Pacer Wealthshield ETF

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sjwoo
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Pacer Wealthshield ETF

Post by sjwoo » Sun Apr 15, 2018 2:49 pm

I was reading up about trend following as a possible method of reducing volatility while providing reasonable growth when I came across this ETF:

https://www.paceretfs.com/products/pws

PACER WEALTHSHIELD ETF
The Pacer WealthShield ETF is an exchange traded fund that seeks to track the total return performance, before fees and expenses, of the Pacer WealthShield Index.

Now I don't mean to split hairs here, but this fund tracks the "Pacer WealthShield Index" -- so is this technically an index fund? Or is this just marketing that enables them to have their cake and eat it, too (i.e., be attractive to both active and passive investors)?

Also, does anyone have an opinion on their methodology? The expense ratio is high at 0.60%, though lower than VMOT (0.79%).

lack_ey
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Re: Pacer Wealthshield ETF

Post by lack_ey » Sun Apr 15, 2018 3:20 pm

Yes, that is definitionally an index fund.

There are a number of ETFs tracking indexes that effectively run some kind of trading strategy in a similar vein. To some degree this means there's a level of transparency required as to the strategy, and the fund then has a natural benchmark we can use to assess the costs (including trading costs) of running the strategy.

You could call it effectively non-discretionary (ruled-based) active in terms of the investment style, but there is an index involved.

The strategy looks witin the realm of typical for a kind of on/off market timing device based on trend signals. I haven't looked into how much the sector selection makes sense but it seems plausibly useful, to the extent that trend signals can select for things (frequently not, but historically on average seems to have helped when you account for performance across market cycles, primarily from reducing vol and exposure to extended downturns).

If I were interested in investing some money in this manner, I think I'd rather do it myself then let somebody run their specific trading strategy and charge 0.60% for it.

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arcticpineapplecorp.
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Re: Pacer Wealthshield ETF

Post by arcticpineapplecorp. » Sun Apr 15, 2018 3:37 pm

from the link you provided:

'Inception date 12/11/17"

Not much of a track record to speak of yet. Don't you think it might be better to see how it performs in different markets before being the first in the pond?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

lack_ey
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Re: Pacer Wealthshield ETF

Post by lack_ey » Sun Apr 15, 2018 3:40 pm

arcticpineapplecorp. wrote:
Sun Apr 15, 2018 3:37 pm
from the link you provided:

'Inception date 12/11/17"

Not much of a track record to speak of yet. Don't you think it might be better to see how it performs in different markets before being the first in the pond?
How long would you wait? Ten years? I don't think that's enough, yet too long in human investor terms.

If anything the answer would be to go and backtest a lot of similar strategies and try to identify the properties of this approach.

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arcticpineapplecorp.
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Re: Pacer Wealthshield ETF

Post by arcticpineapplecorp. » Sun Apr 15, 2018 6:22 pm

lack_ey wrote:
Sun Apr 15, 2018 3:40 pm
arcticpineapplecorp. wrote:
Sun Apr 15, 2018 3:37 pm
from the link you provided:

'Inception date 12/11/17"

Not much of a track record to speak of yet. Don't you think it might be better to see how it performs in different markets before being the first in the pond?
How long would you wait? Ten years? I don't think that's enough, yet too long in human investor terms.

If anything the answer would be to go and backtest a lot of similar strategies and try to identify the properties of this approach.
I don't have an answer specifically as to when the right time to invest would be for a "new" issue, but I do get nervous about people wanting to put their hard earned dollars into things that have no track record whatsoever.

The other point I should have made but neglected to is there is a large amount of mutual funds that do not survive. As Jack Bogle wrote inthe chapter titled "Selecting Long Term Winners in his wonderful book "The Little Book of Commonsense Investing":
Exhibit 8.1 goes back to 1970 and shows the 36-year records of the 355 equity funds that existed at the start of that period. The first and most obvious surprise awaits you: fully 223 of those funds—almost two thirds—have gone out of business. If your fund doesn’t last for the long term, how can you invest for the long term?
Sometimes giant financial conglomerates acquired their management companies, and the new owners decided to “clean up the product line.”
(These conglomerates, truth told, are in business primarily to earn a return on their capital, not on the fund investor’s capital.)
Even funds with solid long-term records go out of business. Often, their management companies are acquired by marketing companies whose ambitious executives conclude that, however good the funds’ early records, they are not exciting enough to draw huge amounts of capital from new investors. The funds have simply outlived their usefulness. In other cases, a few years of faltering performance does the job.
That leaves just three funds. Only three out of the 355 equity funds that started the race in 1970—only 8⁄10 of 1 percent—have both survived and mounted a record of sustained excellence.
There's a lot more in that chapter about how poorly most funds did compared to the S&P500 index fund. Very few came close to the S&P500 and even fewer beat it.

The moral of the story is why search for a needle in a haystack when you can just own the haystack?
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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arcticpineapplecorp.
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Re: Pacer Wealthshield ETF

Post by arcticpineapplecorp. » Sun Apr 15, 2018 6:32 pm

lack_ey wrote:
Sun Apr 15, 2018 3:40 pm
How long would you wait? Ten years? I don't think that's enough, yet too long in human investor terms.

If anything the answer would be to go and backtest a lot of similar strategies and try to identify the properties of this approach.
Even Pacer agrees with me and admit in their own prospectus. They say you're taking "New Fund Risk":
New Fund Risk.
The Fund is new with no operating history. As a result, there can be no assurance that the Fund will grow to or maintain an economically viable size, in which case it may experience greater tracking error to its Index than it otherwise would at higher asset levels, or it could ultimately liquidate.
Do you want to take that risk? I don't. Have you read the prospectus? If not, I'd do so (and always read the prospectus for anything you plan to invest in):

https://www.paceretfs.com/media/Pacer_W ... _Final.pdf

This is also concerning:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund’s performance. Because the Fund is newly organized, portfolio turnover information is not yet available.
and this:
High Portfolio Turnover Risk
At times, the Fund may have a portfolio turnover rate substantially greater than 100%. A high portfolio turnover rate would result in correspondingly greater transaction expenses, including brokerage commissions, dealer mark ups and other transaction costs, on the sale of securities and on reinvestment in other securities and may result in reduced performance and the distribution to shareholders of additional capital gains for tax purposes. These factors may negatively affect the Fund’s performance.
and this:
Shares of the Fund May Trade at Prices Other Than NAV
As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. The price of Fund shares, like the price of all traded securities, will be subject to factors such as supply and demand, as well as the current value of the Fund’s portfolio holdings. Although it is
expected that the market price of the shares of the Fund will approximate the Fund’s NAV, there may be times when the market price of the shares is
more than the NAV intra-day (premium) or less than the NAV intra-day (discount). This risk is heightened in times of market volatility or periods of steep market declines
And Finally...this:
Non-Diversification Risk.
Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered to be non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund. As a result, the Fund may be more exposed to the risks associated with and developments affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. This may increase the Fund’s volatility and cause the performance of a relatively smaller number of issuers to have a greater impact on the Fund’s performance.
source: https://www.paceretfs.com/media/Pacer_W ... _Final.pdf

Nobel Laureate William Sharpe said the three most important things when it comes to investing are:

"Diversify, Diversify, Diversify"

The other three are:

"Keep costs low, Keep costs low, Keep costs low".

Sorry, I'm just not that into Pacer Wealthshield ETF. It's nothing personal. It's not me, It's definitely them.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

columbia
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Re: Pacer Wealthshield ETF

Post by columbia » Sun Apr 15, 2018 6:42 pm

WealthShield Strategy

Evaluates the market for risk
Uses rules to determine whether to invest in equity sectors or fixed income.
Reevaluates regularly to ensure investments are still appropriate for market conditions.
It appears to be a pretty sophisticated investment instrument and undoubtedly worthy of its fees...

lack_ey
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Re: Pacer Wealthshield ETF

Post by lack_ey » Sun Apr 15, 2018 6:50 pm

arcticpineapplecorp., why are you posting prospectus language? Aren't these things obvious from the description of the strategy? And I don't even think you're interpreting concepts correctly. For example, the fund may be nondiversified in the sense of owning multiple ETFs from the same issuer (maybe it just uses all SPDR sector ETFs? something like that). That's different from the way the diversification is understood in the non-legal sense. When it's "risk on" it's diversified in the sens of holding hundreds of stocks, just via other funds.

Also, why point out sections from Bogle's book about most funds underperforming the S&P 500 when this fund by design is trying to take less risk than the S&P 500 and probably will return less by design? That's not a relevant argument that's going to convince somebody. You need to tailor the message based on some kind of level of understanding and addressing the prompt.

The OP asked a fairly reasonable question. There's no need to spend that much time on a kind of stock response that doesn't address what is being asked and doesn't seem to say much that wasn't already apparent.

For example, maybe we should address more the prospects of acting as "a possible method of reducing volatility while providing reasonable growth" as was actually asked. Though actually, I would want to know how "reasonable growth" might be defined. In any case, a system that on average has an equity beta less than 1 will probably be less volatile than the market, even if the market timing is done randomly. If it is based on a trend-following system or anything related, it's likely to reduce vol further, at least when evaluated over the long term (because down-trending markets have on average been more volatile, as I think I've shown in this thread; it's hardly a secret). In the short term, during periods where it's fully invested, it might even have higher vol than the market, as it has sector tilts. (I should note that all of this is just the very basics and doesn't say much either. I'd need to do more research.)


What's not clear to me is the exact signal being used to determine risk on and risk off. That's kind of a big deal. If nothing else, more transparency would be good for what's perhaps the key component to determining behavior over time.

edit: on second thought, if that signal is unknown, then I guess I'm wrong in the sense that we do need a performance history to evaluate the fund (to kind of reverse-engineer the signal or get a sense of what it is following). Only with that then we can kind of backtest and see what it's about and how it might compare to similar approaches.

sjwoo
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Re: Pacer Wealthshield ETF

Post by sjwoo » Sun Apr 15, 2018 7:25 pm

lack_ey wrote:
Sun Apr 15, 2018 6:50 pm
For example, maybe we should address more the prospects of acting as "a possible method of reducing volatility while providing reasonable growth" as was actually asked. Though actually, I would want to know how "reasonable growth" might be defined.

edit: on second thought, if that signal is unknown, then I guess I'm wrong in the sense that we do need a performance history to evaluate the fund (to kind of reverse-engineer the signal or get a sense of what it is following). Only with that then we can kind of backtest and see what it's about and how it might compare to similar approaches.
Thanks for all the comments from the Bogleheads, as always. I'd fully expect lower returns than SPY, since that's basically baked into the trend-following scheme, as it has already been mentioned. Since some people smarter than I am predicting 6% nominal growth for the next 10 years, if PWS could do 5% growth, I'd consider that to be successful.

I'd like to see a backtest of both this ETF and VMOT as well. If there's a simple way to do this via something like Portfolio Visualizer, I'd love to see it.

I must admit, the concept of trend following seems reasonable to me. It seems like rebalancing on steroids, so to speak. With the current state of affairs -- ballooning national debt, unknown effects of QE, governmental gridlock, etc.-- I wouldn't be surprised if higher volatility is here for a while. Though if I'm banking on another financial crisis to hit, it seems like trend following may not be the best road to take?

http://www.etf.com/sections/index-inves ... nopaging=1

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whodidntante
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Re: Pacer Wealthshield ETF

Post by whodidntante » Sun Apr 15, 2018 7:43 pm

I watched a video today where Asness talked about not using quant strategies to pick sectors. He was responding to a question about whether healthcare and biotech would continue to outperform or if should be sold. Paraphrasing, his answer was "I have no idea and run from any quant manager who tells you they do."

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arcticpineapplecorp.
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Re: Pacer Wealthshield ETF

Post by arcticpineapplecorp. » Sun Apr 15, 2018 8:19 pm

lack_ey wrote:
Sun Apr 15, 2018 6:50 pm
arcticpineapplecorp., why are you posting prospectus language? Aren't these things obvious from the description of the strategy?
Because I'm not sure if the OP read the prospectus. In fact, I'm pretty sure most people don't read prospectuses, so I thought I'd draw the OP's attention to it. I think that's important not only for the OP but for anyone else reading boglehead posts and not aware they should be reading prospectuses for any fund they are interested in.
And I don't even think you're interpreting concepts correctly. For example, the fund may be nondiversified in the sense of owning multiple ETFs from the same issuer (maybe it just uses all SPDR sector ETFs? something like that). That's different from the way the diversification is understood in the non-legal sense. When it's "risk on" it's diversified in the sens of holding hundreds of stocks, just via other funds.
That's a fair criticism. I accept that.
Also, why point out sections from Bogle's book about most funds underperforming the S&P 500 when this fund by design is trying to take less risk than the S&P 500 and probably will return less by design? That's not a relevant argument that's going to convince somebody. You need to tailor the message based on some kind of level of understanding and addressing the prompt.
Because I'm drawing a connection between what Pacer wrote in the prospectus and Bogle said about many mutual funds...they don't often survive, for a variety of reasons. All too often people get swept up in new, shiny objects (or investments) which is a mistake. The OP asked what would be reasonable time period before investing. I said I don't have an answer, but I think Bogle's response is spot on. That is "Even funds with solid long-term records go out of business." That's worth repeating. All it might take is a few years of underperformance or the shininess of the new object wears off as investors go in search of the next new shiny object to chase after. Then the fund goes out of business. Meanwhile, what is the likelihood of the total stock market index fund going out of business?
The OP asked a fairly reasonable question. There's no need to spend that much time on a kind of stock response that doesn't address what is being asked and doesn't seem to say much that wasn't already apparent.
It is a reasonable question. I think I gave a very well reasoned answer. I didn't give a stock response. In fact, I'm pretty sure I've never used THAT particular quote from Bogle's book (so far, but I plan to use it again!). I challenge you to find where I quoted that exact passage in any previous post of mine. I don't think you will. Because I don't believe I have. I've quoted other parts from Bogle's book, but not that one, to my knowledge.

Also, a consideration like turnover risk is important and I believe worthwhile to know. They said the Pacer fund can have turnover exceeding 100%. What's the turnover rate of the Vanguard total stock market index fund? 3.1%. Big difference. I think that's worth knowing. I'm not sure if the OP knows it, or its implications. I think the OP and others should.

source:
https://personal.vanguard.com/us/funds/ ... true#tab=2
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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Wade Garrett
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Re: Pacer Wealthshield ETF

Post by Wade Garrett » Sun Apr 15, 2018 9:39 pm

sjwoo wrote:
Sun Apr 15, 2018 2:49 pm
Also, does anyone have an opinion on their methodology? The expense ratio is high at 0.60%, though lower than VMOT (0.79%).
sjwoo wrote:
Sun Apr 15, 2018 7:25 pm
I'd like to see a backtest of both this ETF and VMOT as well. If there's a simple way to do this via something like Portfolio Visualizer, I'd love to see it.
After briefing looking at the link you provided, I'm not sure how comparable the Pacer ETF is to Alpha Architect's VMOT. VMOT's approach is deep value and momentum tilts across global equities with a long term trend following overlay. PWS appears to be U.S. only, makes sector bets, and uses shorter term trend following.

Disclaimer: I own VMOT

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