The problem with most investing strategies is that they haven’t measured up well against simple indexes when comparisons have been confined to the 10-year bull market in U.S. stocks. If you look back far enough to encompass bull-and-bust cycles, the results are quite different.
The rules The Pacer Trendpilot US Large Cap ETF PTLC, -0.10% tracks a custom index called the Pacer Trendpilot US Large Cap Index. The index is designed capture the performance of the S&P 500 during long upward periods, while mitigating risk by doing the following, which we can call Green Light, Yellow Light and Red Light:
• Red Light: When the index is below its 200-day moving average for more than five consecutive days, and the moving average is moving downward, the ETF goes to 100% Treasury bills. The rules that move the fund completely out of stocks during long downturns aren’t perfect, of course. They cannot eliminate all the downside risk. But you can see that the rules would have led investors to avoid most of the decline during the last six bear markets :
Here’s a chart based on back-tested data for the Trendpilot U.S. Large Cap Index against the S&P 500. It shows that if you stretch it back for two complete market cycles, the strategy would have outperformed the benchmark index.
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