This Fund Followed the Rules. That Was the Problem

Pacer Trendpilot US Large Cap ETF PTLC follows an index that does one of three things. It either (1) invests 100% in the S&P 500, (2) invests 50% in the S&P and 50% in cash, or (3) invests 100% in cash. Which thing it does depends on how the S&P 500 performs when compared with its 200-day moving average, or 200 DMA.

(There’s another provision related to whether the S&P 500 is within plus or minus 20% of its 200 DMA, but I’ve focused on the others, which seem to have come into play more often.)

This approach has not succeeded: The exchange-traded fund had gained around 8% annually from its June 11, 2015, inception through May 13, 2025, which was nearly 5 percentage points per year less than the S&P 500‘s return.

True, the exchange-traded fund was less volatile (13.4% per year versus 18.5% for the S&P) and had a smaller maximum drawdown (negative 25% versus the index’s negative 32%), but that didn’t make up for the returns it missed out on. Consequently, its risk-adjusted returns were worse than the S&P’s (0.50 Sharpe ratio versus 0.62 for the index) and even fell short of the 60% US stocks/40% US bonds mix (0.54 Sharpe ratio).

What has bedeviled the ETF? Its rules. Specifically, the provisions that kept it in cash. To illustrate, here is a table that breaks down the ETF‘s cumulative return compared with the S&P in the three scenarios I laid out earlier:

Predictably, it earned most of the S&P’s return when it was fully allocated to stocks. It even did OK when split 50/50 between stocks and cash. But it got its clock cleaned when it was 100% in cash.

For instance, the Pacer ETF went to cash on March 15, 2020. The timing looked exquisite at first, as the S&P plunged 12% on March 16 and stocks would go on to fall another 6% over the following week. But when the S&P rebounded—rising 38% from its March 23 low through June 2, which was the day before the ETF reentered the market—it got left in the dust. All told, stocks gained around 14% over this stretch while the ETF earned nothing.

This was not an isolated occurrence. I found just one stretch of time where the ETF‘s move to cash appeared to have paid off: From April 29, 2022, to Jan. 27, 2023, it earned 1.4%, while the S&P lost 3.8%. Otherwise, it was a washout.

Pacer offers a family of Trendpilot ETFs targeting different stock market segments and asset classes, such as Pacer Trendpilot 100 ETF PTNQ (which aims to beat the Nasdaq-100 Index) and Pacer Trendpilot US Bond ETF PTBD (which targets the iBoxx USD Liquid High Yield Index). These ETFs ply an approach similar to the Pacer Trendpilot US Large Cap ETF, and the results have been no better.

(Index returns shown are as follows: Pacer Trendpilot 100 = Nasdaq-100; Pacer Trendpilot European = FTSE Eurozone; Pacer Trendpilot International = S&P Developed Ex-US LargeCap; Pacer Trendpilot US Bond = iBoxx USD Liquid High Yield; Pacer Trendpilot US Mid Cap = S&P MidCap 400. All returns as of May 14, 2025, except for Pacer Trendpilot European, whose returns are as of April 30, 2025. The index return for Pacer Trendpilot European is estimated based on the author’s calculations, as Morningstar doesn’t license the index in question.)

Despite all of this, these ETFs were recently sitting on almost $5.0 billion in net assets in aggregate, with about $3.3 billion of that in the Pacer US Large Cap ETF alone. Hope springs eternal for market-timing approaches, it would appear.

Takeaways

There’s no need to belabor the obvious point—market-timing is difficult to impossible to pull off.

These ETFs take a simple rules-based approach to the endeavor, which I suppose is preferable to a system that is more purely ad hoc and therefore prone to emotional impulses. Nevertheless, the market doesn’t bend to maxims like “get out when the index breaches its moving average and get back in when it’s back above it.” Regimes change, and what might once have been a reliably clear signal can be quickly reduced to noise.

There’s another lesson in these ETFs’ improbable popularity: Some people really hate getting caught in deep market downdrafts. And so, they’re more open to stories like “you get most of the upside but avoid the brunt of selling” than would stand to reason when you consider the dismal results that market-timing strategies like these have produced.

It’s unfortunate, as investors here would have almost certainly been better off diversifying across stocks and bonds and leaving the portfolio untouched apart from rebalancing. But in another way, it serves to remind us why investors have tended to earn a higher return in stocks than bonds—loss aversion is powerful, and the stock market’s inducement has been the “risk premium” it has offered investors over the long haul. Were it otherwise, stocks would probably be pricier and therefore have lower potential future returns.

Switched On

Here are other things I’m writing, reading, listening to, or watching:

• A great, inspiring cause as befits a great, inspiring person. Related: The WSJ’s Jonathan Clements Wants to Leave a Living Legacy by Jason Zweig.
• Institutions looking to unload private assets say “Open wide!” and evergreen funds needing to put cash to work fast say “Ahhhh.”
• A fund that seemingly can’t lose (more from me on it here—What New Sorcery Is This?).
• Filing for Vanguard’s private/public collaboration with Wellington and Blackstone.
• What If This Turns Out to Be a Terrible Time to Retire? by Christine Benz.
• Christine Benz, Amy Arnott, and Karen Zaya published our annual Diversification Landscape report.
• “Good Stuff” by Bnny.
• And I thought our vacation planning was complicated.

Don’t Be a Stranger!

I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at@syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.