Volatility Targeting Backtest

Strategy summary

Volatility Targeting is a SPY risk-control strategy that scales equity exposure down when realized volatility rises and up when volatility falls, using daily volatility estimates and a synthetic SHY cash/financing proxy to keep portfolio risk closer to a fixed volatility target.

The strategy uses the higher of 20-day and 60-day realized volatility estimates, computed from daily SPY log returns and annualized with 252 trading days. The resulting exposure is capped at 150% of equity and is applied at the next session open. A 5% turnover buffer prevents small leverage changes from forcing a rebalance.

When the target exposure is below 100%, the difference is represented by a synthetic iShares 1-3 Year Treasury Bond ETF (SHY) cash / financing proxy. When target exposure is above 100%, the negative cash weight represents the strategy’s financing leg. SHY is not traded as a separate sleeve; SPY is the only traded strategy security.

What this strategy is not

• Not a market-timing model that exits equities based on trend direction.
• Not a no-leverage 0–100% exposure cap; SPY exposure can rise above 100% and is capped at 150%.
• Not a short-selling or traded-SHY strategy; SHY is a synthetic cash / financing proxy, not a separate traded sleeve.
• Instead: a daily SPY exposure-scaling overlay designed to keep portfolio risk closer to a fixed volatility target.

Report summary

Item	Value
Strategy	Volatility Targeting
Category	Volatility / Risk control
Universe	SPY; SHY synthetic cash / financing proxy
Trade Direction	Long-only exposure scaling
Free Preview Window	2021–2025 (5 years); BTS uses the five most recent whole calendar years for free previews.
Full Backtest Period	2003–2025 (23 years); BTS uses the longest supported whole-calendar-year window available under the strategy universe, required instrument history, indicator warm-up, and methodology rules.
Window Start Rule	Headline reporting begins on the first in-window trading day after strategy and benchmark data, indicator warm-up, and SHY proxy availability are satisfied.
Starting Capital	$10,000
Primary Benchmark	SPY buy-and-hold with total-return benchmark accounting
Methodology Version	BTS-3377
Publication Date	May 12, 2026
Source / Credit	MSCI-style Risk Control methodology; Moreira and Muir, Volatility-Managed Portfolios

Benchmark summary

The primary benchmark is buy-and-hold SPY. This is the cleanest control because it preserves the same core risky asset while removing the volatility-targeting overlay.

For the benchmark-selection framework, see How to Choose the Right Benchmark.

• Primary Benchmark: SPY buy-and-hold.
• Preserves: the same U.S. equity ETF exposure represented by SPY.
• Removes: the daily volatility estimate, exposure-scaling rule, leverage cap, turnover buffer, and SHY cash / financing proxy leg.
• Excludes: SHY, 60/40 portfolios, risk-parity portfolios, and published risk-control indexes, because those change the comparison object or add a second thesis.

Key metrics: 2021–2025 free preview

• The free preview is a recent-window orientation tool, not the complete evidence set.
• A five-year free-preview window can be useful, but it can also overstate or understate the full historical tradeoff.
• The full report expands the scorecard across the complete report window and adds the path-level interpretation behind the headline numbers.

In this five-year free preview, Volatility Targeting kept risk lower than SPY buy-and-hold but still trailed on growth. The strategy compounded at 8.5% with a $15,024 rebased ending value, while the benchmark compounded at 14.7% and ended at $19,791.

Category	Metric	Strategy	Benchmark
Activity	Time in Market	100.0%	100.0%
Activity	Trades per Year	45.0	0.0
Activity	Win Rate	76.1%	—
Risk	Volatility	9.7%	17.1%
Risk	Max Drawdown	-15.1%	-24.5%
Risk	Sharpe Ratio	0.9	0.9
Risk	Calmar Ratio	0.6	0.6
Result	CAGR	8.5%	14.7%
Result	Ending Capital	$15,024	$19,791