Why We Invest In ZIV And Not In XIV

By Frank Grossmann :

Several times I have been asked why we invest in [[ZIV]] (inverse mid-term volatility) and not in [[XIV]] (inverse front month volatility) in our " Maximum Yield Rotation Strategy " and in the "Global Market Rotation Enhanced Strategy."

After all, front month VIX Future contango is about 2-3x bigger than medium term contango. At the moment, XIV profits from nearly 9% monthly VIX Futures contango. ZIV profits from about 3% monthly VIX Futures contango.

Normally you would think that XIV should have a far better performance than ZIV, but now look at this chart of the 1 year performance. ZIV has performed very well. With 64% annual performance, it performs nearly 4% better than XIV and this with much less volatility.

The main problem is that both of the ETFs are inverse ETFs. This means that underlying they are constructed by shorting VIX futures. These ETFs are rebalanced every day and this results in a quite big time decay. XIV has a very high volatility of about 55% compared to only 25% for ZIV. Higher volatility means also bigger time decay losses.

The 25% volatility of ZIV fits very well to the volatilities of our global market ETFs (MDY, FEZ, EEM, EPP, ILF). Rotation strategies work better, if the ETFs have more or less the same volatility.

Rotation Strategy backtests

If I backtest our " Maximum Yield Rotation Strategy " with XIV instead of ZIV, then I only get an annual performance of 31% with a volatility of 48% since 2011. With ZIV, I get 70% annual performance with only 27% volatility. This is a huge difference, which shows you, how important it is, that the ETFs of a rotation strategy fit well together.

Rotation Strategy annual return since 2011 volatility
[[MDY]], ZIV, [[EDV]], [[SHY]] 70% 27%
MDY, XIV, EDV, SHY 31% 48%

Sharpe ratio check

Another way to check which ETF performs better is to calculate the Sharpe ratio. Never look only on the Return of an ETF, without also looking at volatility. Volatility means risk. With XIV, you can have big losses in short time. The Sharpe ratio calculates the risk weighted return. Now you see, that ZIV had a Sharpe ratio of more than 2 (63.8%/25%) and XIV had only a Sharpe ratio of about 1 (59%/55%) for the last 12 month.


For longer-term investments, ZIV is the far better ETF than XIV. But even for ZIV, you need to have an exit strategy. The most basic exit rule, is that you exit ZIV as soon as the front month or the whole VIX term structure goes into backwardation. You can check this at .

However XIV can be interesting for short-term investments if you buy it on VIX spikes and sell it some days later. XIV has a much higher volume than ZIV, but probably the main reason is, that short-term investment ETFs which attract day-traders always have more volume than longer-term investment ETFs.

The low volume of ZIV should not be a big problem, as this ETF is based on VIX Futures which have a much higher volume.

An alternative to ZIV or XIV investments is to short [[VXZ]] or [[VXX]]. However if you hold VXZ for a longer period, you would also have to rebalance from time to time, because a VXZ short position will become smaller and smaller when at the same time a long ZIV position gets bigger and bigger.

Without rebalancing, you cannot make more than 100% profit if you short an ETF. You see this at the 3-year performance of ZIV which is +172% compared to +78% for the same VXZ short position.

Disclosure: I am long [[ZIV]]. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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