Despite coming bottom in the latest release of the Markit Sector PMI survey findings by industry participants, metals and mining shares have seem some positive investor sentiment.

• The metals and mining ETFs have continued to see inflows
• However, short sellers have honed in on industry minors after covering their positions in larger, better capitalized peers
• Coal firm Walter Energy has the highest short interest

The Markit Global Sector PMI surveys in March saw the metals and mining sector rooted the bottom of the 23 sectors tracked by Markit’s monthly sector PMI surveys. The final month of the first quarter saw the sector’s companies report roughly flat output growth with an output reading of 50.5.

This poor performance amongst metals and mining shares saw the basic materials sector come in last amongst the eight tracked by the monthly survey of over 20,000 global companies.

ETP investors bullish

Despite the downbeat views recorded by companies themselves in the latest PMI survey, investors seem to have taken the latest industry developments in their stride.

ETFs exposed to metals and mining shares experienced their seventh monthly net inflow in March after seeing investors pile in over $640m to take the aggregate AUM of the 60 funds which track the sector past the $14bn mark.

This strong performance takes the aggregate inflow into the sector to $1.23bn for the first quarter, which is on track to beat the 2013 total inflows of $4.13bn.

Diving deeper into the number, gold and precious metal funds, which dominate the metals and mining ETFs, have seen the largest inflows.

Eight precious metals funds feature amongst the top 10 funds which saw the largest year to date inflows. These are led by the Market Vectors Junior Gold Miners ETF (GDXJ) which saw its asset base rise by $580m, beating its larger cousin the Market Vectors Gold Miners ETF(GDX), which recorded $277m of inflows.

Two leveraged gold funds lead the outflow list. Investors pulled over 20% of the assets managed by the Market Vectors Steel Index Fund, while the Nomura Next Finds Topix-17 Steel & Nonferrous ETF saw nearly all its asset being withdrawn following nearly $24m of redemptions.

Shorts target minors

While junior miners lead the funds seeing the largest inflows, short sellers have been less enthusiastic about the lower end of the market.

Looking across the 60 constituents of the Market Vectors Junior and Established Miners ETFs, the junior GDXJ fund has seen over borrowing demand over 15% higher than the 39 constituents of the GDX.

Interestingly, the pattern has switched over the last 18 months, when the established miners saw greater demand to borrow than their smaller, more volatile peers.

This reversal of fortune has come hand in hand with the falling price of gold, which has seen the GDX outperform the GDXJ by nearly 9%.

Currently topping the list as the most shorted share is Allied Nevada Gold, with 33% of its shares outstanding on loan after having seen its share price having fallen by 90% from the high in late 2012. This current level of short interest is over twice as high as the second most shorted constituent of the junior fund, Australia’s Kingsgate Consolidated which has 15.3% of its shares out on loan.

Coal looking dark

Looking beyond precious metals, coal firms have seen some of the worst negative sentiment in the sector as Walter Energy saw its short interest jump by over a quarter year to date. The company currently has 34.5% of its shares out on loan after posting five consecutive quarters of losses, something which analysts are not expecting to change over the coming eight fiscal quarters.