This article was originally published on ETFTrends.com.
ETF Trends CEO Tom Lydon discussed the Pacer TrendPilot US Bond ETF (PTBD) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The Pacer Trendpilot US Bond ETF seeks to track the total return performance, before fees and expenses, of the Pacer Trendpilot US Bond Index.
As Lydon explains, PTBD is a dynamic fixed-income ETF idea that helps investors adapt to shifting market trends
For some context regarding the Federal Reserve, monetary policy is a loosening policy to support economic growth or guard against a steeper downturn. The Fed will increase purchases of Treasuries in a bid to inject more liquidity into the financial system, buying over $30 billion in bonds last Friday. This marked the Fed’s third attempt to stabilize a volatile market.
It previously stated it would inject over $1.5 trillion into short-term funding markets to cushion against a potential sharp economic downturn. The central bank also implemented its first emergency interest-rate cut since the financial crisis at the start of March.
So, looking at a lower-for-longer interest rate environment, yields on U.S. Treasuries have hit record lows. Yields on long-term 30-year Treasuries also broke below 1% for the first time. With the Fed eyeing accommodative monetary policies to combat potential economic weakness, we can expect a lower-for-longer yield environment. This is not to mention potential volatility that could push investors into safe-haven government bonds and further depress yields.
Waiting For the Shift in Holdings
So, we take a look at a dynamic bond ETF strategy that can shift its holdings depending on prevailing market trends. This brings Lydon to the Pacer TrendPilot US Bond ETF (PTBD). It provides dynamic market exposure to help investors quickly hedge risks when markets turn volatile. The strategy follows strict guidelines with three indicators, including a high yield indicator, a 50/50 indicator, and a T-bill indicator.
The High Yield Indicator refers to when the Risk Ratio, or the change between the S&P U.S. High Yield Corporate Bond Total Return Index and the S&P U.S. Treasury Bond 7-10 Year Total Return Index, closes above its 100-day simple moving average for five consecutive business days, and the exposure will be 100% to high-yield bonds.
Next, the Price Signal 50/50 Indicator refers to when the Risk Ratio closes below its 100-day SMA for five consecutive business days, the exposure will be 50% to the S&P U.S. High Yield Corporate Bond Total Return Index and 50% to S&P U.S. Treasury Bond 7-10 Year Total Return Index.
Lastly, the Trend Signal T-Bond Indicator refers to when the Benchmark Total Return Index’s 100-day SMA closes lower than its value from five business days earlier, and the exposure will be 100% to Treasury bonds.
The risk ratio is the High Yield Index Total return divided by the 7-10 Treasury Index Total Return. That number’s closing value is what creates the moving average we compare to. If that Risk ratio is above its 100-Day SMA, PTBD will be in risk-on (High Yield). If that Risk Ratio number is below its 100-Day SMA, 50% of the portfolio will move to 7-10 Treasury Index. Once there, PTBD will watch the moving average itself. The portfolio will go to 100% 7-10 Treasuries, if while in the 50/50 position if the SMA itself turns negative (or starts to go down). Once PTBD reaches the 100% 7-10 Treasury position, we will stay there until the Risk Ratio number closes above its 100-day SMA for 5 consecutive days.
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.
PTBD currently shows a 3.51% 30-day SEC yield. The portfolio is also presently holding U.S. Treasury bonds, according to its Trending Signal T-Bond Indicator.
Listen To Tom Lydon Talk PTBD:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.
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