Investors who are looking for ways to diversify their portfolios can consider some different exchange traded fund approaches to the S&P 500 that can help manage risks and potentially enhance returns.
In the recent webcast, Differentiate Your S&P 500 Exposure: Manage Risk, Rotate Factors, Maximize Dividends & Buffer the Downside, Sean O’Hara, president of Pacer ETFs Distributors, warned of the risks that investors are facing today, pointing to a market that is at or near an all-time high with a P/E at very high multiples vs. the historical average and dividend income near an all-time low.
Alternatively, O’Hara argued that investors can better manage their access to the markets by differentiating their S&P 500 exposure. For starters, O’Hara highlighted the Pacer Trendpilot US Large Cap ETF (BATS: PTLC), which tracks the Pacer Trendpilot indexing methodology that helps investors better manage risk and maintain equity market exposure.
Specifically, the strategy follows strict guidelines with three indicators: an equity indicator, a 50/50 indicator, and a T-bill indicator.
The equity indicator is used in the following way: 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 is used in the following way: 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 is used in the following way: 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.
In its latest update, Pacer added an extreme valuation trigger that will operate such that 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 the indicators mentioned above.
In the bond markets, the bull run appears out of gas with the traditional role of bonds sitting in question as investors face low to negative yields and the prospects rising rates ahead.
Meanwhile, on the equity markets side, the NASDAQ, DOW, and S&P 500 are at or near all-time highs, and valuations are priced for perfection. Uncertainty regarding U.S./China relations and the global effect of COVID-19 continue to weigh on sentiment, and long-term return expectations are muted after the record post-recovery run.
In this type of setup, Pacer ETFs came out with a suite of structured outcome strategies, or the Pacer Swan SOS ETF Series, including the Pacer Swan SOS Conservative ETF (PSCX), the Pacer Swan SOS Moderate ETF (PSMD), the Pacer Swan SOS Flex ETF (PSFD), and the Pacer Swan SOS Fund of Funds ETF (PSFF) to help investors navigate market uncertainty.
The Pacer Swan SOS ETF family was created in December of 2020 and aims to give investors exposure to market growth up to a predetermined cap, and they simultaneously offer downside protection via buffers in case of a down cycle within markets. Every ETF in the series has different outcome strategies, giving investors the opportunity to invest with the risk parameters that they want.
Pacer has partnered with Swan Global Management, LLC, which will act as the sub-advisor for the fund family to help pull this off. The Pacer Swan SOS ETF Series seeks to match returns of the SPDR S&P 500 ETF Trust (SPY) up to a predetermined cap on the upside while also offering investors a buffer against market decline to a predetermined point, depending on how conservative an investor is.
Additionally, investors can consider a factor-based investment strategy that alternates its tilt toward S&P 500 investment factors as the market itself changes. Specifically, the Pacer Lunt Large Cap Alternator ETF (ALTL) is an index-based ETF that aims to rotate between high-beta and low-volatility stocks listed in the S&P 500 Index.
The high-beta index is an index comprised of stocks that are most sensitive to changes in market returns. The low-volatility index is an index comprised of stocks that exhibit lower price volatility than the overall market average. The Lunt Capital U.S. Large Cap Equity Rotation Index uses a rules-based strategy to alternate between the high beta and low volatility factors.
Investors who are in search of income in this lower-for-longer yield environment can also turn to a unique, dividend-focused ETF: the Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF (QDPL), which seeks to provide cash distributions equal to 400% of the S&P 500 dividend yield in exchange for modestly lower exposure to the price return performance of the S&P 500.
QDPL separates the S&P 500 into its two return components: dividend cash flow and price appreciation/depreciation. The fund then reduces equity exposure to the S&P 500 Index at approximately 88% and uses the remaining percentage to purchase dividend futures for 4x greater participation in dividends. Lastly, the strategy recombines the components into new ratios to produce an S&P 500 exposure with 4x dividend yield and approximately 88% S&P 500 Index exposure.
Financial advisors who are interested in learning more about managing risks in today’s market can watch the webcast here on demand.