VTS Community,

Great question today from our buddy Navid:

 “I was wondering how the VTS Aggressive Vol Strategy would perform if we replace SVXY with SPXL.”


This is essentially a follow up on a previous article I wrote that you can read later called:  Comparing volatility ETPs to leveraged equity ETFs  –  XIV vs TQQQ

So if you’re not aware of them, there are actually several triple leveraged S&P 500 ETFs and one of them goes by the ticker symbol SPXL  (3x S&P 500 ETF).  So before I actually show the backtested results of switching out the volatility ETF for the equity ETF, let’s take a look at some 5 year charts to create a baseline.


S&P 500 bull 3x equity ETF:   SPXL
Short VIX futures volatility ETF:   SVXY


S&P 500 bear 3x equity ETF:  SPXS
Long VIX futures volatility ETF:  VIXY


So not that far off in performance, and in the original article I showed that a buy & hold on the triple leveraged Nasdaq  (TQQQ)  has actually outperformed XIV since the XIV launched.

So it would stand to reason that if we just switch out the volatility products with the triple leveraged S&P 500 products, we should expect similar performance right?  Well let’s take a look:



That looks awful right?  The replacement strategy looks like a flat line in comparison.  Now the replacement strategy isn’t quite as bad as it looks on that chart, it still returned significantly more than S&P 500 buy and hold.



So despite the similar performance of the underlying symbols on a buy & hold comparison, when trading tactically and moving in and out of positions based on market conditions, there is actually a huge advantage to sticking to the volatility ETPs directly.

I could probably write half a novel on all the reasons why this is, but let me keep this as short as possible and leave you with five:


1)  The correlation between SVXY and SPXL is only 82%.  Now that sounds high, but to be honest for two products that end up at a similar place 7 years later there is actually quite a bit of variation along the way.  I hear it said a lot that volatility products are just triple leveraged S&P 500 products, but in reality that is a massive oversimplification and doesn’t nearly do the nuance justice.


2)  I’m using a variety of volatility specific indicators to maximize the probability of holding successful positions within the strategy.  Those volatility indicators don’t do as good a job at predicting stock market movements as they do with volatility products, and I’m glad that’s the case.  If it wasn’t and the replacement strategy was nearly as good as the main strategy, that would probably mean it’s more dependent on coincidental correlations rather than robust metrics.  The fact that the main volatility strategy destroys the replacement strategy is a confirmation of my indicators.


3)  SVXY beta to the S&P 500 varies wildly from month to month and year to year, and it’s especially variable heading into and moving out of major corrections in the stock market.

If you’re not familiar with beta, you can read this article.  It’s essentially just how much a product moves in relation to another.

The fact that sometimes the SVXY is moving at a beta of 8 or 9 times the S&P 500, and other times it’s moving at just 1-2 times really does matter over the course of 7 years.  And since I hope that my indicators have me allocated to trades at the more ideal times, it’s advantageous to stick to the volatility products rather than equity ETFs.


4)  A lot of the best performance in the stock market is immediately following a bounce off of lows, but no indicators are quick enough to catch the absolute bottom so a lot of that is missed in equities.  In volatility products however, it’s the slower bleed down off the highs that we can catch a good chunk of.  We can capture a lot more profit from volatility products than we can from equity products because it doesn’t require nearly the level of lucky timing.


5)  Drawdowns in the front month volatility ETPs are worse than 3x equity ETFs.  This gives the informed volatility investor a great chance to avoid a larger chunk of the carnage during extended drawdowns.  If two products end up at the same place 7 years later, but one of them has much larger drawdowns, thats the product that gives investors the better opportunity for long-term growth by focusing on avoiding as much of those drawdowns as possible.


There’s many more reasons as well but the punchline is, I’m using volatility specific metrics that are most suitable to predicting the movements of volatility products.  It works fine applying them to the S&P 500 and there’s nothing wrong with that performance for SPXL.  But I’m a perfectionist so I’m looking for more than fine.


Current VTS Total Portfolio Solution Allocations

25% VTS Tactical Volatility Strategy

50% VTS Tactical Balanced Strategy

25% VTS Iron Condor Strategy

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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