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.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (81.9%) in the period of the last 5 years, the total return, or performance of 78.2% of Maximum Yield Strategy is lower, thus worse.
- Looking at total return, or increase in value in of 36.3% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (46.1%).

'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:- Looking at the compounded annual growth rate (CAGR) of 12.3% in the last 5 years of Maximum Yield Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (12.7%)
- During the last 3 years, the annual performance (CAGR) is 10.9%, which is lower, thus worse than the value of 13.5% from the benchmark.

'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.'

Using this definition on our asset we see for example:- Looking at the historical 30 days volatility of 24% in the last 5 years of Maximum Yield Strategy, we see it is relatively higher, thus worse in comparison to the benchmark SPY (19.8%)
- During the last 3 years, the 30 days standard deviation is 27.7%, which is larger, thus worse than the value of 23% from the benchmark.

'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:- Compared with the benchmark SPY (14.5%) in the period of the last 5 years, the downside risk of 17.3% of Maximum Yield Strategy is higher, thus worse.
- Looking at downside risk in of 19.9% in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (16.8%).

'The Sharpe ratio (also known as the Sharpe index, the Sharpe measure, and the reward-to-variability ratio) is a way to examine the performance of an investment by adjusting for its risk. The ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William F. Sharpe.'

Using this definition on our asset we see for example:- Looking at the ratio of return and volatility (Sharpe) of 0.41 in the last 5 years of Maximum Yield Strategy, we see it is relatively smaller, thus worse in comparison to the benchmark SPY (0.52)
- Looking at Sharpe Ratio in of 0.3 in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (0.48).

'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:- Compared with the benchmark SPY (0.7) in the period of the last 5 years, the ratio of annual return and downside deviation of 0.56 of Maximum Yield Strategy is smaller, thus worse.
- During the last 3 years, the downside risk / excess return profile is 0.42, which is lower, thus worse than the value of 0.65 from the benchmark.

'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.'

Using this definition on our asset we see for example:- The Downside risk index over 5 years of Maximum Yield Strategy is 11 , which is higher, thus worse compared to the benchmark SPY (6.08 ) in the same period.
- Compared with SPY (6.77 ) in the period of the last 3 years, the Downside risk index of 13 is greater, 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.'

Which means for our asset as example:- 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)
- Compared with SPY (-33.7 days) in the period of the last 3 years, the maximum DrawDown of -35.7 days is lower, thus worse.

'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:- Compared with the benchmark SPY (139 days) in the period of the last 5 years, the maximum days under water of 471 days of Maximum Yield Strategy is larger, thus worse.
- Compared with SPY (119 days) in the period of the last 3 years, the maximum days below previous high of 471 days is larger, thus worse.

'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 (35 days) in the period of the last 5 years, the average time in days below previous high water mark of 116 days of Maximum Yield Strategy is higher, thus worse.
- During the last 3 years, the average time in days below previous high water mark is 163 days, which is higher, thus worse than the value of 27 days from the benchmark.

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.