In August, exchange-traded funds (ETFs) and exchange-traded products (ETPs) tracking high-beta European equities and silver stood out as the top performers despite rather grim economic readings.
August Outperformers: Eurozone, Gold & Silver ETFs
ETFs tracking the equities of eurozone banks and stock markets in the periphery rose 10-15% during the month of August, likely due to hopes that the ECB would loosen monetary policy further and perhaps engage in more aggressive stimulus in light of the slacking economy. Further supporting this notion, yields on Spanish and Italian short-term bonds tumbled in light of ECB President Mario Draghi's hints that the ECB would reinitiate bond purchases. While the ECB stimulus would most directly impact eurozone banks, it is not surprising that Spanish and Italian equities have come along for the ride given their high-beta relationship to the broader European market and the perceived credit-risk of their home countries. Any ECB action addressing the periphery's bond yields would likely be net positive for firms based in those countries as they would be able to access debt at a lower cost.
Silver and gold ETPs shot up by 8-13% on speculation that further easing may be enacted in the coming months
In addition to hopes for stimulus in the eurozone, US Federal Reserve Chairman Ben Bernanke's comments at Jackson Hole suggested that a third round of quantitative easing (so-called QE3) is not off the table. Despite the ambiguity, silver and gold ETPs shot up by 8-13% on speculation that further easing may be enacted in the coming months. In the past, gold and silver have proven as useful hedges against inflation as they are positively correlated with changes in inflation. Therefore, if further monetary stimulus is implemented, gold and silver ETPs could continue their ascent.
Natural Gas ETFs Plummet in August
Meanwhile, ETPs tracking natural gas futures plummeted by 15-19% for the month of August due to swelling natural gas inventories in the US. In recent years, the adoption of "fracking" technology has enabled natural gas to be harvested in cheaper and more efficient ways--increasing supply and driving down prices. Furthermore, the development of vast shale natural gas reserves in the US has motivated natural gas producers to expand production. According to the US Energy Information Administration, the US possesses 2.5 trillion cubic feet of technically recoverable natural gas resources, of which 33% is held in previously inaccessible shale rock formations. Currently, shale gas represents 25% of total US gas production up from near 0% a decade ago and is expected to represent 50% of total US gas production by 2035. Last month's build-up of natural gas inventories, therefore, is just another in a long line of supply-side surprises that have not been offset by any notable increase in demand for natural gas.
Below is a table of some of the best- and worst-performing ETFs from August 2012:
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