Passive Risk-Off/Risk-On Fixed Income with an ETF! PTBD
The Rieger Report has initiated coverage of the Pacer TrendPilot® US Bond ETF, symbol PTBD.
What caught my attention to this relatively new ETF is that it is a passive rotation strategy for periods of time that are either risk-off or risk-on. In my view, the Pacer concept is beautifully simple: as investors shift to either risk-on or risk-off positions that in turn can drive performance in specific bond market segments. Shifting exposure to those markets to capture the performance is the goal.
To determine the risk-on/risk-off cycles, the PTBD ETF is based on a Pacer developed index which calculates the Risk Ratio(1) between two broad asset classes, junk bonds and risk-free Treasury bonds.
- Risk-on is represented by the S&P U.S. High Yield Corporate Bond Index
- Risk-off is represented by the S&P U.S. Treasury Bond 7-10 Year Index
To alternate exposure, the underlying Pacer index and its Risk Ratio must, over a 5-day consecutive period, trend higher or lower than the 100-day simple moving average.
(1)Risk Ratio is calculated by dividing the S&P U.S. High Yield Corporate Bond Index total return by the S&P U.S. Treasury Bond 7-10 year Index total return.
Passive Risk-Off/Risk-On Fixed Income with an ETF: PTBD
Rieger Report Perspectives on PTBD
Potential benefits of PTBD:
- Bond exposure that is easy to explain and understand.
- Rules based passive risk-on/risk-off fixed income strategy.
- The risk ratio 5-day consecutive trigger and the 100-day simple moving average should help keep transaction costs down while adhering to the overall strategy.
- Currently, the ETF based on Assets Under Management (AUM) is relatively small and holds 100 securities. This nimble size should be beneficial to the execution of the strategy.
Potential pitfalls of PTBD:
- When in the risk-on time periods, PTBD invests in corporate junk bond issues. While these tend to be the larger more liquid bond issues there can still be transaction costs associated with buying & selling these bonds as well as periods where liquidity may vary.
- The passive allocation to a rotation strategy such as this has limited real-life experience. Performance overtime should be telling.
Comparing PTBD to SPDR JNK
Sources: Paceretfs.com, Pacer ETFs, SSGA.com and Yahoo.com. Table is provided for illustrative purposes only. Past performance is not a guarantee of future results. Data as 1/31/2020.
Data Resources Used in this Report:
- At the time of this writing, JR Rieger’s fixed income exposure is in individual municipal bonds and a municipal bond fund.
- JR has not received compensation in any form from Pacer ETFs in the compilation or publication of this report.
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