Trend following has its supporters and its critics. One way to allay the naysayers is to prove the strategy is efficacious in rough markets. For fixed income investors focusing on high-yield debt, the Pacer TrendPilot US Bond ETF (PTBD) is doing just that.

The premise behind PTBD is simple: when risk is in favor of the bond market, the fund can be up to 100% to junk debt. When the risk is off, as it is today, PTBD reduces exposure to junk bonds while increasing its allocation to Treasuries.

“When the Risk Ratio’s 100 Day SMA closes lower than its value from five business days earlier, the exposure of the Index will be 100% to the S&P U.S. Treasury Bond 7-10 Year Index,” according to Pacer ETFs. “From this position, the Index will change to the S&P U.S. High Yield Corporate Bond Index position when the High Yield Indicator is triggered. The Index will not return to its 50/50 position unless the High Yield Indicator is first triggered.”

As for performance, the proof is in the pudding. Year-to-date, PTBD is off just 1.5% while broader measures of the high-yield corporate debt market are lower by 18% and acting as if the financial crisis is being repeated.

Examining PTBD

Pacer’s 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.

The goal is to minimize potential drawdowns during broad market sell-offs and history suggests the strategy does just that. For example, the Pacer Trendpilot US Bond Index exhibited a maximum reduction of 8.1% for the 15 years ended 2019, compared to the 32.7% max drawdown for the S&P U.S. High Yield Corporate Bond Index and the -10.2% max drawdown in the S&P U.S. Treasury Bond 7-10 Year Total Return Index.

The $125.31 million PTBD is currently heavily allocated to medium duration Treasuries. The fund’s top 10 holdings, which combine for over 83% of its weight, are Treasuries maturing between 2027 and 2029, according to issuer data.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.