When Markets Move, Trend-following ETFs Drop One Asset for Another

Pivot. Pivot! PIVOT!

That’s not just what Ross screamed as he, Chandler and Rachel tried to haul a couch up a tight staircase in an episode of Friends. It’s also a niche strategy in the ETF world.

Moving from one asset to another in response to market conditions isn’t new, but its use inside ETFs remains relatively uncommon. Alongside buffer ETFs and low-volatility funds, trend-following products fit into broader risk-management strategies. Clients give up some upside in exchange for a measure of downside protection by shifting into more defensive assets when markets slip. There are some 32 trend-following ETFs now trading on US exchanges with total assets under management of $3.5 billion, per etf.com data. As advisors increasingly seek protection from market swings, issuers are positioning trend-following products as a core allocation in portfolios.

“If you’re looking at these from a total return perspective, you’re not going to get as much because you’re probably getting out early,” said Dan Sotiroff, associate director at Morningstar. He added that these strategies can also be vulnerable to false signals and whipsaws, causing allocations to change at inopportune times.

Change It Up

The latest example is the Global X Adaptive Risk Managed Yield ETF (RMHY)The fund primarily invests in high-yield corporate bonds, but can move entirely into short-term Treasury bills when its model signals elevated risk. 

“It allows you to play a bit more offense, knowing that you have that risk management defense that can easily take over, should that environment decay quickly,” said Patrick Bobbins, an investment manager with Adaptive Wealth. It’s Global X’s third collaboration with Adaptive Wealth Strategies, the investment management arm of NorthCrest, and it comes with an expense ratio of 35 basis points.

There are also a handful of other funds in the category:

• The largest trend-following fund is the Invesco Emerging Markets Sovereign Debt ETF (PCY) with $1.42 billion in assets, per etf.com.
• Pacer Trendpilot US Large Cap ETF (PTLC), which moves between the S&P 500 and Treasuries based on a 200-day moving average signal, and the Pacer Trendpilot US Bond ETF (PTBD), which also shifts between high-yield bonds and Treasury bills, are two other examples.

“They’re very few and far between,” Sotiroff said, adding that bigger firms like BlackRock, Vanguard and State Street haven’t dabbled in them … yet.

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