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2 ETFs That May Be Poised For Profit-Taking After Robust Gains

Published 03/16/2021, 06:07 AM

Prices of a range of stocks as well as exchange-traded funds (ETFs) have appreciated significantly since the start of 2021. In many cases, valuation levels have become overstretched. Similarly, short-term technical charts point to overbought levels.

Therefore, as we get ready to wrap up the first quarter of the year, some investors might take advantage of the recent returns and rotate some profits in those names into more undervalued assets. Today, we introduce two ETFs where such profit-taking might be around the corner.

Invesco Dynamic Leisure and Entertainment ETF

Current Price: $54.78
52-Week Range: $17.60 - $55.25
Dividend Yield: 0.69%
Expense Ratio: 0.64%

The pandemic's effect on various sectors has been different. Initially, travel, leisure and hospitality industries were among the worst affected. But, with positive vaccine developments, share prices of sectors in these segments have recovered significantly.

Different countries might have slightly varying definitions of industry classifications. Yet, they typically include companies that operate in entertainment, e-sports, gaming, lodging, restaurants, sports facilities, travel and tourism.

In the U.S., several indices enable investors to gauge the health of these businesses. They include:

Similarly, the Invesco Dynamic Leisure and Entertainment ETF (NYSE:PEJ) is also up about 18% YTD. It hit a record high on Mar. 15. Therefore, in the coming weeks, profit-taking in several of the names that make up the fund is likely.

PEJ, which follows the Leisure & Entertainment Intellidex index, has 32 stocks. Since its inception in June 2005, funds under management have reached $1.85 billion.

PEJ Weekly

The top sector allocation (by weighing) is hotels, restaurants and leisure (40.87%), entertainment (22.63%), media (15.28%) and others. Global media groups ViacomCBS (NASDAQ:VIAC) and Discovery (NASDAQ:DISCA), online lodging platform Airbnb (NASDAQ:ABNB), Booking Holdings (NASDAQ:BKNG) and Chipotle Mexican Grill (NYSE:CMG) are among the leading names in the roster.

Over the past year, PEJ is up about 96%. Its trailing P/E and P/B ratios of 46.04 and 2.74, respectively, which point to a frothy valuation level by historical standards. In the case of profit-taking, the fund is likely to find support between $50 and $52.5.

2. The Cannabis ETF

Current Price: $22.43
52-Week Range: $15.91 - $30.99
Dividend Yield: 0.43%
Expense Ratio: 0.70% per year

Investors in marijuana stocks and cannabis-focused ETFs have been enjoying strong returns since early November 2020. The main catalyst has been the results of the U.S. Presidential election. Share prices of many companies in the sector have more than doubled in a matter of several months.

At the federal level in the U.S., marijuana remains a Schedule 1 drug and, therefore, is illegal. At the state level, on the other hand, the legal status depends on the laws of an individual state. Investors are hopeful that the new Washington D.C. administration could lead to legalization at the federal level for both medicinal and adult recreational use.

Since 2018, Canada is the only G7 nation to make marijuana fully legal. However, the Canadian market is simply not large enough to make it profitable for most cannabis firms. Put another way, they need U.S. federal legalization to increase revenues.

Wall Street is forward looking. Therefore, it might not be wrong to assume most of the potential positive news regarding legalization has already been factored into the share price of a large number of businesses.

The Cannabis ETF (NYSE:THCX) has returned over 76% YTD. Over the past 12 months it is up close to 220%. Therefore, some investors are likely to take money off the table in the coming weeks.

THCX Weekly

THCX, which has 32 holdings, started trading in July 2019. Assets under management stand at $172.1 million. The leading 10 names make up close to 60% of the fund, which means the fund is top heavy.

The leading names in the ETF currently include Aphria (NASDAQ:APHA), Village Farms International (NASDAQ:VFF) (TSX:VFF), Amyris (NASDAQ:AMRS), OrganiGram (NASDAQ:OGI) and Tilray (NASDAQ:TLRY).

In the case of a decline in price, THCX would find support between $17.5 and $20. The moves in the top cannabis names tend to be momentum-driven. In other words, a fund like THCX is high risk/high return. Short-term traders should use caution at these levels.

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