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Trendpilot in Action - the 2020 Pandemic

April 2020

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Trendpilot® in Action –
the 2020 Pandemic.

- Michael Mack, Portfolio Manager

We have just experienced one of the fastest selloffs in market history. While Pacer Trendpilot Series ETFs may not have shifted into cash immediately, they stuck to the rules and made the move fast enough to miss a significant portion of the market decline.


While the Pacer Trendpilot® US Large Cap ETF (PTLC) and Pacer Trendpilot® 100 ETF (PTNQ) were slower to move because of the market volatility, the Pacer Trendpilot® International ETF (PTIN), Pacer Trendpilot® European Index ETF (PTEU), and Pacer Trendpilot® US Mid Cap ETF (PTMC) each made their gradual move into 3-Month US Treasury Bills (T-Bills). Those who own multiple Pacer Trendpilot® ETFs would have benefitted from the diversification found in those spaces.

To understand the importance of diversification, below is a performance comparison between the Pacer Fund of Funds Trendpilot® Index (TRNDNT Index) – which contains 40% of the Pacer Trendpilot® International Index, and 20% each of the Pacer Trendpilot® US Large Cap Index, Pacer Trendpilot® US Mid Cap Index and Pacer NASDAQ-100 Trendpilot® Index – versus its benchmark index, the S&P 1200 Global Index.

Source: Pacer Advisors

Since TRND contains several Trendpilot® products, its equity exposure gradually entered T-Bills, as seen below. Since inception, the fund has only dipped below 100% Equity exposure once, starting in the beginning of March 2020.

Source: Pacer Advisors

These graphs illustrate a key point: this has been one of the fastest selloffs on record. Usually, a fast move like this means the market has bounced. That is why Trendpilot® ETFs did not immediately move to cash. Had they gone immediately to cash and the market bounced back up, the ETFs would have missed all upside in the market. Over time, the strategies have slowly shifted into T-Bills as the trend has gotten weaker. In this case, we did not miss anything.

It is important to note here that the first 10% loss is not the real killer. It is when losses begin to total 20%, 30%, or even 50% that financial plans are negatively impacted.

Source: Pacer Advisors

The average bear market is down 41%, but the Shiller P/E ratio shows that given the high market valuation leading into this downturn, this drawdown may be higher at nearly 48%. The 10-year Shiller P/E (CAPE) model is an industry recognized measurement of market valuation often used by analysts as a long-term indicator for future market returns. The model implies that during periods with high Shiller P/E ratios, below average future returns are expected. Periods with low Shiller P/E ratios are anticipated to have higher future returns.

The Shiller P/E has long warned investors that the market was expensive. Now, investors are seeing that come home to roost. It is not just recession risks from the market shut down that are causing concern for the market: the market was initially overvalued, causing even greater risk.

The illustration above is for educational purposes only. Source: Pacer Advisors calculations based on data from Bloomberg and Robert Shiller’s website, aida.wss.yale.edu/~shiller/data.htm

With all this in mind, there is still plenty of downside potential in the market. Investors should not forget potential for 10% upturn or downturn at any point in time given the extreme volatility present in the market. There is no precedent for this. Diversification and discipline are key in times of uncertainty.

Remember, the Pacer Trendpilot® ETF Series is a risk management strategy, not a market timing strategy. The average investor cannot afford to risk another 30%, which is why Trendpilot® aims to take them out of the market automatically based on the trends.