Financial advisors probably battle with clients who want to invest big in tech stocks. There is undoubtedly strong upside when it comes to this asset class, but volatility and potential dud companies are landmines that are hard to uncover until it’s too late. Pacer ETFs suggests advisors and investors take a rules-based approach when it comes to tech equity exposure. It’s a way to bridge the disconnect between financial advisors and clients.
Pacer ETFs offers the Pacer Trendpilot™ 100 ETF (PTNQ), a rules-based strategy that rotates exposure between the NASDAQ-100 and Treasury Bills depending on the 200 day simple moving average of the index. It’s exposure to tech stocks with built-in risk mitigation. This leaves clients satisfied with their tech exposure, with a strategy designed to protect from major losses and long-term sell-offs.
Sean O’Hara, President of Pacer ETFs, said PTNQ is one of its Trendpilot series ETFs that utilizes the 200 day SMA to determine exposure between the Nasdaq-100, a 50/50 combo of the Nasdaq-100 and 3-month US Treasury bills, or 100% 3-month US Treasury bills.
“We like to think of it like a stoplight,” O’Hara said. “The green light signifies what we call the ‘Equity Indicator’, which is when the ETF will invest in 100% equities based on our rules-based, trend following strategy. That means the Nasdaq-100 total return index we use closes above its 200 day simple moving average for five consecutive business days. The yellow light signifies ’50/50 Indicator’, which is when the market starts to change direction, we pair back market exposure using a 50/50 split between equity and treasury bill to reduce risk based on the movement of the 200 day SMA of the total return index (5 business days). The red light signifies ‘Treasury Bill Indicator’, which is when we identify a long-term downward trend determined by the 200 Day SMA closing lower than its value from five business days earlier (after being in the 50/50 position), and exit the ETF out of the market by moving exposure to 100% treasury bills.”
The strategy for PTNQ is to be fully invested, in this case, in the tech and health care heavy Nasdaq-100 when there is a positive trend.
O’Hara said this strategy captures much of the upside that the index offers.
“For investors, this helps provide exposure to an asset class (tech) that is volatile but one of the most potentially promising asset classes to be in,” he said. “You can own the big tech names but have a strategy designed to potentially protect from substantial downturns. History has shown that the 200 day moving average has been particularly effective when used on a broad index like the Nasdaq index, at getting investors out before the drastic declines that occur periodically in the equity markets.”
Many financial advisors use the strategy next to their existing ETF equity exposure like QQQ, O’Hara said, adding it also is an option for financial advisors who struggle with clients who want to take on direct tech equity exposure.
“Many clients may feel they need to own these big tech names outright, but we have found that ETFs can offer a more strategic approach and has been a complementary piece of individual’s portfolios who want to have a tech-heavy bend but with a more structured approach,” he said. “At Pacer ETFs we have been successful at working with FAs to build portfolios for clients that include the right combination of the Trendpilots and existing long-only equity holdings and would be happy to run models to construct the right portfolio for FAs and clients.”
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