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If someone would have told you six months ago that silver ETFs are getting ready to soar, you would have probably laughed at them. This is the same precious metal has endured wave after wave of lower prices over the past half-decade. So much so that many investors have flat given up on the prospect of a meaningful rebound or the re-emergence of judicious inflation. 

However, like so many other investments facing negative headwinds and extremely pessimistic sentiment, it found a way to disprove the masses.

The largest and most heavily traded fund in this space is the iShares Silver Trust (SLV), which tracks the daily price movement of silver bullion. SLV has over $7 billion in total assets and charges an expense ratio of 0.50%. 

The trust behind SLV actually owns physical silver bullion, similar to the SPDR Gold Shares ETF (GLD). This makes it a very easy way for investors and speculators to participate in the trend of precious metals without having to worry about storage, safety, and markups charged by over-the-counter dealers. 

Since the beginning of the year, SLV has jumped 45% and recently hit new 2016 highs. In a matter of just over six months, it has erased three years of declines.  That’s an impressive rally in such a short time frame.

Perhaps even more impressive is the effect this has had on the stock prices of silver mining companies.  The Global X Silver Miners ETF (SIL) is a traditional stock-focused ETF that owns 22 global silver mining companies.  SIL has risen 167% so far in 2016 and shows little signs of slowing its vertical ascent.

The smaller company focused PureFunds Junior Silver Miners ETF (SILJ) has even managed to top that feat.  SILJ owns a basket of 25 silver explorer and junior producer companies and has risen an astounding 242% this year.  The smaller and riskier footprint of the underlying holding in SILJ has paid off handsomely in the higher degree of reward.  

While the gains in these funds have been tremendous, they may also indicate potential red flags for those who have committed capital or are considering wading into this sector.

1. You may be late to the party. It’s rare that they hand out triple digit gains in an unleveraged ETF in just a matter of six or seven months. Those who are just now hearing about the fantastic rise of silver mining stocks are likely behind the curve when it comes to chasing performance. Fresh money committed to this area after such a large jump is at a much higher degree of risk than those who were fortunate enough to enter earlier on. There is no telling where the near-term top in silver bullion or miners may be, but caution is warranted after such a strong move to the upside.

2. Picking top sectors is difficult. Hindsight is one of those factors that distort our perceptions of reality. There is no way to know ahead of time what the top performing sector of the market will be in any given year. Therefore, it should come as no surprise when esoteric markets or out-of-favor industries suddenly rise from obscurity.  While individual stock pickers may benefit from these outsized moves, it behooves a diversified portfolio to avoid trying to time these one-hit wonders.

3. Conviction will be tested. When an asset has been severely beaten down, it takes a lesser degree of momentum or essential characteristics to drive returns. As conditions evolve, hot money that is easily spooked requires continued trend support or obvious catalysts to stay committed. The confidence in silver will now need to be supported by expanding demand, shrinking supply, or other fundamental qualities. Sentiment is also a factor that has likely swung from one of extreme pessimism to extreme optimism over the course of this rally.

The bottom line is to carefully evaluate any stock or sector after a tremendous move (up or down) in order to determine if it still meets your investment criteria.