Playing the short ETF game
There are dozens of short commodity ETFs to choose from, and also ones shorting stockmarkets and European specialist sectors, such as healthcare.
ETF Securities is the only provider of short commodity ETFs on the London Stock Exchange. They range from ETFs shorting an agriculture index to those shorting specific metals and crops.
They work by tracking a commodity index - ETFS Short Gold tracks the DJ-UBS Gold Sub-Index, for example - and the price of the ETF changes by -100% of the daily change in the index. So investors earn a positive return when the index falls but a negative return when it rises.
Courtiers started shorting gold for its clients in October, when chief investment officer Gary Reynolds decided a gold bubble had developed and the price would fall. "Demand for gold in jewellery has fallen," he says. "And the only unique selling point gold has is for jewellery. Silver is a better conductor of electricity and copper is the most cost-efficient."
Reynolds adds: "The only people buying gold are investors. And as soon as interest rates increase, it will kill gold."
The ETFS Short Gold ETF has seen high inflows this year: $20.8 million (£12.9 million) to 29 October. That represents the second-highest sales for a short ETFS fund, eclipsed only by Short Copper. However, the best performing short ETFS funds this year are natural gas and energy.
There are also inverse ETFs, which are the same as short ETFs, and "2 x short" or "2 x inverse", which mean that if the index falls by 10% on a daily basis, the "2 x short/inverse" ETF will rise by 20%. There is also one short fixed-income ETF available on the LSE: db-x UK Gilts Short Daily.
Investors need to remember that using short ETFs is not a buy-and-hold strategy, and to closely monitor their ETFs. Robert Lockie, investment manager at Bloomsbury Financial Planning, says: "Shorting is a market timing play, and we are not smart enough to know which markets to time or when to do it, so we would not do that."
Jason Witcombe, a chartered financial planner at Evolve, adds: "Shorting is speculation, not investment. Most people shouldn't do it."
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.