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.

'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:- The total return over 5 years of Maximum Yield Strategy is 100.7%, which is lower, thus worse compared to the benchmark SPY (106.8%) in the same period.
- During the last 3 years, the total return, or performance is 31.7%, which is smaller, thus worse than the value of 71.9% from the benchmark.

'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 15%, which is smaller, thus worse compared to the benchmark SPY (15.7%) in the same period.
- Looking at annual return (CAGR) in of 9.6% in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (19.8%).

'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:- Looking at the historical 30 days volatility of 23.3% in the last 5 years of Maximum Yield Strategy, we see it is relatively higher, thus worse in comparison to the benchmark SPY (18.9%)
- During the last 3 years, the historical 30 days volatility is 27%, which is larger, thus worse than the value of 21.9% 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.'

Applying this definition to our asset in some examples:- Looking at the downside risk of 16.7% in the last 5 years of Maximum Yield Strategy, we see it is relatively greater, thus worse in comparison to the benchmark SPY (13.8%)
- Compared with SPY (15.9%) in the period of the last 3 years, the downside volatility of 19.4% is larger, thus worse.

'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 (0.69) in the period of the last 5 years, the risk / return profile (Sharpe) of 0.54 of Maximum Yield Strategy is smaller, thus worse.
- During the last 3 years, the Sharpe Ratio is 0.26, which is lower, thus worse than the value of 0.79 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:- The downside risk / excess return profile over 5 years of Maximum Yield Strategy is 0.75, which is lower, thus worse compared to the benchmark SPY (0.95) in the same period.
- Looking at ratio of annual return and downside deviation in of 0.37 in the period of the last 3 years, we see it is relatively smaller, thus worse in comparison to SPY (1.09).

'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:- Compared with the benchmark SPY (5.61 ) in the period of the last 5 years, the Ulcer Index of 11 of Maximum Yield Strategy is larger, thus worse.
- Looking at Ulcer Index in of 13 in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (6.08 ).

'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:- 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)
- During the last 3 years, the maximum drop from peak to valley is -35.7 days, which is smaller, 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). 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 471 days, which is larger, thus worse compared to the benchmark SPY (139 days) in the same period.
- Looking at maximum days below previous high in of 471 days in the period of the last 3 years, we see it is relatively greater, thus worse in comparison to SPY (119 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.'

Applying this definition to our asset in some examples:- Looking at the average days below previous high of 118 days in the last 5 years of Maximum Yield Strategy, we see it is relatively larger, thus worse in comparison to the benchmark SPY (32 days)
- Compared with SPY (22 days) in the period of the last 3 years, the average days under water of 164 days is higher, 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.