In last Thursdays email discussing the VTS Aggressive Vol Strategy, recall I had the question about whether the tickers for that strategy (SVXY, VIXY) can simply be replaced with the ZIV and VXZ. Basically asking whether they can use the more conservative tickers within the more active strategy.
I mentioned that it’s not a good idea to simply replace those tickers and I wanted to do a little more thorough explanation as to why.
ZIV and VXZ trade a different part of the VIX futures curve.
Those futures from the 4th – 7th month in orange are quite often flatter than the 1st and 2nd month in green, which means the day to day movements of ZIV and VXZ are also often times less. That may make them safer, so why not increase the trade frequency?
Well it’s very important to note, the signals I use and the thresholds for each are also different when pertaining to that part of the VIX futures curve. We actually have to calculate and track them in a different way because sometimes market events have a much different effect on those two different sections of the VIX futures. There’s plenty of times when the front months are inverted and the back months are normal.
So if it did work out well by simply switching the tickers without changing anything else in the strategy, that would only be by coincidence. A backtest of this will illustrate:
VTS Aggressive Vol using ZIV / VXZ instead of SVXY / VIXY:
(purely switching the tickers, no other changes made)
It looks fine right? Consistent, great performance, and the drawdowns were quite minimal as well. So on first glance it appears to be working. But like I said that’s really only by coincidence.
Here’s the same strategy compared to the VTS Conservative Vol:
In reality the specifically designed VTS Conservative Vol Strategy that only took 45% of trading days actually outperformed the hypothetical “Aggressive Vol replacement strategy” that would have taken about 73% of trades.
So more trades isn’t enough. It also has to be specifically designed to profit from the right market movements and avoid the negative ones, and all for the right reasons. I believe the best first line of defense against portfolio drawdowns is not being in the bad trades in the first place. That doesn’t mean we don’t take losses or have bad days, we do and will again. But we don’t enter trades just to be more active.
Cash is an active portfolio position, and we only deploy capital when the risk reward profile of doing so is beneficial. Anytime we can take less risk, reduce market exposure, and increase performance that’s a win every time.
Our family of volatility strategies is specifically designed to target different levels of risk tolerance, and they are my best effort at optimization. I absolutely welcome questions and I will calculate and run the numbers on anything you ask me so feel free to brainstorm your ideas with me.
However it’s probably unlikely it will improve things. I literally spent years in the past crunching numbers on every possible combination of signals and thresholds I could think of. But yes, feel free to keep trying 🙂
Current VTS Total Portfolio Solution Allocations
VTS Aggressive Vol Strategy – Optional replacement for higher risk tolerance investors
VTS Conservative Vol Strategy – Optional replacement for lower risk tolerance investors
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