Shorting Volatility: Comparison of ZIV replacements in MYRS

Here is a comparison of different ZIV replacement ETFs in the MYRS strategy, shorting volatility. Going long ZIV is the most simple way to execute the strategy. ZIV is in fact an inverse ETF, so even if ZIV does not have leverage, ZIV needs to be rebalanced daily. Rebalanced ETFs in general have losses. These losses become bigger with higher volatility. 

Shorting Volatility the smart way

On the chart below you can see the quite poor ZIV performance during the last 197 days. The effect is not so bad in the strategy, because during high volatile periods like now, you are only partly invested. So, the total rebalancing loss you will suffer during one year is probably only about 3% on the whole strategy. But nevertheless if you can short VXZ, then you should do it. The effect of a short position is the same.

The difference of 3% between ZIV and VXZ shortingvolatility may not seem big at the first view, but such small differences can sum up and at the end of the year, this may be worth quite a nice christmas present. However if all this sounds much too complicated for you, then just go with the default strategy using ZIV.

A way to use TVIZ would be, to always invest about the same amount in TVIZ and only change the EDV hedge, so that the final allocation is respected. A profit of 19% (after borrowing cost) only with rebalancing losses in less than a year is not bad at all.

By the way, the poor performance of ZIV is due to a 65% higher volatility (VIX level) during these 197 days. So in fact ZIV did even a good job to achieve a zero performance. Once volatility goes back to normal levels, ZIV will profit a lot – the reason why shorting volatility

ETF197 day performanceperformance (trade adjusted)comment
ZIV (inverse)-0.48%-0.48%simple investment but 8% rebalancing losses
VXZ -7.85%+7.85% (with a short investment)
+5% (after borrowing costs)
the way to go if you can short ETFs. This is similar to short the underlying futures with the difference that futures don’t have borrowing costs
TVIZ (2x leveraged)-21.11%+10.55% (with a 50% short investment)
+9.5% (after borrowing costs)
this would be the best if you don’t rebalance too often.
TVIZ has a poor liquidity and a huge spread, but borrowing cost is only half because you only need to invest half the capital.

Shorting volatility

Shorting Volatility ZIV VXZ TVIZ comparison

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14 thoughts on “Shorting Volatility: Comparison of ZIV replacements in MYRS”

  1. Hi Frank. Great post.

    Could you please give an example of this “A way to use TVIZ would be, to always invest about the same amount in TVIZ and only change the EDV hedge, so that the final allocation is respected.”

    Please make an example from the current MYRS strategy suggestions:

    Investment for January 2015:
    30% ZIV + 70% EDV

    • If you for example want to invest always 100’000$ in ZIV, you could short also 50’000$ TVIZ. This is the same.
      The hedge ratio does not change. For 100’000$ ZIV you would need to buy 100’000/30%*70%=233000$ EDV. This corresponds then to the actual 30%/70% hedge ratio.
      Even better would be to short half of the EDV amount in TMV. So, you would have short positions of 50’000 TVIX and 116500$ TMV

  2. Hi Frank,
    You mention both TVIX (short term 2X VIX) and TVIZ (medium term 2X VIX). Can they be used interchangeably, or is one preferred over the other? TVIX has good volume while TVIZ has very little, and it would be easier for the broker to find short TVIX.

  3. Frank, I’ve been using the EDV/ZIV combo for awhile with good results. I have tried to switch over to VXZ/TMV but my trades at ThinkorSwim (TOS) have been rejected because they are “hard to borrow.” TOS said they are certainly willing to allow shorts but they don’t seem to have ready supplies of either ETF to loan out. Do you have a U.S. brokerage recommendation where borrowing VXZ and TMV is easier? Thanks.

    • When I try to short VXZ at Schwab they reply “This stock is either ineligible to be shorted or shares must be borrowed externally. Lenders of hard-to-borrow securities charge a fee in the form of interest. Clients who wish to short a minimum of $50,000 of a hard-to-borrow security and are willing to pay a fee to cover the cost of borrowing those shares, may contact Securities Lending at 800-355-2448 to determine the fee amount.”

  4. Stephen,
    Depending on the broker, shorting is very easy, or a bit extra work, or very difficult. Schwab I believe is in the very difficult category. On Interactive Brokers it is usual automatic, easy and cheap. On Tradestation, it does require a call to the trade desk, but they usually get the security in seconds and the fees/costs are usually very low. Shorting ETFs can potentially create other challenges of the securities getting called back, changing borrow costs, etc., so they are certainly not appropriate for many.

    • Scott,

      Since I posted here I checked at OptionsXpress who is a partner with Schwab, and where I also have an account. They have SPXS, SPXU, TMV available to short, but not VXZ.

      I read a lot of bad reviews about IB.

      Thank you.

  5. I dealt with a lot of brokers over many decades. I had accounts with IB for many years before they were ever advertised. Best technology, best pricing and execution, bar none. However, if you want to talk with someone, need help, whatever – not as good as others. They are ideal for those that are either professionals in the industry, “hard core”, or very self reliant.

  6. Thanks for the great post Frank. I am not able to short in my retirement account, but interestingly enough I can purchase options. What’s your opinion on buying ITM puts against SVXY or VIXY as opposed to buying VIZ? Would this be any more or less advantageous?

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