A Smart Way To Capture Profits On Your ETFs
The market’s going gangbusters so far in 2013.
The S&P 500 registered its best start in a decade with a gain of 5% for the entire month of January. And the Dow Jones Industrials performed even better, jumping 5.8% for its biggest January gain in nearly 20 years.
Stocks are moving higher on expectations the global economic recovery will gather steam as the year progresses.
With the market on fire, investors are pouring money into ETFs at a rapid pace.
More than $30 billion flowed into exchange traded funds during the month of January. That’s up from $29 billion in the year ago period. And it’s the largest monthly inflow since the $37 billion investors added in September 2012.
What’s more, the total amount invested in ETFs increased 5.5% in January to $1.423 trillion, just under the all-time record.
As a result, a number of ETFs have racked up nice gains so far this year. For example…
- Guggenheim Solar (TAN)… +15.6%
- Dow Jones US Broker-Dealers Index Fund (IAI)… +14.8%
- Market Vectors Oil Services ETF (OIH)… +14.1%
- Dow Jones US Medical Devices Index Fund (IHI)… +11.1%
- SPDR S&P Transportation (XTN)… +10.9%
You might own one or more of these ETFs in your own portfolio. If not, you probably have other ETFs that are showing nice gains so far this year.
But with the gains starting to add up, it’s important to start thinking about protecting your profits. A good way to do that is to use a trailing stop for your ETFs.
A trailing stop is simply a sell stop order that is set to a specific percentage below the market price for your ETF.
As your ETF moves higher, your trailing stop rises with it. But if your ETF drops and triggers the sell stop order, your ETF will be sold at the next available price.
For example…
Let’s say you purchase an ETF for $20 per share and immediately set a 10% trailing stop. If your ETF runs up to $30, you’d be sitting on a huge 50% gain.
Now, let’s assume your ETF drops the next day to $27. Your sell stop order would be triggered and your ETF sold at the next market price.
For the sake of simplicity, assume your ETF is sold at $27.
Congratulations, you just captured a tidy 35% profit on your trade. And you didn’t have to watch the market every second or take any further action to lock in your gain.
As you can see, a trailing stop lets your profits run while providing downside protection. If the trend reverses and your ETF begins to fall, the stop loss will be there to get you out while capturing most of your gain.
Don’t let your hard earned profits slip away if the market changes direction. Use trailing stops on your ETFs to lock in your gains before they melt away.
Profitably Yours,
Robert Morris
Category: ETFs
