Playing Hot Silver With ETFs

September 26, 2012

Morgan Stanley has a note out this week predicting silver will outperform gold over the next five quarters. So, what is the best way to play silver with ETFs?

With the advent of the latest round of bond purchases by the Federal Reserve, analysts are once again getting hot and bothered about precious metals. Some say gold is going to the moon, others say it will only climb to $2,000 an ounce.

Then there are those, like Morgan Stanley and Peter Hug who believe silver is the metal to own. For those ETF investors who buy in to the silver-outperformance thesis, it’s time to start determining how to take advantage of it.

Let’s start by looking at how silver-focused ETFs have performed in the past.

During the summer of 2011, when the European economy was bursting at the seams and the threat of coordinated global monetary intervention peaked, gold and silver prices spiked, taking both to all-time nominal highs.



During that period—July 1 to Aug. 22, 2011—the performance of commodity ETFs and ETNs focused on silver outperformed equities-based silver ETPs.

Specifically, the iShares Silver Trust (NYSEArca: SLV), the ETFS Physical Silver ETF (NYSEArca: SIVR), the Etracs CMCI Silver Total Return ETN (NYSEArca: USV) and the PowerShares DB Silver Fund (NYSEArca: DBS) returned just under 30 percent compared with just over 18 percent for the equities-focused Global X Silver Miners ETF (NYSEArca: SIL).

Some speculated that the miners “didn’t believe the spike in silver” but, for whatever reason, investors holding equity ETFs targeting silver-mining firms were all outperformed by those tracking the commodity itself—by more than 10 percentage points.

Fast-forward to the latest ramp-up in silver prices in anticipation, and reaction to the Fed’s announcement of QE infinity and that dynamic has changed.


SIL, the silver mining ETF, SIL—from June 28 to Sept. 20 of this year—has outperformed the various commodity trackers by nearly 10 percentage points. So the story line has been flipped, with equities-focused SIL returning just over 40 percent compared with just over 30 percent for the physical funds.

We’re still too close to the Fed’s latest announcement to determine what the policy’s longer-term impact will be on silver prices, but judging by the movement in SIL, it seems like the miners “believe” in this move.

Ultimately, it’s up to ETF investors to determine how much they believe in this latest silver rally. If they are waiting in line to buy tickets to get on the silver train, recent history suggests the miners, via ETFs like SIL, are the choice for those looking for the best performance.

The old saying “If history is any guide …” couldn’t be more confusing in this case. After all, any investor using this past month’s performance as their signpost at the expense of last summer’s results are likely falling victim to “recency bias”—a common investor pitfall.

Going with your gut has never been so hard.

At the time this article was written, the author held no positions in the securities mentioned. Contact Paul Baiocchi at [email protected].


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