ETFs have become a popular mechanism for traders in recent years as they allow one to play macro trends while eliminating single company risk. Tracking the price movements in commodities is also a viable option. Just as is the case with stocks, it is important for traders to know when to take profits on an ETF that has experienced a big run-up. Here are four where traders may want to consider trimming their positions.
Commodities on the Upswing
A nasty drought in has driven the price of corn to record highs as it has surged more than 50% since the start of June. The rise has been a major win for investors in the PowerShares DB Agriculture Fund (NYSE: DBA). The fund is up 11.7% over the past three months versus 1.6% from the S&P 500.
Now may be a good time for traders to consider taking some money off the table on this trade. We saw a similar move like this from corn in 2008 before it came back in to orbit. The parabolic path on which this commodity has moved is not sustainable over the long run. Recent rains across the country have alleviated some of the worry over persistent crop damage. Although corn only makes up a portion of DBA, a pullback in the commodity will be enough to curb the recent rally of this ETF.
Another commodity play that has worked is the United States Gasoline Fund (NYSE: UGA). This fund which tracks the price movements of gasoline has jumped 11.6% in the past month. The fund is now likely running out of room to run in the short term. Given that higher ethanol prices resulting from the drought have been a significant factor in this move, William Fisher, a Stock Traders Daily contributor, believes this ETF may soon be taking a breather for some of the same reasons as DBA.
Favorites in the Financial Sector
Over the past three months the iShares Barclays 20+ Year Treasury Bond Fund (NYSE: TLT) has risen by 7.8%. From one year ago the ETF is up 24.5%. Long term Treasuries of this country may be a safer investment than the debt of other nations, but the flight to safety is overdone.
Should the U.S. economy begin to recover in the not too distant future, some of the money stashed here will make its way back into stocks. The federal government continues to struggle with deficit spending which will additionally pose long term threats to TLT.
One other ETF that traders may want to consider taking profits on is the ProShares Ultra Financials Fund (NYSE: UYG). The fund is up 28.1% year-to-date, but the 50-day moving average has begun to come back down towards its 200-day moving average. The unending financial difficulties in the E.U. should continue to weigh on the U.S. banking sector and make it difficult for a prolonged breakout from UYG to occur.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.