PTBD - PTBD's Strategy Failed No Reason To Buy

2023-08-02 16:54:13 ET

Summary

• Pacer Trendpilot US Bond ETF is a trend-following bond exchange-traded fund.
• The strategy does not seem to work, underperforming during the current hiking cycle.
• A closer look at the fund, and its strategy, follows.

I've covered several of the Pacer Trendpilot ETFs, including the Pacer Trendpilot US Bond ETF (NYSEARCA: PTBD ), these past few years. I've generally been bearish, as the trend-following strategies used by these funds seemed ineffective, in both theory and practice.

PTBD itself had seen some success and excess returns in the past, but the fund's strategy proved ineffective during the most recent hiking cycle, with the fund significantly underperforming during the same. Due to Pacer Trendpilot US Bond ETF's unsuccessful strategy and underperformance, I would not be investing in the exchange-traded fund.

PTBD - Strategy and Analysis

PTBD invests in a combination of high-yield corporate bond and treasuries. Asset allocation is dependent on market conditions, and is intended to maximize gains while minimizing losses.

Simplifying things a bit, we can say that PTBD's strategy is as follows.

• When high-yield bonds have outperformed Treasuries, the fund is fully invested in high-yield bonds
• When high-yield bonds have underperformed Treasuries for a short period of time, the fund is invested 50% in high-yield bonds and 50% in Treasuries
• When high-yield bonds have underperformed Treasuries for a longer period of time, the fund is fully invested in Treasuries

PTBD's actual strategy is as follows:

In my opinion, the fund's strategy is broadly ineffective, for three key reasons.

First, is the simple fact that most momentum and trend following strategies are ineffective and underperform. It is not obvious to me why this is the case, but data mining, trading costs, tracking error, and momentum becoming an overcrowded trade are the likeliest culprits. Momentum worked much better in prior decades, when markets were more inefficient, than today.

Second reason for the fund's ineffectiveness, is its significant underperformance during the ongoing hike cycle. PTBD has underperformed both treasury and high-yield corporate bond indexes since 2022, when the Fed started to hike, and by a very wide margin.

PTBD's underperformance was entirely due to an ineffective strategy. Specifically, the fund was generally invested in treasuries when these underperformed, and switched to high-yield bonds when these underperformed. Let's have a close look at a specific quarter, 1Q2022, to more clearly understand the situation.

As can be seen above, PTBD closely tracked high-yield corporate bonds from the start of the year to mid February, when these securities were underperforming. The fund acted somewhat erratically for the next few weeks, slightly underperforming. PTBD switched to treasuries sometime in late February, significantly underperforming in March, during which treasuries underperformed. Other months and quarters show a broadly similar pattern.

Third reason I believe the fund's strategy to be ineffective, is the fact that Pacer Trendpilot ETFs generally underperform their respective benchmark.

Pacer Large-Cap has underperformed.

Pacer Mid-Cap ETF has underperformed.

Pacer Nasdaq-100 ETF has underperformed.

Europe ETF has underperformed.

International equity ETF has underperformed, although by much less.

As should be clear from the above, the trend-following strategy used by Pacer ETFs has been incredibly ineffective and unsuccessful in the past. Although performance could always improve, I have no reason to think it will.

Considering PTBD's ineffective strategy and underperformance, I would not be investing in the fund.

Looking Back, and Forward

Long-time readers know I tend to start my articles with an analysis of a fund's investment strategy. Performance track-records come later and, in most cases, I put more weight on a fund's strategy and assorted forward-looking metrics, including valuations, dividend yields, and the like. I do this because, well, the old adage that past performance is no guarantee of future results is genuinely true, and I think overly focusing on an investment's past performance to be misguided. I mention this because last time I wrote about PTBD, in mid-2021, the fund had a much stronger performance track-record:

Nevertheless, I argued against investing in the fund, as I was concerned about the effectiveness of its strategy, past performance notwithstanding. That proved to be the right call, with the fund significantly underperforming since:

For me to be bullish on PTBD, I would need to be convinced of the effectiveness of its strategy . Past performance is part of this, effective strategies should lead to outperformance, but other factors matter too. For momentum strategies, the fact that these have not been terribly successful for decades matters. The fact that other Pacer Trendpilot strategies have failed matters too. Valuations, dividend yields, and other fundamentals matter as well, less so for PTBD. Past performance matters, but it is not the only factor.

Conclusion

Pacer Trendpilot US Bond ETF's trend following strategy seems ineffective, in theory and practice. As such, I would not be investing in the fund.

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