The S&P 500 Just Reached a Key Level That Could Signal a Major Shift for This $2 Billion Etf

The recent downturn in the stock market has pushed the S&P 500 below a crucial support level, potentially increasing selling pressure. This decline has triggered a rule-based response from the $2 billion Pacer Trendpilot US Large Cap ETF (PTLC), which aims to shield itself from market downturns by adhering to strict rules.

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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 remains below this level for five consecutive days, the PTLC will automatically adjust its portfolio. It will shift from an all-stock portfolio to a 50-50 split between equities and Treasury bills. Furthermore, if the 200-day moving average starts to decline, the fund will transition to a 100% Treasury bill allocation.

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While the PTLC's rebalancing actions may not singlehandedly move the markets, the fund's reliance on the 200-day moving average is illustrative of how movements across widely followed indicators can induce market volatility. Active managers who rely on technical analysis, as well as quantitative hedge funds that incorporate the 200-day moving average into their trading algorithms, are other examples of investment styles that might be more prone to making significant trades now that the S&P 500 has fallen below this critical threshold.

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The PTLC's automated rebalancing structure can lead to notable divergences with the broader stock market at different times. Year to date, the fund has posted a gain of just under 5%, a figure that lags behind the more than 11% gain achieved by the SPDR S&P 500 ETF Trust (SPY).

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However, the PTLC has outperformed the SPY over the past three years, demonstrating its ability to navigate the market turbulence of 2022 effectively.

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Sean O'Hara, President of Pacer ETF Distributors, highlighted the value of strategies like PTLC for long-term investors who are concerned about managing downside risk. The incorporation of the 200-day moving average can serve as an effective tool for risk management in investment portfolios.

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Nevertheless, a downside of funds that rigidly follow rebalancing rules is that they may miss sharp market swings. In response to the fund's underperformance during the rapid stock market rebound in the wake of the COVID-19 pandemic in 2020, Pacer made an adjustment to the PTLC in October 2020. They introduced a "special indicator" that would reset the fund to a 50% stocks and 50% bonds allocation whenever the S&P 500 deviates 20% from the moving average in either direction.

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Sean O'Hara pointed out that for the market to move 20% above or below its moving average, it typically requires a significant and rapid market shift. The inclusion of this extreme valuation trigger has contributed to the PTLC's success this year and demonstrated its effectiveness in managing risk in volatile market conditions.

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The PTLC's approach underscores the importance of adapting investment strategies to respond to changing market dynamics and risk scenarios. By incorporating rules based on technical indicators, such as the 200-day moving average, investors can potentially navigate uncertain market conditions more effectively while seeking to achieve their long-term financial goals.

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