Market Overview

A New ETF Brings Trend Following To Fixed Income

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A New ETF Brings Trend Following To Fixed Income

Pacer ETFs, the exchange traded funds issuer behind a lineup of trend following funds, added to that lineup Wednesday with the debut of the Pacer Trendpilot US Bond ETF (NYSE: PTBD).

What Happened

PTBD is the seventh ETF in Pacer's trendpilot lineup, a group that currently includes five equity-based funds and the Pacer Trendpilot Fund of Funds ETF (NYSEARCA: TRND), which is composed of other Trendpilot ETFs

“The Pacer Trendpilot US Bond ETF has a similar approach to the rest of the Trendpilot funds, implementing a passive, trend-following strategy that will direct exposure between the S&P U.S. High Yield Corporate Bond Index and the S&P U.S. Treasury Bond 7-10 Year Index based on the 100-day simple moving average (100-day SMA) of the fund’s risk ratio,” according to a statement issued by Pacer.

“The risk ratio is calculated by dividing the value of the S&P U.S. High Yield Corporate Bond Index by the value of the S&P U.S. Treasury Bond 7-10 Year Index.”

Why It's Important

What's interesting about PTBD's methodology, meaning the potential shifts between junk bonds and intermediate-term Treasuries, is that new Pacer ETF debuted at a time of strength for both assets.

With Treasury yields falling, some investors have been taking on added risk to find higher yields. Likewise, declining interest rates have help investors looking to take on more duration risk.

“When the risk ratio closes above the 100-day SMA for five consecutive business days, the fund will have 100% exposure to the S&P U.S. High Yield Corporate Bond Index,” according to Pacer.

“If the risk ratio closes below the 100-day SMA for five consecutive business days, the fund will switch exposure to 50% of the S&P U.S. High Yield Corporate Bond Index and 50% of the S&P U.S. Treasury Bond 7-10 Year Index. The fund will switch to 100% exposure to the S&P U.S. Treasury Bond 7-10 Year Index when the risk ratio’s 100-day SMA closes lower than its value from five business days earlier.”

What's Next

Forecasting the success of new ETFs is always tricky, but PTBD could prove well-timed and certainly brings a unique methodology to bonds, which are driving ETF growth this year.

The new ETF has 20 components and charges 0.60% per year, or $60 on a $10,000 investment.

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