Trend following investors can appreciate the exchange traded fund strategy that incorporates Pacer’s Trendpilot approach, along with the recent enhancements to the methodology that make it even more responsive to the modern markets.
Having a risk management plan for equity exposure can give investors confidence rather than maintaining large cash positions. With equity valuations near the highest in history, the risk of a large market decline increases when valuations are elevated.
In the recent webcast, Time Tested Trend Following Meets Modern Markets: A Trendpilot Update, Sean O’Hara, President, Pacer ETFs Distributors, outlined 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, 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.
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.
In its latest update, Pacer added an Extreme Valuation Trigger where 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 Methodology
The Pacer Trendpilot methodology follows the 200-day simple moving average as a technical indicator because of its lower historical turnover. For example, from 199 through September 2020, the S&P 500’s 200-day SMA triggered 150 changes, compared to 222 changes for the 150-day SMA, 244 changes for the 100-day SMA and 362 changes for the 50-day SMA.
O’Hara also explained that the Trendpilot methodology waits for 5 days to make a change in its portfolio holdings to further limit turnovers and not for alpha generation purposes. For example, for a 1-day confirmation of the 200-day SMA, the S&P 500 showed 150 changes, whereas for a 5-day confirmation of the 200-day SMA, the S&P 500 showed 34 changes.
Overall, the S&P 500 was trading on an uptrend above its 200-day SMA on an average of 69.4% of days from 1999 through September 2020, compared to 5.2% of days trading below the 200-day SMA while the SMA was increasing, 2.9% of days trading above its 200-day SMA while the SMA was decreasing, and 22.5% of days trading below its 200-day SMA while the SMA was decreasing. About 81.6% of the time the S&P 500 was trading inside the range of +/- 10%.
Through the enhanced Trendpilot methodology that now includes the Extreme Valuation Trigger, 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.
“The Pacer Trendpilot ETF Series is designed to complement an existing equity portfolio. In using a risk management strategy alongside alpha and beta equities, clients are better positioned for more downside risk management form the market,” O’Hara said.
Investors who are interested in this trend-following strategy have a number of options to choose from. Pacer’s Trendpilot series includes the Pacer Trendpilot US Large Cap ETF (BATS: PTLC), Pacer Trendpilot US Mid Cap ETF (BATS: PTMC), Pacer Trendpilot 100 ETF (BATS: PTNQ), Pacer Trendpilot International ETF (PTIN), and Pacer Trendpilot Fund of Funds ETF (TRND).
Financial advisors who are interested in learning more about a trend following investment strategy can watch the webcast here on demand.