The Double Edged Sword Of Trend Following ETFs

I’ve always been a big proponent of following the major trends in the market to serve as guideposts for sizing the stock allocation of my portfolio.Trend lines like the infamous 200-day moving average have never been a perfect predictor of stock market direction.However, using these types of technical indicators can serve as a useful tool for making incremental adjustments over time.

Pacer ETF is a relatively upstart company in the exchange-traded fund world that operates a suite of TrendPilot ETFs designed to automate the trend following process.Their lineup includes a range of well-known U.S. and European indexes with several hundred million in combined assets under management.

The largest and most popular fund in their mix is the Pacer TrendPilot 750 ETF (PTLC), which is based on the Wilshire U.S. Large-Cap Index.This includes a diversified basket of 750 large-cap stocks that aims for broader exposure than the stalwart S&P 500 Index (SPY).

PTLC currently has $336 million in total assets and enough consistent daily trading volume to be considered liquid for most investor’s purposes.It also charges an expense ratio of 0.60%, which is on the high side for a typical ETF but not necessarily abnormal for a quasi-active approach.

The basic premise behind PTLC is to participate when the stock market is going up and move to cash (or treasury bills) when it is going down.They accomplish this through a systemic, rules-based methodology that indicates when a positive or negative trend is established using the 200-day simple moving average.

In an uptrend, PTLC owns 100% stocks.The fund then moves to 50% stocks and 50% treasury bills when the index falls below the trend line for five consecutive days.It then uses a final confirming indicator to move to 100% treasury bills if the simple moving average falls lower than its prior reading for five days.The process starts over again once the index regains its 200-day moving average on the upside.