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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

Risk Management using Timed Hedging – Avoid DrawDowns

As you perhaps know I have invested all my money in my own strategies, and I and my family (the best wife of all and 4 nice children) are living from the return of these investments. So, I just cannot afford to lose much money in market corrections. Therefore I always try to improve the strategies to lower the risk of major losses through hedging. Timed Hedging The new "Timed hedging" is a major improvement of the rotation strategies. It increases the Return to Risk ratio of all strategies a lot. Timed hedging allows you to reduce the downside risk or the volatility of your investment by about 1/3rd without affecting the performance of the strategies. An excellent way to reduce the volatility or risk of your investment is hedging with Treasuries. Treasuries are most of the time negatively correlated to the stock market and still have a long term positive return. In my strategy emails, I will from now on always give an indication on how you can hedge the current strategy investment. There is a good possibility that 2014 will be a more choppy market than 2013. The 32% performance of the US stock market is just crying for some corrections, even if the economy outlook is still very positive. In a normal year like 2012 without tapering, the stock market (MDY – orange) and Treasuries (EDV – blue) have nearly perfectly mirrored charts. 2013 was a special year with extremely fast rising treasury yields during the summer period. This had the effect, that long duration ETFs like EDV lost up to 20% for the whole year. Since the beginning of 2014 treasuries show again a normal negative correlation of about -0.5 to the stock market (SPY). Since hedging with Treasuries is an extremely simple and effective [...]

2017-10-02T20:00:00+00:00 By |14 Comments

A new enhanced Global Market Rotation Strategy with adaptive ETF investment allocation

Update: See the current performance of this ETF investment strategy here. A new enhanced Global Market Rotation Strategy with adaptive ETF investment allocation The GMR strategy performed well during the last 10 years. Especially during years with a strong trend in one of the 5 world markets, this strategy was able to switch early to the best ETF and stay invested until another market ETF took the lead. A known problem for such monthly rotation strategies have been years like 2014 with no clear trend in the markets. During 2014, conflicts like Syria or Ukraine or the fear that the US market may have culminated and is ready for a correction, made investors switch several times in “risk off” mode which favors safe haven assets like our long term EDV or TLT Treasury. The bad thing was, that shortly after they switched back to “risk on” mode favoring our stock market ETFs. Such a whipsaw market is bad for “switching” rotation strategies and as a result, our GMRS strategy shows a negative return for 2014. The strategy had two big monthly losses, both with foreign market ETF investment and both times because of a soaring dollar after a FED statement. In fact most of the times a full switch from a stock market ETF investment to a treasury ETF is not the best strategy. Better is to keep both stock market and Treasury ETF investment and change the allocation gradually. In January I proposed to invest 20% in a short TMV Treasury hedge which is about equal to a nearly 50% TLT hedge. This was a first approach to tell you that in such years it is better to invest in both, stock market and Treasury ETF investment. This hedge has performed extremely well in 2014. TMV is 46% up and [...]

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

Backtest: New adaptive Global Market Rotation backtester

I just want to share a screenshot of the new backtest software, we have written in C# to calculate and backtest the new adaptive logical-invest strategies. This software can be used to calculate the variable allocation for the MYRS, GSRS and GMRS. Since 2017, QuantTrader, this backtest software is now also available for retail and institutional investors, see here. Our backtest software QuantTrader now available Below you see a 2 year graph showing the Global Market Rotation strategy backtest. The top chart just shows the 6 ETFs used in this strategy. The middle chart shows the allocation in percent of the ETFs for each month and the bottom chart shows the performance chart with EDV and SPY as benchmarks. It is interesting to see in the backtest, that normal years with strong trends like 2013 have long periods with the same ETFs. 2013 was dominated by MDY and IEV. IEV (Europe) is used as a replacement for FEZ, because it has a 10 year history. In 2014 we had many changes between the markets, but still this type of adaptive algorithm did manage this difficult situation much better than the old algorithm which could only switch 100% into one ETF. The backtest performance for these last 2 years 19.7% per year, with a Sharpe of 1.94. The old algorithm had 15% annual performance because of a good year 2013 but only a Sharpe ratio of 0.9. In general you can say that during years with long consistent trends, both algorithms will do well, but in years like 2014, where the really best allocation is somewhere in between stocks and Treasuries, a 100% rotation algorithm has problems to find the good ETF. Best regards Frank Grossmann Here more about the capabilities of QuantTrader: All you need for steering your investment [...]

2017-10-02T20:00:00+00:00 By |8 Comments

Logical Invest Strategy Performance for 2014

Dear investors, In general 2014 was quite a difficult year for investors, so we want to summarize and comment our strategy performance. Apart of the US market, all global markets finished the year with negative performances. SPY 13.46% (S&P 500 US market) FEZ -9.75% (Euro Stoxx 50) EEM -3.89% (MSCI Emerging Markets) EPP -1.92% (MSCI Pacific ex-Japan) ILF -12,29% (S&P Latin America) AGG 5.99% (Core Total US Bond (5-6yr)) Our Strategy Performance See here for a most recent Strategy Performance overview. However, most of the negative performance of these foreign market ETFs is due to the strong US$. The Euro lost 12% on the US$ and the US$ index UUP is 10% higher.  In fact, the USD/EUR hedged DBEU (MSCI Europe) ETF had a +4% performance, which is nearly 15% better than the USD denominated FEZ.  It is very difficult to forecast the influence of exchange rates on our strategies.  All this is driven by the Yellen and Draghi, but longer term, a strong US$ will make European and Asian markets more competitive.  So, we will probably see a rotation away from the US market to some foreign markets at some point. In spite of the global weakness and currency dislocations, the rotation strategy performance came through flat to up nicely for the year, and all had a strong year with hedging.  We had 5 intermediate short market corrections, which typically had a 2 week pullback of up to 10% and then a very fast recovery.  This sort of whipsaw market is not ideal for our rotation strategies.  At least for the old style of rotation strategies which always switched 100% between stock market ETFs and treasuries.  2014 was also a very strong year for treasuries, which again proved all analyst forecasts wrong. The 20% treasury hedge which I promoted since February 2014 had a very positive [...]

2017-10-02T20:00:00+00:00 By |7 Comments

Portfolio optimization: The all new Portfolio Builder

  From individual Strategies to Portfolio Optimization Based on the interest of our followers and our own investment philosophy, we have gradually evolved from offering single quantitative strategies towards blends or portfolios of strategies. The way we visualize our own development cycle might be best summarized in a chart: Where are we on this path and where are we heading? We believe we have now a stable set of 'core-strategies', which cover a broad spectrum of both risk/performance but also trading and hedging instruments. We will continue our research on new strategies, and will also in future come up with smart ideas in that area. However, we are currently increasing our effort in blending these strategies into portfolio solutions. The "Portfolio Builder" with fixed-weight allocations is here only the first step. Developing a dynamic Strategies of Strategies (or Meta-Strategies) which smartly allocate with changing weights among a set of our strategies is one of the projects we initiated since the four of us met in mid 2014. Our thought: Quickly reacting to or even anticipating changes in the market environment by changing horses on the fly, better dealing with changing correlations of markets and constantly challenging whether one of our strategies has lost ‘steam power’ should be even better than simply allocating funds with fixed weights or even worse discretionary among strategies. To continue the enhancement of our tools towards this vision, we’ve given our fixed-weight Portfolio Builder a major overhaul and implemented many of the requested features. Key features for portfolio optimization Some of the new key features for portfolio optimization are: Equity lines according to most recent strategy review Our subscribers know that we review our strategies periodically, either because we find improvements for the execution (change of IEV to FEZ in the Global Market Rotation), or introduce newly developed [...]

2017-10-02T20:00:00+00:00 By |9 Comments