In a previous Daily Blog post titled: “XIV / VXX and Volatility strategy performance during the financial crisis” I said this:
” The TQQQ (triple leveraged Nasdaq) has outperformed the XIV on both an absolute and risk adjusted measure since the XIV launched, yet nobody is talking about that. And I might point out how few people would be willing to buy TQQQ aggressively right now, yet they can’t get enough of XIV. Baader-Meinhof “
In this context, before the past year or two very few people had ever heard of volatility products like the XIV, and now it’s all they see. I didn’t mention the TQQQ or triple leveraged equity ETFs to get people interested in investing in them. With market valuations seemingly stretched to the high side right now I don’t believe now is a good time to be doing that. I don’t know if there is ever a good time for that actually, but certainly not now.
I was simply making a point that many people are ultra aggressive this year when buying the XIV because of the sheer magnitude of articles they’ve seen this year talking about it.
Yet how many of those same people would be willing to buy a triple leveraged equity ETFs right now?
But I mentioned the TQQQ already (cat’s out of the bag) so let’s talk about it. What do I mean when I say that it’s outperformed the XIV on an absolute and risk adjusted measure?
XIV vs TQQQ since XIV launched on Nov 30th, 2010:
Absolute return is just the terminal return over a time period, so in this case it’s pretty easy to see that the TQQQ has outperformed the XIV on an absolute basis.
25,000$ in TQQQ on November 30th, 2010 would be worth 382,000$
25,000$ in XIV on November 30th, 2010 would be worth 264,000$
Risk adjusted return is a more broad term though and can mean different things to different investors. I have a video series talking about some of these so for continuity I’m going to use the ones I’ve spoken at length about in the past, but of course there are other metrics as well (And you can view the YouTube videos later if you want by clicking the blue hyperlinks)
Sharpe Ratio – (the higher the better)
Ulcer Performance Index – (the higher the better)
Maximum Drawdown – (the lower the better)
Correlation to the S&P 500 – (the lower the better)
XIV vs TQQQ since Nov 30th, 2010:
Annualized return or compound annual growth rate (CAGR) is just absolute return and you can see the TQQQ is about 8% a year higher.
But it also has a higher Sharpe Ratio, higher Ulcer Performance Index, and a much lower maximum drawdown. The only category it underperformed in is correlation to the S&P 500, which I guess isn’t surprising because of course it is an equity ETF.
So in a pure “buy & hold” comparison TQQQ is arguably better than XIV.
But if everyone agrees that triple leveraged ETFs are risky, perhaps it’s a little easier to see why I also often say the same thing about inverse volatility products. So two conclusions if I may:
1) We will continue investing in volatility products as usual and they will always be a major part of our diversified portfolio. It’s true they are inherently riskier, but there’s plenty of ways to add layers of risk management and turn them into safer long term investments.
2) Although buy & hold comparisons favor the TQQQ, when trading tactically like we do and including plenty of cash positions as well, the XIV still suits our needs better and overall is the much better underlying instrument for our strategies.
I don’t like to do teasers and leave people hanging, but if you don’t mind let’s save that for a future blog post so I can dive into it in more detail.
I’ll show at a future date why the XIV is still better than the TQQQ for us, despite the lower buy & hold performance.
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