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. Therefore 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.

'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:- The total return, or increase in value over 5 years of Maximum Yield Strategy is 174%, which is greater, thus better compared to the benchmark SPY (69.8%) in the same period.
- Looking at total return, or increase in value in of 50% in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (37.6%).

'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.'

Using this definition on our asset we see for example:- The annual return (CAGR) over 5 years of Maximum Yield Strategy is 22.3%, which is higher, thus better compared to the benchmark SPY (11.2%) in the same period.
- Looking at compounded annual growth rate (CAGR) in of 14.5% in the period of the last 3 years, we see it is relatively greater, thus better in comparison to SPY (11.2%).

'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 30 days standard deviation of 26.7% in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (19%)
- During the last 3 years, the volatility is 29.1%, which is greater, thus worse than the value of 22% from the benchmark.

'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:- The downside risk over 5 years of Maximum Yield Strategy is 19.5%, which is larger, thus worse compared to the benchmark SPY (13.9%) in the same period.
- Compared with SPY (16.1%) in the period of the last 3 years, the downside risk of 21.9% is larger, thus worse.

'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.'

Which means for our asset as example:- Looking at the risk / return profile (Sharpe) of 0.74 in the last 5 years of Maximum Yield Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (0.46)
- During the last 3 years, the ratio of return and volatility (Sharpe) is 0.41, which is higher, thus better than the value of 0.4 from the benchmark.

'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.'

Which means for our asset as example:- Compared with the benchmark SPY (0.63) in the period of the last 5 years, the excess return divided by the downside deviation of 1.02 of Maximum Yield Strategy is higher, thus better.
- Compared with SPY (0.54) in the period of the last 3 years, the downside risk / excess return profile of 0.55 is higher, thus better.

'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.'

Which means for our asset as example:- Compared with the benchmark SPY (5.91 ) in the period of the last 5 years, the Ulcer Index of 12 of Maximum Yield Strategy is larger, thus worse.
- Compared with SPY (6.99 ) in the period of the last 3 years, the Ulcer Index of 14 is greater, thus worse.

'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.'

Which means for our asset as example:- Compared with the benchmark SPY (-33.7 days) in the period of the last 5 years, the maximum DrawDown of -44.6 days of Maximum Yield Strategy is lower, thus worse.
- Compared with SPY (-33.7 days) in the period of the last 3 years, the maximum drop from peak to valley of -44.6 days is lower, thus worse.

'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.'

Which means for our asset as example:- The maximum days below previous high over 5 years of Maximum Yield Strategy is 346 days, which is higher, thus worse compared to the benchmark SPY (187 days) in the same period.
- Looking at maximum days below previous high in of 346 days in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (139 days).

'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.'

Using this definition on our asset we see for example:- Looking at the average days below previous high of 77 days in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (45 days)
- Compared with SPY (42 days) in the period of the last 3 years, the average days under water of 101 days is larger, 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.