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varan
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Individual investor.
  • A Strategy For QLD (Ultra QQQ) And Volatility ETFs VXX And XIV 9 comments
    Aug 17, 2012 8:51 AM | about stocks: QLD, XIV, VXX, QQQ

    File this under too good to be true for actual implementation, but it is remarkable nevertheless.

    Generally it is not advisable that non-professional investors play around with QLD, VXX, and XIV and similar ETFs because of the amplified risks associated with them. However, a monthly strategy based on relative strength and risk parity for QLD, VXX, and XIV does so well that it is worth noting it here even though the period of time for which all three have been available is quite short (2011-2012)

    1. On the first of every month, find the two of the ETFs (from QLD, VXX, XIV) that did the best during the prior month.

    2. Buy the top ETFs according to the weights based on risk parity and their daily returns during the prior month.

    3. Hold them for a month and repeat the process at the beginning of next month.

    In back testing, the strategy yields annual return of 67% in 2011, and has yielded the same 67% YTD in 2012.

    The maximum drawdown of the monthly returns is only 6.1%.

    Out of the 20 months since January 2011, only six months were not profitable.

    The results are robust in that a change of the evaluation period from one month to two or three months yields similar high returns.

    The following plot depicts the growth of $1 since the beginning of the 2011.

    (click to enlarge)

    Substitution of QLD by the Ultra SPY ETF SSO, and by the Ultra Russel Index ETF UWM yields similar high returns, though slightly lower than QLD.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Themes: Trading volitilty ETFs Stocks: QLD, XIV, VXX, QQQ
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Comments (9)
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  • dharmeshrbhatt
    , contributor
    Comment (1) | Send Message
     
    how to calculate weights based on risk parity?
    17 Aug 2012, 05:59 AM Reply Like
  • Stephen Harlin, MD
    , contributor
    Comments (16) | Send Message
     
    Love this! What makes it work is the asset allocation and rebalancing scheme.

     

    SSO/VXX have better liquidity and offer weekly options ...two advantages over QLD and XIV. (Better potential for risk control and income.)

     

    One last note ...on rebalancing schedules: Monthly seems fine for the ease of backtesting, but a SIMPLE, systematic regimen for rebalancing - based upon market dynamics - would be more in line with the "adaptive" part of an adaptive asset allocation model. Why not rebalance when a significant change in volatility and price occurs? There is a "sweet spot" here.
    17 Aug 2012, 12:06 PM Reply Like
  • varan
    , contributor
    Comments (4474) | Send Message
     
    Author’s reply » That's true, but there are two reasons why I do not do that: (a) for individuals not entirely devoted to investing it may lead to too much work, (b) the number of parameters that determines the optimal strategy increases, and, therefore, larger datasets are required for the results to be statistically meaningful and not suffer from large generalization errors.

     

    Thanks for your interest.
    17 Aug 2012, 12:34 PM Reply Like
  • Stephen Harlin, MD
    , contributor
    Comments (16) | Send Message
     
    If the real goal in portfolio building is to lessen or avoid market losses ...and capital at risk is the most important risk metric, then don't we really only have two strategies:

     

    1) adaptive asset allocation, whose ideal is a portfolio that runs with the market when the market runs, plays defense when the market declines and reduces volatility along the way, and

     

    2) defensive hedging (e.g. the married put, the costs for which can be substantially reduced or fully mitigated).

     

    Varan, do you believe that defensive hedging protects the downside more effectively than asset allocation? After all, if all positions were to suddenly crash and not recover, an insurance put would firmly cap the downside.

     

    And without getting overly complicated, a two asset portfolio - as we have been discussing - could be constructed with downside protection, e.g. by collaring. Best of both worlds.

     

    It seems to me that in this "new normal" market environment, a re-thinking of traditional investing is make-or-break. And, in the same context ...you just can't be too careful.
    17 Aug 2012, 02:20 PM Reply Like
  • RMP704
    , contributor
    Comment (1) | Send Message
     
    Hello Varan,

     

    Very interesting article. Is there an update on the return through April 2013?

     

    A question if you please; what methodology do you use to achieve the results from step 2?

     

    Thank you.
    7 May 2013, 12:31 PM Reply Like
  • swilner
    , contributor
    Comments (14) | Send Message
     
    Hi Varan - Have you continued to monitor this? Also, have you investigated whether it would be useful to add a bond ETF, levered or unlevered, to the mix?
    31 Jan, 11:14 PM Reply Like
  • varan
    , contributor
    Comments (4474) | Send Message
     
    Author’s reply » I will defer to this http://bit.ly/18EepdX . There seem to be much better alternatives described on that site.
    31 Jan, 11:59 PM Reply Like
  • Alpha Man
    , contributor
    Comments (364) | Send Message
     
    Varan, sorry for posting against an old article but one thing strikes me about choosing 2 out of 3 to hold, it seems adding TLT might improve the strategy since QLD and XIV are bullish type etfs and VXX is bearish.
    2 Feb, 08:52 PM Reply Like
  • varan
    , contributor
    Comments (4474) | Send Message
     
    Author’s reply » Alpha Man

     

    Point taken. Given the stratospheric returns in some of the plots in the link I gave above, I have given up on this. In any case, here it goes.

     

    With UBT added, three months look back, selection of the top two:

     

    2011 73.25%
    2012 20.06%
    2013 23.88%
    2014 20.17%
    2015 9.00%

     

    CAGR 34.65%

     

    Without UBT

     

    2011 40.76%
    2012 71.64%
    2013 46.18%
    2014 20.73%
    2015 2.27%

     

    CAGR 43.35%

     

    Both have the same MaxDD, but Sharpe without UBT is much higher.

     

    So looks like that changing the lookback period to 3 months is the best way to modify this.

     

    However, the sample size is too small to make any definitive conclusions.
    2 Feb, 09:56 PM Reply Like
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