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.'

Applying this definition to our asset in some examples:- Looking at the total return, or performance of 113.8% in the last 5 years of Maximum Yield Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (102%)
- Looking at total return in of 108.5% in the period of the last 3 years, we see it is relatively higher, thus better in comparison to SPY (31.5%).

'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.'

Which means for our asset as example:- Looking at the annual return (CAGR) of 16.4% in the last 5 years of Maximum Yield Strategy, we see it is relatively greater, thus better in comparison to the benchmark SPY (15.1%)
- During the last 3 years, the annual return (CAGR) is 27.8%, which is higher, thus better than the value of 9.6% from the benchmark.

'Volatility is a rate at which the price of a security increases or decreases for a given set of returns. Volatility is measured by calculating the standard deviation of the annualized returns over a given period of time. It shows the range to which the price of a security may increase or decrease. Volatility measures the risk of a security. It is used in option pricing formula to gauge the fluctuations in the returns of the underlying assets. Volatility indicates the pricing behavior of the security and helps estimate the fluctuations that may happen in a short period of time.'

Which means for our asset as example:- The historical 30 days volatility over 5 years of Maximum Yield Strategy is 27.2%, which is larger, thus worse compared to the benchmark SPY (20.9%) in the same period.
- Looking at volatility in of 24.8% in the period of the last 3 years, we see it is relatively larger, thus worse in comparison to SPY (17.6%).

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

Applying this definition to our asset in some examples:- The downside risk over 5 years of Maximum Yield Strategy is 19.6%, which is larger, thus worse compared to the benchmark SPY (14.9%) in the same period.
- During the last 3 years, the downside risk is 17.7%, which is higher, thus worse than the value of 12.4% from the benchmark.

'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.'

Applying this definition to our asset in some examples:- Compared with the benchmark SPY (0.6) in the period of the last 5 years, the risk / return profile (Sharpe) of 0.51 of Maximum Yield Strategy is lower, thus worse.
- During the last 3 years, the ratio of return and volatility (Sharpe) is 1.02, 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.'

Using this definition on our asset we see for example:- Looking at the ratio of annual return and downside deviation of 0.71 in the last 5 years of Maximum Yield Strategy, we see it is relatively lower, thus worse in comparison to the benchmark SPY (0.84)
- Looking at ratio of annual return and downside deviation in of 1.43 in the period of the last 3 years, we see it is relatively larger, thus better in comparison to SPY (0.57).

'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.'

Using this definition on our asset we see for example:- Looking at the Ulcer Ratio 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 (9.32 )
- Looking at Downside risk index in of 7.26 in the period of the last 3 years, we see it is relatively lower, thus better in comparison to SPY (10 ).

'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:- The maximum reduction from previous high over 5 years of Maximum Yield Strategy is -35.7 days, which is smaller, thus worse compared to the benchmark SPY (-33.7 days) in the same period.
- Compared with SPY (-24.5 days) in the period of the last 3 years, the maximum DrawDown of -23.5 days is greater, thus better.

'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'

Using this definition on our asset we see for example:- The maximum time in days below previous high water mark over 5 years of Maximum Yield Strategy is 516 days, which is higher, thus worse compared to the benchmark SPY (488 days) in the same period.
- Compared with SPY (488 days) in the period of the last 3 years, the maximum time in days below previous high water mark of 126 days is smaller, thus better.

'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 time in days below previous high water mark of 133 days in the last 5 years of Maximum Yield Strategy, we see it is relatively greater, thus worse in comparison to the benchmark SPY (123 days)
- Compared with SPY (177 days) in the period of the last 3 years, the average time in days below previous high water mark of 32 days is smaller, thus better.

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 and do not account for slippage, fees or taxes.
- Results may be based on backtesting, which has many inherent limitations, some of which are described in our Terms of Use.