Protecting High Yield Bond Investments With VIX/VXV Based Timing
Vance Harwood | Nov 12, 2012 02:31PM ET
The holy grail of investing is a market timing method that gets you out of the market on bad days and gets you in for the good days. There are innumerable methods for doing this, ranging from slogans, VXV indexes as a convenient way to implement this volatility metric.
I’ve been running simulations using the VIX/VXV ratio as the entry / exit trigger point for market positions. The chart below shows the price performance of the speculative bond fund JNK, since its inception in 2008 compared with SPY, which tracks the S&P 500.
JNK’s performance would be disappointing if it wasn’t for its high dividend payouts, averaging 10% (!) per year. This next chart shows JNK’s performance if you had closed your JNK position whenever the VIX/VXV ratio at market close was greater than 0.917, re-entering when the ratio at close was below that level.
This strategy would have enabled you to avoid the entire 2008/2009 meltdown, plus adding about 3% of extra performance in 2010 through 2012.
Why 0.917? There’s nothing magical about it. It was just the best compromise choice over the last three years. The chart below shows the performance for JNK for all realized VIX/VXV levels for 2010, 2011, and 2012.
In my simulations this threshold worked well for high yield bond funds (JNK, HYG), high dividend funds (SDY), inverse volatility (ZIV, XIV) and general equity (SPY).
Eventually, perhaps tomorrow, this heuristic will stop working, but for the time being it’s a good tell for the market.
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