The latest stock market slump has dropped the S & P 500 below a key support level, and that could create additional selling pressure, as seen by one large ETF that follows strict rules in an attempt to avoid market downturns. On Friday, the S & P 500 closed below its 200-day moving average for the first time since March 17. If the total-return version of the index closes below that level for five straight days, then the $2 billion Pacer Trendpilot US Large Cap ETF (PTLC) will automatically sell some of its all-stock portfolio to shift to a 50-50 split between equities and Treasury bills. And if the 200-day moving average itself then starts to fall, the fund will go to 100% T-bills. The PTLC’s rebalance alone likely won’t be enough to move the markets. Still, the fund’s rule tied to the 200-day moving average is an example of how the move of a stock or index across a widely-followed indicator can cause volatility. Active managers who lean on technical analysis, or quantitative hedge funds that include the 200-day in their trading algorithms, are other examples of investing styles that could be more likely to make big trades now that the S & P 500 has dropped below the key threshold. The PTLC’s automatic rebalancing structure can make for wide divergences with the broader stock market at different times. Year to date, the fund is up just under 5% — well below the gain of more than 11% for the SPDR S & P 500 ETF Trust (SPY) . But the PTLC has outperformed the SPY over the past three years, showing that it handled the 2022 market declines well. PTLC YTD mountain The PTLC has underperformed in 2023. “For long-term investors who are concerned about managing some of their downside risk, a strategy like PTLC which incorporates the 200-day moving average can be a pretty effective tool for that,” said Sean O’Hara, president of Pacer ETF Distributors. One downside of a fund that follows strict rebalancing rules is that it could miss sharp swings in the market. Pacer adjusted the PTLC in October 2020 to include a “special indicator” that reset the fund to 50% stocks and 50% bonds whenever the S & P 500 gets 20% away from the moving average in either direction. The change came after the fund underperformed during the sharp stock market rebound off of the Covid era low in the spring of 2020. “For the market to get 20% above or below its moving average, it takes a pretty extreme move in a short period of time,” O’Hara said. O’Hara pointed to the extreme valuation trigger as a reason for the success this year of the Pacer Trend Pilot 100 ETF (PTNQ) , a similar fund that tracks the Nasdaq-100 Index. That fund trimmed its equity position earlier this year as the hype surrounding artificial intelligence fueled a rally in technologystocks, and the PTNQ has outperformed the Invesco QQQ Trust (QQQ) over the past three months.
