Protecting High Yield Bond Investments with VIX/VXV Based Timing

Sunday, May 3rd, 2015 | Vance Harwood
 

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, “Sell in May and Go Away” to closely guarded multi-factor proprietary algorithms.

The worst methods have no apparent causal relationship between the predictor and the thing being predicted.  A non-stock market example is the “Redskins Rule.”  Between 1940 and 2008 if the Redskins won the Sunday before the election the party that won the popular vote in the prior election won the presidency—17 out of 18 times.  After Obama’s re-election this rule is now 17 of 19.  These non-causal rules are just coincidence, if you look at enough data you will find them everywhere—and they mean nothing.

Most stock market timing methods are based on price action—things like moving averages, technical chart indicators, price/earnings ratios, or pattern recognition.   At least they have some sort of connection to the stock market.

Recently I’ve been looking at volatility metrics for predicting market action.   The CBOE’s VIX index gets a lot of attention, but using absolute values of the VIX to trigger investments is almost certainly useless.  On the other hand, volatility prices over different time frames, often called the term structure, does show significant predictive value.

In a truly bearish market the short term expected volatility, typically cheaper than longer term volatility, climbs higher than the longer term value. This behavior is shared between flavors of VIX (e.g., the one month VIX & its three month version VXV), VIX futures, and the implied volatility of same strike options of different months. The chart below from VIX Central shows the progression in VIX futures prices from before the May 6, 2012 Flash Crash through the 7th.

VIX Futures Term Structure May 2010 (VIXcentral.com)

 

A simple metric that captures this behavior divides the short term volatility number by a longer term number.  If the ratio is below one the market is relatively calm, if above one the market is especially nervous.  I’ve been using the CBOE’s VIX & 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.



Protecting Junk Bond Principal With a Volatility Hedge

Monday, April 20th, 2015 | Vance Harwood
 

At the moment investment grade bonds with their low yields and risky exposure to interest rates are unattractive places to put your money.   Broad equity indexes like the S&P 500 have higher potential gains and dividend yields in the 2% range, but the dramatic drawdowns of 2008/2009 are still fresh in our minds.   Commodities like gold and oil look expensive—so where is a good place to put your money?

Below investment grade bond funds like SPDR’s JNK or iShares HYG are yielding in the 7% range.   The interest rate risk of these “junk” bond ETFs is less than investment grade instruments because their yield is dominated by default risk rather than prevailing interest rates.   If interest rates on highly rated bonds climb due to improved macro economics the non-investment grade yields stay relatively stable because corporate defaults decline during good economic times.

The prices of high yield ETFs tend to follow the general equity market because stocks prices are well correlated with the risks of corporations defaulting on their debt.  The chart below shows the performance of $1000 invested in SPY (S&P 500) and JNK over the last few years.

 

SPY vs JNK including dividends

 

During the 2008/2009 crash JNK bottomed out with a  38% decline.   SPY declined 51%.

Volatility based tail risk funds like Barclays’ XVZ provide a way protect the principal of high yield bonds against severe market declines without giving up their interest rate advantages.  For more information on XVZ see under the hood and backtest to 2004. The chart below shows the performance of $1000 invested in SPY, XVZ, JNK, and a hedged investment where 28%  is put in XVZ and the rest in JNK.

High Yield Backtest

 

The respective compound annual growth numbers including dividends for this 4 year period were 2.6% (SPY), 28.5% (XVZ), 6.5% (JNK) , and 15.7% for the hedged approach.

You might ask, why not just put it all in XVZ?  It had the best overall return, but the drawdowns (peak to trough) of 16% and 25% during the backtest time period would be hard for me to live with.    The hedged portfolio on the other hand never dropped substantively below the starting level and its worst case drawdown was 9.2%.    In the simulation I rebalanced the XVZ / JNK position quarterly and invested any accumulated dividends.

Risk factors include the fact that XVZ has only been trading since August of 2011, so its demonstrated track record is short.   The high yield bond funds themselves are highly diversified, with JNK currently holding 227 different investments and HYG holding 504, but there are concerns that their current surge in popularity ($12 billion in inflows in the last 6 months), will result in increased risk and potential liquidity problems.  That’s something I will be monitoring, but currently the overall sub-investment grade bond market is around $1 trillion, so the all the high yield ETFs together comprise less than 2% of that.



Monthly ETF Dividend Amounts

Monday, February 13th, 2012 | Vance Harwood
 

Tickers covered:  AGG, BIL, SCJ, HYG, IEF, INY, JNK, LAG, LQD, MUB, PFF, TIP, TLT

For dividend history data and charts from 2005 on click here.

You can use the search window within the post (upper right) to search for a specific ticker, or increase the number of entries to show in the upper right box to 25 in order to see all the symbols.

SYMBOL--DESCRIPTIONNovember Ex-dividendNovember Distribution
AGGAGG iShares Barclays Aggregate Bond Fund1-Nov-137-Nov-13
BILBIL SPDR Barclays Capital 1-3 Month T-Bill ETF1-Nov-1312-Nov-13
CSJCSJ iShares Barclays 1-3 Year Credit Bond Fund1-Nov-137-Nov-13
HYGHYG iShares High Yield Corporate Bond Fund1-Nov-137-Nov-13
IEFIEF iShares Barclays 7-10 Year Treasury Bond Fund1-Nov-137-Nov-13
INYINY SPDR Barclays Capital New York Municipal Bond1-Nov-1312-Nov-13
JNKSPDR Barclays Capital High Yield Bond1-Nov-1312-Nov-13
LAGLAG SPDR Barclays Capital Aggregate Bond1-Nov-1312-Nov-13
LQDiShares iBoxx $ Investment Grade Corporate Bond1-Nov-137-Nov-13
MUBiShares S&P National AMT-Free Municipal Bond Fund1-Nov-137-Nov-13
PFFPFF iShares S&P U.S. Preferred Stock Index1-Nov-137-Nov-13
TIPiShares Barclays TIPS Bond1-Nov-137-Nov-13
TLTiShares Barclays 20+ Year Treasury Bond1-Nov-137-Nov-13

 

For more ETF ex-dividend and pay dates see this post.

 



Dividend History

Wednesday, December 28th, 2011 | Vance Harwood
 

I’ve recently created a tool for generating dividend history reports on any of the iShares and SPDR ETFs.

You can access it here: Dividend History Report.

Links to a few selected pre-generated reports are shown below:

DIA dividend history

DVY dividend history

IWM dividend history

JNK dividend history

LQD dividend history

SPY dividend history

TIP dividend history

XLP dividend history

XLU dividend history

If you need dividend history on a non iShare / SPDR fund or stock then I recommend the DividendInvestor site.

 

 



2015 Dividend, Ex-Dividend, and Paydate / Distribution information for ETFs

Tuesday, April 21st, 2015 | Vance Harwood
 

I have collected dividend, ex-dividend, paydate/distribution  information for 2015 on the following ETFs.

Alerian:  AMLP


Guggenheim:Quarterly Group I:  EWEM, EWRI, EWRM, EWRS, RSP, RCD, RGI, RHS, RTM, RYE, RYF, RYH, RYT, RYU, RFG, RFV, RPG, RPV, RZG, RZV, XLG

 

iShares

iShares: AGG CMF CSJ HYG IEF IEI IGOV ISHG LQD PFF SHV SHY TIP TLH TLT

iShares: AGZ CFT CIU EMB GBF GVI MBB MUAA MUAB MUAC MUAD MUAE MUAG MUB NYF SUB

iShares: DVY, DSI, IAI, IAK, IAT, IDU, IEO, IEX, IHE, IHF, IHI, ITA, ITB, IYC, IYE, IYF, IYG, IYH, IYK, IYM, IYR, IYT, IYW, IYJ, IYY, IYZ, KLD … DVY dividend history

iShares:  IJJ   IJH   IJK IJR    IJS   IJT  ISI   IVE   IVV  IVW   OEF

iShares MSCI:  EEM, EFA, EPP, EWC, EWH, EWY, EWZ and Others

iShares Russell: IWB   IWC   IWD    IWM   IWO   IWR   IWS   IWP  IWV   IWW    IWZ

iShares:  IFEU, IFAS, DVYE, IFGL, IFNA, DVYA, IDV, WPS

 

PIMCO:  AUD  BABZ  BOND  BUND  CAD  CORP  FIVZ  HYS  ILB  LTPZ  MINT  MUNI  SMMU  STPZ  TENZ  TIPZ  TRSY  TUZ  ZROZ

 

Schwab
Schwab Monthly Distributions:   SCHP, SCHO, SCHR, SCHZ

Schwab Quarterly and Annual Distributions:  SCHA, SCHB, SCHC, SCHD, SCHE, SCHF, SCHG, SCHH,SCHM, SCHV, SCHX

Schwab Quarterly Distributions:  FNDB, FNDX, FNDA

 

SPDR

SPDR:  BIL  BMX  CWB  CXA   INY IPE   ITE  ITR  (jnk)JNK   LAG  LWC MBG MWZ  SJNK SHM  TFI  TLO VRD WIP
SPDR: DIADIA Dividend HistoryDIA Dividend Capture

SPDR: XLB, XLE, XLF, XLI, XLK, XLP, XLU, XLV, XLY

SPDR: MTK, SLYG, SLYV, SPYG, DGT, SLY, SDY, XRT, DWX and others 

SPDR: SPY

 

Vanguard
Vanguard Summary of all the tickers below: Vanguard Summary

Vanguard Monthly Distributions: BND, BSV, VGLT, BIV, VCSH, BNDX, VWOB

Vanguard Monthly Distributions: VCIT, VCLT, VGSH, VMGS

Vanguard Quarterly Distributions: VFH, VNQ, VUG, VOO

Vanguard Quarterly Distributions: VIG, VTI, VTV, VV, VYM

Vanguard: Quarterly Distributions: VWO, VGK, VEU, VSS, VNQI, VEA, VGK, VPL, VXUS, VT, EDV, MGV, MGC, VPU

Vanguard Semi-annual Distributions:  VO, VOT, VB, VBR, VBK, VOE, VXF

Vanguard Annual Distributions : VAW, VDE, VGT, VCR, VDC, VHT, VIS, VOX, VTIP

 

Archival / Reference Information from SPDR and iShares

 




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