Playing the short ETF game

If you have an opinion on which commodities or sectors are going to slow down or crash, one way to put your money where your mouth is is to buy a short ETF.

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.

Gold bubble

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."

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