U.S. Markets open in 53 mins

A Trend Following ETF Strategy to Reduce Risk, Capture Long-Term Returns

  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.
  • Oops!
    Something went wrong.
    Please try again later.

This article was originally published on ETFTrends.com.

Investors who are concerned about their long-term exposure to the equities market may consider an ETF strategy to navigate the markets on autopilot, using the 200-day moving average - a tried-and-true technical indicator widely used by market mavens to identify key trends and the direction they’re most likely headed.

On the recent webcast, How Investors Can Navigate the Markets on Autopilot, Sean O’Hara, President of Pacer ETFs, highlighted the benefits of a trend following strategy that could diminish draw downs during bearish market conditions to help improve the overall, long-term investment returns.

For example, during the depression that started in 2007, the markets experienced a loss of 5.7% before the index fell below its 200 day simple moving average. If an investor were to adhere to a trend following strategy, he or she would have avoided most of the 51.9% total market loss during the October 2007 through November 2008 period.

Over the period of 1999 through 2018, a portfolio strategy that followed a 100% position in S&P 500 when above its 200 day simple moving average or 100% T-bills when below the 200 day simple moving average produced a return of 5.36%. On the other hand, a 100% position in the S&P 500 regardless of market conditions produced a return of 4.86%. It can be seen that a simple trend following strategy helped investors avoid the steeper drop offs while still maintaining an investment portfolio's upside potential.

As a way to help investors automate the trend following strategy, Pacer has come out with the Pacer Trendpilot strategy, which is implemented through a rules-based indexing methodology found under the fund provider's four ETFs - Pacer Trendpilot US Large Cap ETF (PTLC) , Pacer Trendpilot US Mid Cap ETF (PTMC) , Pacer Trendpilot 100 ETF (PTNQ) and Pacer Trendpilot European Index ETF (PTEU) .

"The Pacer Trendpilot strategy seeks to participate in the market when it is trending up, pare back market exposure during the short-term market down trends, and prevent extended declines by moving to T-bills during long-term market down trends," O’Hara said.

For example, the Pacer Trendpilot US Large Cap indexing methodology experienced annualized average returns of 6.87% from 1999 through 2018, with annualized volatility of 11.62% and a maximum drawdown of -17.6%. In comparison, the S&P 500 Index experienced an annualized average return of 4.9%, a 19.2% annualized volatility and -55.3% maximum drawdown.

Specifically, the strategy follows strict guideline with three indicators, including an equity indicator, 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.

Lastly, 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.

PTLC implements the Pacer Trendpilot strategy with the S&P 500 Index as its benchmark. PTMC takes on the S&P 500 MidCap 400 Index for middle-capitalization stock exposure. PTNQ is exposed to the widely observed Nasdaq-100 Index. Lastly, PTEU implements the trend following strategy with the FTSE Eurozone Index.

"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 from the market," O’Hara added.

Financial advisors who are interested in learning more about trend-following strategies can watch the webcast here on demand.

POPULAR ARTICLES AND RESOURCES FROM ETFTRENDS.COM

READ MORE AT ETFTRENDS.COM >