared with the benchmark SPY (0.36) in the period of the last 5 years, the ratio of return and volatility (Sharpe) of 0.26 of Maximum Yield Strategy is lower, thus worse.
- Looking at Sharpe Ratio in of 0.48 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (0.9).

'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.'

Which means for our asset as example:- Compared with the benchmark SPY (0.49) in the period of the last 5 years, the excess return divided by the downside deviation of 0.36 of Maximum Yield Strategy is lower, thus worse.
- During the last 3 years, the ratio of annual return and downside deviation is 0.71, which is lower, thus worse than the value of 1.35 from the benchmark.

'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.'

Using this definition on our asset we see for example:- 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 (9.15 )
- During the last 3 years, the Ulcer Ratio is 9.83 , which is larger, thus worse than the value of 9.78 from the benchmark.

'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:- Compared with the benchmark SPY (-33.7 days) in the period of the last 5 years, the maximum reduction from previous high of -35.7 days of Maximum Yield Strategy is lower, thus worse.
- During the last 3 years, the maximum reduction from previous high is -23.5 days, which is larger, thus better than the value of -24.5 days from the benchmark.

'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'

Applying this definition to our asset in some examples:- Looking at the maximum days under water 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 (305 days)
- During the last 3 years, the maximum days under water is 331 days, which is greater, thus worse than the value of 305 days from the benchmark.

'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:- Compared with the benchmark SPY (65 days) in the period of the last 5 years, the average time in days below previous high water mark of 137 days of Maximum Yield Strategy is higher, thus worse.
- Looking at average days under water in of 99 days in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (80 days).

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.