As we look for ways to better adapt to changing market conditions, investors have turned to rules-based exchange traded funds that can help limit downside risks and still maintain upside potential.

“We saw quite a bit of new flows last year at Pacer ETFs into our trend pilot series, which uses a simple 200-day moving average to determine exposure to an index. It’s a way to stay invested in the market, and if things change based on the rules that we use, at some point, you’ll go to the sidelines,” Sean O’Hara, President, Pacer ETFs Distributors, said at the Inside ETFs conference.

Pacer Financial Inc. offers a suite of so-called Pacer Trendpilot ETFs, including the Pacer Trendpilot US Large Cap ETF (BATS: PTLC), Pacer Trendpilot US Mid Cap ETF (BATS: PTMC) and Pacer Trendpilot 100 ETF (BATS: PTNQ).

A trend-following strategy could diminish drawdowns during bearish market conditions to help improve the overall, long-term investment returns. The Pacer Trendpilot strategy basically tries to participate in the market when it is trending up, pare back market exposure during the short-term market downtrends, and prevent extended declines by moving to T-bills during long-term market downtrends.

Specifically, the strategy follows strict guidelines with three indicators, including an equity indicator, a 50/50 indicator, and a T-bill indicator.

The Equity Indicator refers to 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 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 3-Month US 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.

Lastly, the Trend Signal T-Bill Indicator refers to 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 3-Month US 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.

Watch Sean O’Hara Discuss Changing Market Conditions:

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