RBS Trendpilot™: Market timing autopilot? TBAR, TRND and TRNM

20 Mar

Sell these stocks today!

I came across these new ETNs from the Royal Bank of Scotland last week:

Essentially, these ETNs time the market based on crosses of the 200-day moving average after a 5-day lag.  They invest in the index mirroring the underlying asset when the asset is above its 200-day MA.  When it falls below the 200-day MA, the investment moves to cash in the shape of 3-month T-Bills.  So they are basically performing a rules-based market timing system  similar to the way we manage our Simple and Conservative portfolios.  Honestly, I’m impressed.  If I were a financial advisor whose firm could not offer market-timed investments or active portfolio management, I would seriously consider these investments for the portfolios of conservative clients who would expect to have long-term holding periods.

There is one thing that one should absolutely not forget when looking at the Trendpilots and thinking one could be more efficient doing the market timing oneself: There is no tax consequence to the investor when a Trendpilot moves from equities to cash.  That’s not true of managed investments and the impact could be considerable.

Why long-term?  Well, if you look at the fact sheets for these products you will conclude, as did I, that a large part of their upside comes from the capital preservation in being out of the market in down periods.  And, as I have been saying, it makes a big difference.  However you will notice that the Trendpilots also underperform the underlying indices in up periods.  Let’s use the modeled 20-year chart of the Large Cap Trendpilot:

I could not see why TRND underperforms in good times. There must be something other than tracking error but I haven’t been able to figure out what’s going on so if anyone else knows please post a comment.

The T-Bills used in the Trendpilots sometimes really add to portfolio value, as the lengthy 35-year chart modeling TBAR shows in the 1980s:

Those of us of a certain age will remember the interest rates of the 80s, younger readers who weren’t around, not so much.  But the point is that the elevation in value over 2o years ago is what really sets TBAR up to succeed in this model.

Earlier we talked about the tax treatment of the Trendpilots and how that gives them a big leg up in the market timing derby.  This is only true, of course, in a taxable account.  If you are conservatively market timing in a tax-deferred account, for example an IRA, that advantage goes away as the capital gains are tax-deferred too.  Using SPY as an example (not the same as the S&P 500 total return index which shows reinvested dividends, but I’m damned if I can find chart data for it).

You could choose to use a 200-day crossover yourself as a timing signal with an appropriate lag.  The 5-day lag the Trendpilots use are good.  If we look at a chart of the ETF SPY going back almost 20 years we can see that real, big-time breaches of the chart are rare, but we could have had some in and out whipsaws which are circled on the chart.  Who cares, should be the appropriate answer though, as a 200-day MA timer would have avoided the major wealth-destroying downs.

This presupposes that one does not become distracted and misses these major timing signals.  A few weeks’ delay could have been disastrous in 2008.  This is where the Monthly Trade Triangles (MTT) from Marketclub could come in handy.  They may be a tad more “busy” and trigger more trades, but you could rely on the alert e-mails you can set up to tell you make the trades.  In the following chart you can compare the MTTs to 200-day MA crosses.  In any event, the RBS Trendpilots are a great product that will automatically save your rear in big down moves.  If you can and will do it yourself, you can probably do better in a tax-deferred environment but it will take keeping in touch with your portfolio and being active.

One Response to “RBS Trendpilot™: Market timing autopilot? TBAR, TRND and TRNM”

  1. Randy Stone March 21, 2011 at 9:49 pm #

    I am glad to see these. Finally some firms are providing products that get you out of the market on downdrafts. I am familiar with another one for managed accounts: Vireo marketed by Navellier ==> http://www.navelliervireo.com/vireo_investment_strategies.aspx

    It is a combination of market timing (out of market into T-bills for downdrafts) plus sector rotation during bull markets.
    Disclosure: Relationship exists with Vireo

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