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Invest in VIX volatility using ZIV

Update January 2017: The recent performance of investing in volatility can be seen here. You are probably wondering how we could achieve yearly performances of more than 50% with some of our rotation strategies. The reason is that the Maximum Yield Rotation Strategy and the Global Market Rotation Enhanced Strategy are investing in inverse volatility. Invest in inverse Volatility So, here are now some facts to show you why I like inverse volatility so much. In this chart you see the performance of the ZIV mid-term inverse volatility ETF compared to some other global market ETF from our rotation strategy. The ZIV performance of 76% for the last 12 month was just incredible. In the next chart you see a comparison of the VIX volatility index compared to the ZIV performance. ZIV has a inverse relation to the VIX index. This means that ZIV goes down when volatility or VIX goes up. For the 1 year period VIX is more or less the same (+0.19%). The VIX index is now at 15.6%. So, why did ZIV go up so much, when the VIX index is unchanged? This is because of the strong contango of the VIX mid-term futures of which the ZIV ETF is composed. If I calculate, then I get an average monthly performance of 4.8% (=12. root of 1.76), during the last 12 month, due to the strong contango of the VIX futures which track volatility. At the moment the monthly "roll yield" of ZIV is a little bit lower, but it is still about 3% per month. Now, if you look at the ZIV performance you see that ZIV only made 0.69% since April 12. Why this??? If you look at the VIX Index, you see that during the same period, it went up by almost 30%. [...]

2017-10-02T20:00:00+00:00 By |0 Comments

Harvesting Contango: How To Build An ETF Rotation Strategy With More Than 50% Annualized Returns

In this paper I want to explain the readers how the Maximum Yield Rotation Strategy of www.logical-invest.com is built. This strategy harvests the so called Contango. Harvesting Contango by investing in inverse volatility This Strategy harvests contango and achieves very high returns investing in inverse volatility. From 2011 to today the annual performance was more than 70% per year. Year to date the performance is 40.9%. The Sharpe Ratio (Return/Risk) of 2.12 is a "DREAM VALUE" and I doubt that someone can show me a strategy with a higher ratio. The strategy invests in 4 different ETFs and harvests the contango: US Market (MDY - S&P MidCap 400 SPDRs) U.S. Treasury Bonds - (EDV Vanguard Extended Duration Treasury 25+yr) Volatility - (ZIV VelocityShares Inverse VIX Medium-Term) cash - (SHY Barclays Low Duration Treasury) only if Treasury correlation to SPY > -0.25 The Maximum Yield Strategy switches semi-monthly between these 4 ETFs. For the switching I use a ranking system like the one I explained in my SeekingAlpha article of the Global Market Rotation Strategy. The ranking system is also using 3 month historical performance and 20 day volatility. Using also volatility is quite important for harvesting contango, because it reduces the ranking of high volatile ETFs like ZIV. However, if you want to play such a rotation strategy by yourself, then you can also just look at the 3 month historical performance to benefit from contango. In this strategy the ZIV ETF is the most important performance driver. ZIV can only be backtested since 2011, so that I cannot present a longer backtest for the whole strategy, but the way the strategy is built, you can backtest parts of it for more than 10 years. Benefit from Contango The Maximum Yield Rotation Strategy is composed by several smaller sub-rotation strategies. Here is an overview of [...]

2017-10-02T20:00:00+00:00 By |2 Comments

Volatility Premium – Why we invest in ZIV and not in XIV

Several times I have been asked why we invest in ZIV (inverse mid-term volatility) and not in XIV (inverse front month volatility) in our Maximum Yield Rotation Strategy and in the "Global Market Rotation Enhanced Strategy" to harvest the volatility premium. Harvest Volatility Premium smartly After all, front month VIX Future contango is about 2-3x bigger then medium term contango. At the moment XIV profits from nearly 9% monthly VIX Futures contango. ZIV profits from about 3% monthly VIX Futures contango, or volatility premium Normally you would think that XIV should have a far better performance than ZIV, but now look at this chart of the 1 year performance. ZIV has performed very well. With 64% annual performance it performs nearly 4% better than XIV and this with much less volatility - thus allows better to harvest the volatility premium. The main problem is that both of the ETFs are inverse ETFs. This means that underlying they are constructed by shorting VIX futures. These ETFs are rebalanced every day and this results in a quite big time decay. XIV has a very high volatility of about 55% compared to only 25% for ZIV. Higher volatility means also bigger time decay losses. The 25% volatility of ZIV fits very well to the volatilities of our global market ETFs (MDY, FEZ, EEM, EPP, ILF). Rotation strategies work better, if the ETFs have more or less the same volatility. Rotation Strategy backtests - all to benefit from volatility premium If I backtest our Maximum Yield Rotation Strategy with XIV instead of ZIV, then I only get an annual performance of 31% with a volatility of 48% since 2011. With ZIV, I get 70% annual performance with only 27% volatility. This is a huge difference, which shows you, how important it is, that the ETFs [...]

2017-10-02T20:00:00+00:00 By |2 Comments

Strategies For Trading Inverse Volatility

Update: You can see the most recent performance our our inverse volatility strategy here. Consult vixcentral for the daily VIC term curve. In this paper, I present five different strategies you can use to trade inverse volatility. Why trade inverse volatility you ask? Because since 2011, trading inverse volatility was probably the most rewarding investment an investor could make in the markets. Annual returns of between 40% - 100% have been possible which crushes any other strategy I know. Smartly Trading inverse volatility In modern markets, the best way to protect capital would be to rotate out of falling assets, like we do in our rotation strategies. This is relatively easy, if you are invested only in a few ETFs, but it is much more difficult, if you are invested in a lot of different shares. In such a situation an easy way to protect capital is to hedge it, going long VIX Futures, VIX call options or VIX ETFs VXX. If 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. To hedge a portfolio by 100% an investor needs to buy VXX ETFs for about 20% of the portfolio value. The VXX ETF loses up to 10% of it's value per month, because of the VIX Futures contango, so this means that scared investors are willing to pay 1.5-2% of the portfolio value per month or around 25% per year for this insurance. Investing in inverse volatility means nothing more, than taking over the risk and collecting this insurance premium from worried investors and you can capitalize on this with a few simple strategies, which I will show you below. Something seems afoot. Why do investors pay 25% per year [...]

2017-10-02T20:00:00+00:00 By |45 Comments

New Maximum Yield Rotation Strategy backtest charts

Here are two backtests charts of the new MYRS strategy with adaptive allocation, now also suitable for your retirement account. The annual return of the old and the new strategy is more or less the same. During low volatility markets, the return of the new strategy is probably slightly lower, however during difficult volatile years like 2014, the return of the new strategy is significantly higher and the drawdowns and the risk is reduced nearly by a factor of 2x. The slightly lower return is due to the fact that some time a part of your capital is invested in the Treasury hedge to reduce risk. An option for your retirement account? The overall risk/return (Sharpe) ratio is about 2x higher than the one of the old strategy, so there is no question, that the new strategy is significantly better and maight be a suitable option for your retirement account. See the updated performance charts also here.   If you are new to our site, here a summary of our strategy: "The Maximum Yield Rotation Strategy is our top performing investment strategie. The Strategy invests on a semi-monthly basis in two US asset classes or cash. These US asset classes are: U.S. Treasury Bonds – (EDV Vanguard Extended Duration Tsy 25+yr) Volatility – (ZIV VelocityShares Inverse VIX Medium-Term) cash – (SHY Barclays Low Duration Treasury) Treasury bonds and inverse Volatility ETFs have significant negative correlation to each other. This means, that whatever the market sentiment is, there is always one assets performing well. The strategy is a good way to profit from VIX contango without risking heavy losses during a volatility spike. The incredibily high return of this strategy does not mean that this strategy is very risky.  The strategy minimizes the risk of losses during financial crisis by switching early into Treasurys or even switching [...]

2017-10-02T20:00:00+00:00 By |10 Comments

Volatilidad: Como construir una inversión con un rendimiento de más del 50%?

En este artículo quiero explicar cómo funciona nuestra Estrategia de Rotación de Máximo Rendimiento "Maximum Yield Rotation Strategy". Esta estrategia logra muy altos retornos por invertir en fondos de volatilidad inversa. Desde 2011 hasta hoy el rendimiento anual fue de más del 55% por año. Durante el año presente el rendimiento acumulado es del 27%. El ratio de Sharpe (una estimación del retorno por unidad de  riesgo) de 2,1 es un "valor sueño" y dudo que alguien puede mostrar una estrategia con una mayor proporción.La estrategia invierte en 4 ETF diferentes: Mercado de acciones de Estados Unidos Bonos del Tesoro Volatilidad Inversa Equivalente a Efectivo

2017-10-02T20:00:00+00:00 By |0 Comments