Silver Mining ETFs Performing Brightly

April 14, 2014

Miners’ return to profitability fuels rebound in beaten-down segment.

Silver mining ETFs have had a solid run so far this year, significantly outperforming the broad stock market—and the rally in silver spot prices—in a rebound that is largely centered on miners’ return to profitability after a bloodbath year in 2013.

Andrew Chanin, co-founder of New-York-based PureFunds, went as far as saying that silver mining ETFs could be the “deep value contrarian play” of the year after ranking as the “most hated investment” in 2013.

His fund, the smallest in the three-ETF segment in terms of assets but also the only one to focus exclusively on small- and micro-cap miners, has outperformed the modest rally in silver spot prices by roughly 20 percentage points year-to-date.

The $5 million PureFunds ISE Junior Silver Miners ETF (SILJ | F-34) has now seen total returns of more than 22.2 percent so far this year, gains that came as silver spot prices rallied less than 3 percent, and the S&P 500 slipped 1.7 percent in the same period.

Investors who bought into a larger fund like the Global X Silver Miners ETF (SIL | B-74) at the beginning of the year have now seen total returns of nearly 16.5 percent year-to-date. SIL is the biggest ETF in the segment, with more than $245 million in total assets, and it tracks a market-cap-weighted index of silver mining companies.

SILJ_SLVP_SIL_SLV_YTD

Chart courtesy of StockCharts.com

The upward momentum in silver prices has been anything but steady, and has in fact waned in recent days as investors who look at silver as a safe-haven precious metal reacted to broader economic news.

But the modest 2.6 percent rally so far this year has been enough to bring silver back to hover close to the crucial $20 mark—a level that for many silver miners and explorers is the breakeven point when it comes to operating in the red.

“Typically, silver is more volatile than gold, and miners are even more volatile than metals,” Chanin told ETF.com. “They are correlated to the spot metal price, but they typically trade with higher beta to it.”

“Last year was a brutal year for precious metals, and silver took a bigger hit than gold,” he added. “But this year, silver popped above $20, and that gave people some encouragement that miners would do better. There aren’t a ton of mining companies that can make profits below $20 silver.”

According to him, silver’s industrial uses are what is supporting the metal’s outperformance. It’s that trait that should continue to push its prices—and silver mining stock levels—higher ahead, he says.

“The mining space has been selling off the past few years, but a lot of people are now looking for alternatives to bonds and cash, wondering whether the economic recovery is here to stay,” said Chanin. “Many are finding that silver mining—the most hated investment in 2013—could be a deep value contrarian play that is overextended to the downside.”

In 2013, silver prices slipped 36 percent, and funds like SILJ bled 53.6 percent, while larger-cap SIL slipped 50 percent in the same 12-month period.

Whether that prediction holds true remains to be seen. ETF Securities, for instance, noted that demand for cyclical assets, including industrial metals, is beginning to overtake demand for so-called defensive assets such as precious metals globally.

“Commodity investors appear to be rotating toward more cyclical assets as the global economic recovery remains intact,” Nicholas Brooks, head of research and investment strategy for ETF Securities, said in the note.

So far this year, investors have cautiously embraced silver strategies. The $6.5 billion iShares Silver Trust (SLV | A-99)—a fund that owns physical silver—has attracted net inflows of $187 million year-to-date, but silver mining funds have seen far more modest net creations.

Investors have poured a net of $4 million into SILJ and $23 million into SIL, year-to-date. The $9.6 million iShares MSCI Global Silver Miners ETF (SLVP | D-99) has attracted a net of $1 million in the same period.

 

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