Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Addendum To Adding XIV, Inverse Volatility ETF, Enhances The Performance Of A Stocks And Bonds Portfolio

At the request of some readers I publish here the simulation results on the XIV portfolio using back simulated price data downloaded from us.spindices.com.

The simulation covers the time interval from March 2006 to June 2015. We compare the following two portfolios:

  • Basic Portfolio: MDY, QQQ, SHY, TLT.
  • XIV Portfolio: MDY, QQQ, SHY, TLT, XIV.

In table 1 we show the optimization results by maximizing returns without any constraints on volatility. The equity curves are given in figure 1.

Table 1. Performance of portfolios optimized for maximum achievable returns without constraints on volatility.

 

TotRet%

CAGR%

maxDD%

VOL%

Sharpe

Sortino

Basic Portfolio

418.57

19.45

-17.94

16.68

1.12

1.64

XIV Portfolio

3,735.45

48.25

-52.97

44.91

1.07

1.17

Figure 1. Equity curves of portfolios optimized for maximum achievable returns without constraints on volatility.

Source: This chart is based on calculations using the adjusted daily closing share prices of securities.

We see that the XIV portfolio was capable of returning a compound annual return of 48.25%, more than double than the return of the basic portfolio of 19.45%. The maximum drawdown of the XIV portfolio was -52.97% slightly less than the SPY drawdown of -55.18%. Also, the volatility of the XIV portfolio is almost three times larger than the volatility of the basic portfolio. Clearly, the XIV portfolio would have returned a huge 3,735% gain over a ten year period.

Only very aggressive investors would try to achieve maximum returns, regardless of how large the volatility is. For that reason, we simulated the portfolio with a target annual volatility of 12%.

The results are shown in table 2 and figure 2.

Table 2 Performance of portfolios optimized for maximum returns with a target of 12% annual volatility.

 

TotRet%

CAGR%

maxDD%

VOL%

Sharpe

Sortino

Basic Portfolio

240.57

14.15

-13.3

12.02

1.18

1.59

XIV Portfolio

280.04

15.51

-13.6

12.01

1.29

1.55

Figure 2. Equity curves of portfolios optimized for maximum returns with a target of 12% annual volatility.

Source: This chart is based on calculations using the adjusted daily closing share prices of securities.

There is no clear winner if one considers the whole history of the equity curves. Based on the final results as on June 30, 2015, the XIV portfolio outperformed by a cumulative return of 40% over the ten year period.

Disclosure: I am/we are long QQQ,SHY.