~ by Snehasish Chaudhuri, MBA (Finance).
Pacer Trendpilot™ 100 ETF (NASDAQ:PTNQ) is an exchange-traded fund, or ETF, that invests primarily in equities of the information & communication technology (ICT) sector and 3-Month U.S. Treasury bills issued by the Federal Reserve. Almost two-thirds of its assets are invested in the ICT sector, mostly in stocks of large-cap growth-oriented software and semiconductor companies. The fund pays an annual dividend and generates a very low yield. Despite a negative 16 percent return during 2022, PTNQ generated an annual average total return of 15.3 percent during the 5-year period between 2017 and 2022. It is priced at around $55 and is trading at a marginal discount of 0.12 percent to its NAV.
PTNQ Invests In 3-Month US Treasury Bills And In Equities From ICT Sector
Pacer Trendpilot™ 100 ETF was launched by Pacer Advisors Inc. on 11th June 2015. The fund seeks to replicate the performance of the Pacer NASDAQ-100 Trendpilot Index, by using full replication technique. The index implements a systematic trend-following strategy that directs exposure: (i) 100% to the NASDAQ-100® Index; and (ii) 50% to the NASDAQ-100 and 50% to 3‑Month U.S. Treasury bills. PTNQ has an expense ratio of 0.65 percent and an asset under management of $746 million. The fund has a very low turnover ratio of 7 percent, indicating that it is passive in nature. PTNQ has a weighted average P/E of 28.2, which is comparatively higher than that of the index.
PTNQ’s Investments Significantly In Semiconductor And E-Commerce Stocks
Pacer Trendpilot™ 100 ETF made significant investments in companies engaged in the business of semiconductors such as NVIDIA Corporation (NVDA), Broadcom Inc. (AVGO), Texas Instruments Incorporated (TXN), Advanced Micro Devices, Inc. (AMD), Intel Corporation (INTC), Analog Devices, Inc. (ADI), QUALCOMM Incorporated (QCOM), Lam Research Corporation (LRCX), and Micron Technology, Inc. (MU). E-commerce giants such as Amazon.com, Inc. (AMZN), Booking Holdings Inc. (BKNG), and Fiserv, Inc. (FISV) also featured among the top investments of PNTQ. During the past six months, as well as during the past five years, all these stocks generated significant price growth. Barring INTC and MU, all other stocks generated price growth in excess of 6 percent CAGR in the long run. AMD and NVDA registered a price growth of 696 percent and 380 percent respectively. AVGO, LRCX, TMUS, QCOM, and ADI also registered price growth in excess of 100 percent.
PTNQ’s Investments In Software Stocks Generated Significant Price Growth
Pacer Trendpilot™ 100 ETF has invested among all the sub-segments of the ICT industry. Its major equity investments included the world’s most valued software developers such as Microsoft Corporation (MSFT), Apple Inc. (AAPL), Meta Platforms, Inc. (META), Alphabet Inc. (GOOGL and GOOG), Adobe Inc. (ADBE), and Intuit Inc. (INTU); and communications equipment manufacturers and service providers like Cisco Systems, Inc. (CSCO), T-Mobile US, Inc. (TMUS), Comcast Corporation (CMCSA), and Netflix, Inc. (NFLX). During the past six months, barring TMUS, all these stocks generated positive price growth. However, during the past five years, stocks from communication services failed to generate significant price growth. Software stocks, on the other hand, generated price growth within a range of 8 and 22 percent CAGR.
Trade-off Between Volatility Versus Stability And Scope Of Generating A High Yield
U.S.-based large-cap software and semiconductor stocks have become the benchmark for the technology sector as they represent innovation and growth while at the same time generating stable cash flows. However, in a market that is used to strong liquidity and volume for more than a decade, artificially creating a hindrance in cash flow and removing liquidity from the system is causing uncertainty. In these conditions, unless a fund creates a portfolio that ensures a certain amount of stability. This is achieved through the inclusion of 3-Month US Treasury bills in PTNQ’s portfolio that are issued by the Federal Reserve. However, that takes away any opportunity of generating decent yields. Thus, instead of dividends, PTNQ focuses on capital formation.
Pacer Trendpilot™ 100 ETF generated a low yield, but a strong annual average total return over the long run. It has a high AUM and is trading at a marginal discount over its NAV. The core portfolio of software and semiconductor stocks also had a strong price performance both over the short run and over the long run. In addition to stocks from the ICT sector, the fund invests almost 20 percent of its assets in stocks from consumer staples and consumer discretionary sectors. However, the lack of diversification into energy, utilities, financial, healthcare, industrial, real estate, etc. makes this fund a little riskier.
Also, Pacer Trendpilot™ 100 ETF has invested in almost all the mega-cap stocks from these segments, which are in general extremely volatile in nature. Going forward, global economic growth will surely drive the growth of these mega-cap stocks. But in case of a stock market crash, these are the stocks going to be hit the hardest. Sustaining its current yield is not at all a challenge, as it’s almost non-existing. I expect PTNQ to also generate strong capital gains over the long run. But, at the same time, would be aware of the fact that the fund price may go down drastically in adverse situations. Thus, buying the fund at the right price is of key importance. I’d prefer to wait for a strong discount before jumping my guns, and only then start accumulating units of Pacer Trendpilot™ 100 ETF.
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