The ETFs that benefited from the Reddit silver rally

Reddit traders are now piling into silver. We explain the backstory and highlight how this translated into strong performance for silver ETFs.

Last week, the US small-cap stock GameStop (NYSE:GME) dominated financial news headlines around the world. Now, some Reddit Wall Street Bet traders appear to have now moved on to a slightly bigger target: silver.

It is not exactly clear why Reddit traders are now piling into silver. Some seem to be motivated by the dubious theory that pushing up the price of silver will bankrupt some of the world’s biggest financial institutions. However, other Reddit posters are calling on their fellow traders to stay away from silver, arguing it is a distraction and unlikely to rally the way GameStop did. More questionably, some claim that the “buy silver” trend is a conspiracy of hedge funds, which are long silver (buyers) rather than short (seeking to profit from silver falling in value).

• A risky investing craze: GameStop’s most volatile day
• ETFs for investing in the new commodity supercycle
• The cheapest ETFs to track global markets at the start of 2021

Whatever the reason for the interest, the price of silver is hitting highs not seen for years. On Monday 1 February, the metal briefly rose above $30, its highest level since 2013.

Silver ETF performance

This translated into strong performance for silver ETFs.Most conventional silver ETF saw gains of around 6% (on Monday 1 February), with slight variations depending on how they track silver and their currency hedging.

Both the Invesco Physical Silver ETC (LSE:SSLV) and WisdomTree Physical Silver ETC (LSE:PHAG) gained 5.93%, while the Xtrackers Physical Silver ETC (LSE:XSIL) returned just below 6%.

Investors in leveraged silver ETFs experienced an even better day. For example, the WisdomTree Silver 3x Dl Lvrgd ETP GBP (LSE:3LSI), which produces three times the daily return of silver, returned investors more than 20%, while the WisdomTree Silver 2x Daily Leveraged ETC (LSE:LSIL) returned 12.8%.

These products, however, are highly risky and can easily incur huge losses for investors if the market goes the other way.

The risk of the market going against you can be seen in the single-day losses for inverse leveraged ETFs. For example, the WisdomTree Silver 3x Dl Short ETP GBP (LSE:3SSI), which produces the opposite of the return on silver, multiplied by three, lost investors 14.6%.

Another risk of leveraged and inverse ETFs is the so-called decay that comes with holding them for more than one day, which is explained here.

Not quite another GameStop

Despite these decent one-day returns, silver is unlikely to see the sort of gains experienced by GameStop.

First, as noted above, there is far from universal agreement among the Reddit Wall Street Bet traders about the trade being a good idea. The numbers piling into this trade are likely to be smaller than with GameStop.

On top of that, silver is a much bigger and liquid market than GameStop, which was a small-cap stock– or at least it used to be. As a result, it is much harder for Reddit traders to move the price of silver.

Finally, as many have noted, most professional fund managers are long silver as opposed to short. That means a “short squeeze” is unlikely to play out.  

• How to invest in emerging markets using ETFs: a beginner’s guide
• The ETFs Show: tech stocks in the Biden era
• This ETF lets you track tech chip sector – but it’s very boom and bust

That said, there are reasons to be bullish on silver besides the Reddit trading frenzy. For example, Stuart Clark, portfolio manager at Quilter Investors, argues that “looking long-term, the case for investing in silver looks encouraging”.

Clark points out that climate-friendly policies are resulting in increased demand for solar panels, electric vehicles and battery cells – and silver is a key component of these products.

However, he says it is perhaps best to steer clear of silver at the moment: “With the volatility of the day trading skewing prices significantly, we will need to wait until calm returns before assessing silver’s true value.”

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.