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.

In addition due to the delisting of UGLD we've replaced this ticker now by UGL, the 3x leveraged GDL ETF.

Due to the changes, especially the shorting of VXZ, 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:- Looking at the total return, or increase in value of 171.1% in the last 5 years of Maximum Yield Strategy, we see it is relatively higher, thus better in comparison to the benchmark SPY (92.4%)
- Looking at total return in of 42.3% in the period of the last 3 years, we see it is relatively lower, thus worse in comparison to SPY (44.3%).

'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 annual performance (CAGR) of 22.1% in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus better in comparison to the benchmark SPY (14%)
- During the last 3 years, the annual performance (CAGR) is 12.5%, which is lower, thus worse than the value of 13% from the benchmark.

'Volatility is a statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a 'volatile' market.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (18.8%) in the period of the last 5 years, the volatility of 23.6% of Maximum Yield Strategy is larger, thus worse.
- Looking at volatility in of 26.1% in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (22.5%).

'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.'

Which means for our asset as example:- The downside volatility over 5 years of Maximum Yield Strategy is 16.6%, which is higher, thus worse compared to the benchmark SPY (13.7%) in the same period.
- Looking at downside volatility in of 18.9% in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (16.5%).

'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:- Compared with the benchmark SPY (0.61) in the period of the last 5 years, the ratio of return and volatility (Sharpe) of 0.83 of Maximum Yield Strategy is larger, thus better.
- Compared with SPY (0.47) in the period of the last 3 years, the Sharpe Ratio of 0.38 is lower, thus worse.

'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.'

Using this definition on our asset we see for example:- Compared with the benchmark SPY (0.84) in the period of the last 5 years, the downside risk / excess return profile of 1.18 of Maximum Yield Strategy is larger, thus better.
- Compared with SPY (0.64) in the period of the last 3 years, the ratio of annual return and downside deviation of 0.53 is lower, thus worse.

'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 (5.81 ) in the period of the last 5 years, the Ulcer Index of 8.65 of Maximum Yield Strategy is larger, thus worse.
- Looking at Downside risk index in of 9.79 in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (7.11 ).

'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:- Compared with the benchmark SPY (-33.7 days) in the period of the last 5 years, the maximum DrawDown of -35.7 days of Maximum Yield Strategy is lower, thus worse.
- During the last 3 years, the maximum DrawDown is -35.7 days, which is lower, thus worse than the value of -33.7 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) in days.'

Applying this definition to our asset in some examples:- The maximum days below previous high over 5 years of Maximum Yield Strategy is 169 days, which is greater, thus worse compared to the benchmark SPY (139 days) in the same period.
- During the last 3 years, the maximum days below previous high is 169 days, which is larger, thus worse than the value of 139 days from the benchmark.

'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.'

Which means for our asset as example:- Looking at the average days below previous high of 45 days in the last 5 years of Maximum Yield Strategy, we see it is relatively greater, thus worse in comparison to the benchmark SPY (37 days)
- Looking at average days under water in of 50 days in the period of the last 3 years, we see it is relatively higher, thus worse in comparison to SPY (45 days).

Historical returns have been extended using synthetic data.
[Show Details]

Allocations and holdings shown below are delayed by one month. To see current trading allocations of Maximum Yield Strategy, register now.

()

- 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.