The BGSV Portfolio
August 21, 2020 - Currency Trading, Gold, Volatility Effects
How might an investor construct a portfolio of very risky assets? To investigate, we consider:
- First, diversifying with monthly rebalancing of:
- Bitcoin Investment Trust (GBTC), representing a very long-term option on Bitcoins.
- VanEck Vectors Junior Gold Miners ETF (GDXJ), representing a very long-term option on gold.
- ProShares Short VIX Short-Term Futures (SVXY), to capture part of the U.S. stock market volatility risk premium by shorting short-term S&P 500 Index implied volatility (VIX) futures. SVXY has a change in investment objective at the end of February 2018 (see “Using SVXY to Capture the Volatility Risk Premium”).
- Second, capturing upside volatility and managing drawdown of this portfolio via gain-skimming to a cash position.
We assume equal initial allocations of $10,000 to each of the three risky assets. We execute a monthly skim as follows: (1) if the risky assets have month-end combined value less than combined initial allocations ($30,000), we rebalance to equal weights for next month; or, (2) if the risky assets have combined month-end value greater than combined initial allocations, we rebalance to initial allocations and move the excess permanently (skim) to cash. We conservatively assume monthly portfolio reformation frictions of 1% of month-end combined value of risky assets. We assume accrued skimmed cash earns the 3-month U.S. Treasury bill (T-bill) yield. Using monthly prices of GBTC, GDXJ and SVXY adjusted for splits and dividends and contemporaneous T-bill yield during May 2015 (limited by GBTC) through June 2019, we find that: