Income investors love high-yield bonds when they’re in favor, but these bonds are a drag when the credit cycle shifts and they fall out of favor. The Pacer Trendpilot US Bond ETF (PTBD) that launched on Wednesday employs a passive trend-following strategy designed to capture the good times for high-yield debt while providing risk management to mitigate the bad times in this asset class composed of bonds rated below investment grade.

The fund is based on the interaction between two indexes: the S&P U.S. High Yield Corporate Bond Total Return Index and the S&P U.S. Treasury Bond 7-10 Year Total Return Index. The value of the former index is divided by the value of the latter index, producing a number called the risk ratio. When the risk ratio closes above its 100-day simple moving average for five consecutive business days, it means the trend is positive for high yield and the fund will be 100% exposed to the component securities of the S&P U.S. High Yield Corporate Bond Index.

When risk ratio closes below its 100-day simple moving average for five straight days, the fund will go to a 50-50 split between components of the two indexes. If the risk ratio’s simple 100-day moving average closes lower than its value from five days earlier, the fund will be 100% exposed to the S&P U.S. Treasury Bond 7-10 Year Total Return Index.

“We want to own high yield most of the time because we get more income and have a better long-term total return,” says Sean O’Hara, president of Pacer ETF Distributors. “But we don’t want to own high yield when the credit markets are collapsing, so we’d want to own seven- to 10-year Treasuries in those markets. The risk ratio is the signal we have the most confidence in regarding moving us in the right place at the right time.”

He adds that the product aims to provide income in a world filled with negative interest rates overseas and, in the U.S., where 30-year Treasuries don’t provide a significant income boost above 10-year Treasuries.

The PTBD fund has an expense ratio of 0.60%, and O’Hara notes that it comes out of the gate with a bias that’s transitioning back to high yield. “It was in Treasuries for the past month or so, but with the recovery in the stock and credit markets it’s moving back to high yield,” he says.

The PTBD fund joins Pacer’s six existing equity Trendpilot ETFs designed to be exposed to risk assets by investing 100% in stocks when the trend is favorable and shifting into Treasuries when the trend isn’t favorable for risk assets.

Five of the funds are based on a single equity index (the sixth product is a fund of funds containing four Trendpilot ETFs). The largest product in the group, the $2.7 billion Pacer Trendpilot US Large Cap ETF (PTLC), illustrates how they work.

That fund’s exposure will be 100% to the components of the S&P 500 Total Return Index when that index closes above its 200-day simple moving average for five consecutive business days. It will assume a 50/50 position between the S&P 500 and 3-Month U.S. Treasury bills when the former closes below its 200-day simple moving average, and will go 100% into 3-Month U.S. Treasury bills when the S&P 500 closes lower than its value from five days earlier.

This fund launched in 2015, as did Trendpilot ETFs based on the S&P MidCap 400 Index, NASDAQ-100 Index and FTSE Eurozone Total Return Index, respectively. (The remaining single-index equity fund in this group launched this past May and is linked to the S&P Developed Ex-US Large Cap Index.) All four of the older funds are getting smoked this year by the indexes they’re linked with, but three of the four produced positive returns in 2018 while their associated indexes finished in the red. (The eurozone ETF lost nearly 17% last year, which trailed its index by 270 basis points).

“What causes the underperformance in a year like this is we had such a massive quick recovery in January, and it takes a while for the index to come back above its moving average,” O’Hara says. “We’re okay with that in terms of giving up some of the upside from time to time because we think we’ll provide more risk mitigation and won’t go down near as much as the broad indexes during the next downturn.”

He adds the Trendpilot funds are designed to complement an investor’s existing large cap, mid cap, Nasdaq 100 and developed international equity strategies.

All told, Pacer ETFs has 20 products with $5 billion in assets.