ETF Of The Week: Small Cap Silver Miners Soar

July 05, 2019

Precious metals mining ETFs have been on a tear lately, with the top five best-performing ETFs of the past month all involved some way in the mining business:

 

Source: ETF.com; data as of July 3, 2019

 

Though most of these are gold mining ETFs, the top performer is actually a silver miner fund: the $58.8 million ETFMG Prime Junior Silver ETF (SILJ).

There's a good reason for that: Gold and silver—and gold and silver miners—tend to move together, because gold and silver deposits tend to appear together in the ground, meaning there's lots of crossover between the metals in terms of specific projects and exploration activity.

In terms of demand, however, silver has far more practical industrial applications than gold, including medical equipment, electronics, solar panels and more. Therefore, investors often view silver as a hybrid investment: It works both as a store of value, like gold, and a consumable commodity, like oil.

That helps to establish a floor of demand for the metal, which can help boost the attractiveness of silver miners over gold funds.

Why Small Cap Matters

There are only three silver miner ETFs on the market, of which SILJ is the smallest. The other two are the $341 million Global X Silver Miners ETF (SIL) and the $66 million iShares MSCI Global Silver Miners ETF (SLVP).

SILJ's 33-stock portfolio skews toward small- and micro-cap names, drilling down even more narrowly on this already narrow slice of the mining market.

While concentration risk is an issue, SILJ's focus on smaller cap stocks also helps push portfolio exposure toward purer-play picks, rather than large gold/silver conglomerate miners for whom silver might account for smaller portions of total revenue.

Most of the portfolio is in Canada (72%), with the remainder split between the U.S. (16%) and the U.K. (12%). Top holdings include First Majestic Silver Corp (12%), Pan American Silver Corp. (12%) and Hochschild Mining plc (11%).

 

[Use our stock finder tool to find an ETF’s allocation to a certain stock.]

 

SILJ's small-cap focus has been its secret sauce. Since June, SILJ has been on a tear: The fund is currently up 21.5% over the past 30 days, well outpacing its competitors.

 

Source: StockCharts.com; data as of July 3, 2019

 

Fund Of Wide Swings

Unsurprisingly, however, returns for SILJ exhibit significant volatility, and wide performance swings are common. That has dented longer-term returns; since the start of the year, SILJ has risen 8%, and over a 12-month period, the fund has actually dropped 18%.

Historically, SILJ has also experienced significant swings in premiums and discounts; currently SILJ exhibits a significant premium to net asset value (NAV) of 1.16%.

That said, large premiums/discounts to NAV are common in illiquid market sectors, especially ones as illiquid as silver miners (and small cap miners, to boot). It should be no surprise that SILJ is a low volume, high-spread fund, with average daily trading volume of $1 million and average bid/ask spreads of 0.69%.

While concerning, those metrics aren't all that much worse than SLVP, which has a spread of 0.59% and trades only $372K daily on average. (Meanwhile, SIL trades $4.7 million on average, with a spread of 0.18%.)

SILJ has an expense ratio of 0.69%.

Contact Lara Crigger at [email protected]

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