- The “Anti-VIX” ETN ZIV is designed to increase in value when the volatility of the S&P 500 decreases, as measured by the prices of VIX futures contracts.
- The model buys ZIV only during up-markets when the VIX > 17 and rising, otherwise during up-markets it buys either QLD or DDM, or IEF when upmarket conditions are absent.
- A backtest of the model from Jan-2011 to Jul-2017 produced a high 60% annualized return with a maximum drawdown of -16% with only 41realized trades.
The VelocityShares Daily Inverse VIX Medium-Term ETN (ZIV) is linked to the inverse (-1x) of the daily performance of the S&P 500 VIX Mid-Term Futures Index less fees and expenses. It has a medium-term time horizon of about 5-month.
The author of Backtesting VelocityShares’ ZIV inverse volatility ETN to 2004 was “surprised at how volatile, and how low this hypothetical ZIV went during the recent bear market—losing 80% of its value from 2007 to 2008.” He concludes that “ZIV and XIV appear to be bull market only instruments and not suitable for buy and hold.”
Our own backtest to 2007 of ProShares Short VIX Short-Term Futures (SVXY) described in Profiting from Market Volatility with the “Anti-VIX” ETF SVXY indicated that a hypothetical SVXY would have lost about 90% of its value from 2007 to 2008, with subsequent further high drawdowns of 75% in 2011, 56% in 2015, and 68% in 2016. It follows that Anti-VIX instruments should only be held during up-stock market periods and are not useable as long-term investments.
The inception date of ZIV was 11/30/2010, from which date data is available at Portfolio 123. There is no extended data for ZIV on P123 prior to inception. For QLD and DDM the inception date was 6/19/2006. The start date of the model is 1/2/2011.
Performance of ZIV
Figure-1 shows the performance of ZIV from Jan-2011 to end of Jul-2017. Buy-and-hold ZIV produced an annualized return of 29% with a -41% maximum drawdown in Oct-2011, and further large drawdowns followed; 30% in 2015, and 35% in 2016. It is evident that ZIV should only be held during up-market periods to avoid these losses.
Performance of a ZIV–Cash Model
Figure-2 shows the performance of ZIV when timed with the iM-Composite Market Timer and the VIX. The simulated annualized return from Jan-2011 to end of Jul-2017 was 32% with a maximum drawdown of -22%. Although the return is similar to buy-and-hold, the drawdowns are much better for the timed model.
This model buys ZIV only when the Composite Market Timer Score is greater or equal to 50; i.e. when up-stock market conditions prevail.
It sells ZIV
- If ZIV has lost more than 5% from a recent high after it was bought,
- or if the VIX becomes less than 17 and the 3-day moving average of the VIX is below the 20-day moving average at the same time,
- or if the 3-day moving average of the VIX becomes less than 13.5.
The model is rebalanced weekly on the first trading day of the week using closing prices, and transaction costs were assumed as 0.1% of the trade amounts to account for commission and slippage.
There were 14 periods when the model was in ZIV, about 65% of the backtest period; otherwise it was in cash.
iM VIX-Timer with ZIV – 2011
Buy- and Sell-Rules for the iM VIX-Timer with ZIV
This model’s rules include stop-loss rules for all ETPs except for IEF.
The model buys ZIV only during up-markets when the VIX is higher than 17 and rising; otherwise during up-markets when the VIX is lower than 17 it buys either QLD or DDM, or IEF when upmarket conditions are absent.
It sells ZIV when
- ZIV has lost more than 7% (not 5%) from a recent high after it was bought,
- or when the 3-day moving average of the VIX becomes less than 13.5.
It sells DDM or QLD when
- DDM or QLD have lost more than 5% from a recent high after they were bought,
- or when down-stock market conditions exist, as indicated by Composite Market Timer Score being less than 50, and when up-market conditions do not exist based on analysts’ Current Year Consensus Estimated Earnings for the S&P500 stocks.
It sells IEF when the Composite Market Timer Score is greater or equal to 50; i.e. when up-stock market conditions prevail.
Performance of the iM VIX-Timer with ZIV
Performance of the ZIV–Cash model with a 32% annualized return and a reasonable maximum drawdown of -22% is very satisfactory. However, a much higher return with much lower drawdown can be achieved by switching between ZIV, and either QLD or DDM, or IEF.
The model uses a simple ranking system which assumes trading ETPs, rather than investing for longer periods. The one factor system is based on the price changes over a short period. The idea being that ETPs which have experienced a decline over a short period will bounce back, reverting and doing better than ETPs which have not declined in this way.
Simulated performance from Jan-2011 to end of Jul-2017 is shown in Figure-3 and Table-1. The annualized return is about 60% and the maximum drawdown is a reasonable -16%. The model is rebalanced weekly on the first trading day of the week using closing prices, and transaction costs were assumed as 0.1% of the trade amounts to account for commission and slippage.
The trading summary is in Table-2. There were only 41 realized trades. The biggest loss of any trade was 4.8%, 81% of all trades were winners and the average holding period was about 55 days. The longest holding period was 33 weeks and 4 trades had the shortest holding period of one week (not shown in the table).
The risk measurements are in Table-3.
Following the model
At iMarketSignals we will provide weekly signals of the iM-VIX Timer with ZIV (starting before end August 2017 and a Gold subscription is required). Currently the model holds DDM, which it bought on 3/27/2017.
A similar model, the iM-VIX Timer with SVXY, can be followed by subscribing to it at Portfolio 123 when it will be opened for subscription at the beginning of Nov-2017.
Note: All performance results are hypothetical and the result of backtesting over the period 2011 to 2017. No claim is made about future performance. Backtesting involves optimizing parameters by looking at past data. Even if parameter values may be optimal going forward, future returns may generally not be as high as past returns.