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
|ETF||197 day performance||performance (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.