Silver has been performing quite poorly over the past few weeks due to the broad commodity weakness and a shift to more risky asset class like equities (read: Time to Sell This Commodity ETF?). This is especially true with the backdrop of the strengthening dollar and continued bullishness in the equity space that are tempering the demand for lower risk assets across the board.
In fact, the white metal has plunged 30% in the year-to-date time frame and more than 50% since its peak at the end of April 2011, making it one of the worst performing metals this year. Currently, the metal is trading below $23 per ounce with some forecasting a bigger drop in the days ahead as well.
Silver is moving on the same track as gold, due to falling investment demand and weak industrial applications, a primary driver in determining silver price. This is particularly the case given some of the fundamental factors surrounding the global markets (read 4 Ways to Short Gold with ETFs).
Weak Global Markets
The U.S. economy is improving but China, which is considered to be the biggest industrial fabricator after the U.S, is seeing sluggish economic growth. Europe is still in recession (or near-recession territory) and we are seeing an increasing appetite for equities over commodities.
Further, the growing speculation over the end of the Fed’s quantitative easing program amid an improving U.S. economic outlook adds to the appeal of the dollar, and lowers the demand for silver and silver ETF holdings (read: Commodity Slide Hits Silver ETFs).
As a result, investors who are bearish on silver right now may want to consider a near-term short on the precious metal. Fortunately, silver ETFs offer several options to investors to accomplish this task. Below, we highlight a few of our favorites and some of the key differences between each in the short silver ETF market:
ProShares UltraShort Silver ETF
This fund seeks to deliver twice (2x or 200%) the inverse (or opposite) return of the daily performance of silver bullion in U.S. dollars; the silver price is fixed for delivery in London. Launched in December 2008, ZSL makes a profit when the silver market declines and is suitable for hedging purposes against the fall of silver prices.
The product is expensive when compared to other geared options in the space though, charging 95 bps in fees a year. However, it is rich in AUM with $149.3 million and average daily volumes of roughly 500,000 shares. The inverse silver ETF has gained about 66% in the year-to-date time frame, suggesting it has been a solid investment in the current environment.
VelocityShares 3x Inverse Silver ETN
This product provides three times (3x or 300%) short exposure to the daily performance of the S&P GSCI Silver Index Excess Return plus returns from U.S. T-bills net of fees and expenses (read: Combine Silver ETFs and Covered Calls with SLVO).
The ETN was launched in October 2011 and since then has been able to amass an asset base of $30 million. The product is the high cost choice in the silver bullion space, charging 165 bps in fees per year from investors. However, it has a relatively tight bid/ask spread given its good average volume of more than 223,000 shares per day.
Unsurprisingly given silver’s slump, the note has returned more than 110% so far in the year buoyed by negative sentiments for silver across the globe.
Investors should note that since these products are extremely volatile, these are suitable only for traders. Additionally, the daily rebalancing—when combined with leverage—may make these products deviate significantly from the expected long-term performance figures (see more in the Three Biggest Mistakes of ETF Investing) .
Still, for ETF investors who are bearish on silver in the near term, any of the above products could make for an interesting choice. Clearly, many are abandoning the precious metal, so a near-term short could be intriguing for those with a high risk tolerance, and a belief that the trend is your friend in this corner of the investing world.
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