Investors can utilize a dynamic trend-based exchange traded fund strategy to follow the price movement of an investment over time by using an unbiased approach to stay in or out of the markets.
In the recent webcast, How Trend-Following Can Help Your Investment Participate in Positive Trends and Minimize Losses, Sean O’Hara, president of Pacer ETFs Distributors, outlined the Pacer Trendpilot indexing methodology that helps investors better manage risk and maintain equity market exposure through constantly changing market conditions to better capture prevailing trends.
Specifically, the strategy follows strict guidelines with three indicators: an equity indicator, a 50/50 indicator, and a T-bill indicator.
The equity indicator refers to the fact that when the Benchmark Total Return Index closes above its 200-day SMA for five consecutive business days, the exposure will be 100% to the benchmark index. From the equity position, the index will change to the 50/50 position or the T-bill position depending on the 50/50 indicator and the T-bill indicator.
The price signal 50/50 indicator refers to the fact that when the Benchmark Total Return Index closes below its 200-day SMA for five consecutive business days, the exposure will be 50% to the benchmark index and 50% to three-month U.S. Treasury bills. From the 50/50 position, the Trendpilot Index will return to the equity position or change to the T-bill position, depending on the equity indicator or T-bill indicator.
The Trend Signal T-Bill Indicator refers to the fact that when the Benchmark Total Return Index’s 200-day SMA closes lower than its value from five business days earlier, the exposure will be 100% to three-month U.S. Treasury bills. From the T-bill position, the Trendpilot Index will change to the equity position when the equity indicator is triggered. It will not return to its 50/50 position unless the equity indicator is first triggered.
Pacer also added an extreme valuation trigger, by which if at close of business the index is either 20% above or 20% below its 200-day SMA, the exposure will automatically go to the 50/50 position. The index will not move to the 100% equity position or the 100% T-bill position unless triggered by one of those indicators mentioned above.
The Pacer Trendpilot methodology follows the 200-day simple moving average as a technical indicator because of its lower historical turnover. For example, from 1999 through 2022, the S&P 500’s 200-day SMA triggered 161 changes, compared to 235 changes for the 150-day SMA, 267 changes for the 100-day SMA, and 393 changes for the 50-day SMA.
O’Hara explained that the Trendpilot methodology waits for five days to make a change in its portfolio holdings to further limit turnovers and not for alpha generation purposes. For example, for a one-day confirmation of the 200-day SMA, the S&P 500 showed 160 changes since 1999, whereas for a five-day confirmation of the 200-day SMA, the S&P 500 showed 38 changes.
O’Hara argued that the trend-following ETF strategy can produce improved returns during rising market conditions and limit drawdowns during falling market conditions to generate better returns over time.
For example, since 1999, the Pacer Trendpilot US Large Cap Enhanced Rules Index, which acts as the underlying benchmark for the Pacer Trendpilot US Large Cap ETF (BATS: PTLC), exhibited a 8.2% annualized average return, a 13.3% annualized volatility, and a max drawdown of -27.7%. In comparison, the S&P 500 benchmark index showed an annualized average return of 6.0%, an annualized volatility of 19.8%, and a max drawdown of -55.3%.
Investors who are interested in this trend-following strategy have a number of options to choose from. Along with PTLC, Pacer’s Trendpilot series includes the Pacer Trendpilot US Mid Cap ETF (BATS: PTMC), the Pacer Trendpilot 100 ETF (BATS: PTNQ), the Pacer Trendpilot European Index ETF (BATS: PTEU), the Pacer Trendpilot International ETF (PTIN), and the Pacer Trendpilot Fund of Funds ETF (TRND).
“The Pacer Trendpilot ETF Series may be appropriate for clients who are fearful of the market, but still in need of growth,” O’Hara added.
Financial advisors who are interested in learning more about the trend-following strategy can watch the webcast here on demand.