The challenging first quarter has come to a close, and by taking a look at the top performing exchange traded funds (ETFs) for the period, one can get a sense of what the story was. Short ETFs and commodities were the strongest performers, signaling that the markets were tough for investors and they turned to shorts to capitalize, or commodities to hedge rising costs. Meanwhile, many investors shied away from stock ETFs as the market continued its attempt to right itself.

United States Natural Gas (UNG): It’s up 33.8% year-to-date, no surprise given that the cost of energy has skyrocketed. It settled at $10.101 per 1,000 cubic feet. Natural gas isn’t the same as gasoline used to power cars; it’s used residentially, commercially and industrially to heat homes, heat boilers and generate electricity.

Energy is getting more expensive all across the board: the price of a barrel of oil and a gallon of gas hit all-time highs in the first quarter, and relief doesn’t appear to be anywhere in sight. Gas prices are expected to continue to rise through the summer, and oil finished the quarter 5.8% higher than it was when it started, reports Adam Schreck for the Associated Press. The direction of oil in the coming months is a matter of debate: some think it will go up, others think it’s on a bubble that’s bound to burst.

iShares Silver Trust (SLV): Silver has stumbled in the last couple of weeks, but it was one of the brightest spots of the first quarter and is up 16.4% year-to-date. Its rise was part of a broader metals rally (gold was up 9.9%, and base metals were up 15.3%).

Silver benefits from its wide range of applications: it’s a major component in developing film, it’s an excellent conductor of heat and electricity. It’s used in batteries, fuses and contacts. It’s a water purifier, and it’s used in plenty of jewelry. As the developing world continues to build and grow, demand for silver should continue as it has been.

There’s not a lot of silver lying around: the price of it bottomed out in 1980, and much of the existing stockpile was melted down and mining for more slowed.

UltraShort QQQ ProShares (QID): The Nasdaq fell 14.6% in the first quarter, so this fund doubled the inverse and ended up 31.6%. The "UltraShort" in the name means this fund is designed to do twice the opposite of whatever its underlying index does.

Bear market funds were especially popular the first three months of this year, as the markets proved to be finicky and volatile – up high one day, down low the next. For investors with the stomach for the risk, funds like QID kept the returns coming in. At least, as long as the index it was designed to track kept heading south. The potential for gains in these kinds of funds are as great as the potential for losses, and they should be used with caution.

UltraShort FTSE/Xinhua China 25 ProShares (FXP): China was last year’s darling, finishing up 2007 up by about 55%. In the first quarter of 2008, it has stumbled. The iShares FTSE/Xinhua China 25 (FXI) is down 20.6% year-to-date, sending the UltraShort fund up 21.6%.

Many believe that China still has room to grow and that it will pick up steam, albeit at a slower pace, this year. One portfolio manager predicts 10% growth in 2008, despite the slowdown. China is sinking money into improving its infrastructure under a five-year plan that’s currently in its third year.

The trade surplus in China is set to grow by 22.2% in 2008 while the country’s dependence on exports shrinks. Capital investment is rising, as well.

Tags: Asia, China, Emerging Markets, Energy, FXI, Material ETFs, Metals & Mining, NASDAQ, Natural Gas, Oil, Silver, UNG