Three ETFs For $50 Silver

by on April 27, 2011 | ETFs Mentioned:

Thanks to inflationary pressures and booming emerging markets, a number of key commodities have seen their values soar so far in 2011. While this trend has been especially pronounced in the energy and food commodity markets, precious metals have also been a huge beneficiary of the movement as many traders and investors have piled into these assets as safe havens. While gold has performed admirably during this time period, silver has been the real star, with prices surging from under $30/oz. at the start of the year to well over $40/oz. in a matter of months. 

Thanks to these gains, and the continued worry over fiat currencies as well as the ever increasing demand for the metal both in industrial uses and by those in emerging markets, some believe that silver still has quite a bit of room to run. In fact, several analysts are calling for the metal to break through the $50/oz. mark and possibly continue higher. “Silver has certainly gone up a lot in the last 9-10 months. There is no question about that, but remember, silver is still 10% below where it was 31 years ago,” said legendary commodity investor Jim Rodgers in a recent interview. “I bet you do not know many things that are 10% below where they were 31 years ago.” That perspective suggests at least one commodity guru doesn’t think the run is over just yet [see all the precious metal ETFs here].

ETFs have become a popular way for playing all types of commodities, and investors have particularly embraced the low costs, tax efficiency, and intraday liquidity offered as a means of achieving exposure to precious metals. There are dozens of different options for gaining exposure to silver, including direct physically-backed exposure, a futures-based strategy, and investment in silver intensive companies. Below, we profile three of these options that approach an investment in the white metal from different angles:

iShares Silver Trust (SLV)

SLV is by far the most popular physically-backed silver fund and is one of the most popular ETFs in the world as well with AUM exceeding $16 billion and average daily trading volume in excess of 34 million shares. The fund is designed to track the spot price of silver bullion by holding it in secure vaults and publishing the list of bars on the company website; in total the firm holds more than 11,000 tonnes of the metal. In terms of performance, SLV has been on a tear; this ETF is up close to 115% over the past year and has gained nearly 50% since the beginning of 2011.

Another option for physically-backed silver exposure is the ETF Securities Physical Silver Shares (SIVR). The approach taken by this fund is nearly identical to SLV, as both ETFs invest directly in silver bullion stored in secure vaults. The biggest differentiator for SIVR is the expense ratio; this fund charges just 0.30%, compared to 0.50% for SLV [see How ETFs Have Democratized Investing].

Global X Silver Miners ETF (SIL)

For investors seeking an equity play on silver instead of a physically-backed approach, SIL makes for a compelling choice. The fund targets the Solactive Global Silver Miners Index, which is designed to reflect the performance of the silver mining industry. It is comprised of common stocks, ADRs and GDRs of selected companies globally that are actively engaged in some aspect of the industry such as silver mining, refining or exploration. Currently, it consists of 25 securities in total with the heaviest weights going towards companies based in Canada and the U.S. In terms of individual holdings, four companies combine to make up about 45% of the total assets; Silver Wheaton Corp., Fresnillo Plc, Industrias Penoles SAB de CV, and Pan American Silver Corp.

SIL has, much like the underlying metal, performed very well over the past quarter, gaining close to 30%. Because the profitability of mining companies depends on the market price for their goods, these stocks can often trade as leveraged plays on spot metal prices. Moreover, some may be more comfortable evaluating companies that produce cash flows and pay out dividends instead of just investing in a bar of metal; for those, SIL could make for an interesting way to play silver [see Precious Metal ETFs: Physical Vs. Equity Exposure].

iShares MSCI All Peru Capped Index Fund (EPU)

Although Mexico recently eclipsed Peru as the world’s top producer of silver, the relatively small size of Peru in comparison to its northern neighbor ensures that silver has a much greater impact on Peruvian markets. In fact, close to four ounces of silver are produced per person in Peru every year, compared to just over one ounce per person in Mexico. Nonetheless, Peru still produces roughly 16% of total silver supplies in the world, ensuring that although it may have lost the title for world’s biggest silver producer it is still a vital nation for the metal. Thanks to this dependence on commodities and silver in particular, Peru can be thought of as an indirect play on silver prices–albeit it in a high risk emerging market vehicle. Many Peruvian companies are directly engaged in the extraction of the white metal, creating a link between commodity and equity markets. But higher silver prices also translate into increased exports and wealth for Peru, which can trickle through other sectors of the economy as well.

EPU tracks the MSCI All Peru Capped Index which measures the performance of the Peruvian equity market. Currently, the fund has 29% securities in total with a large chunk going towards small and micro cap companies. In terms of sectors, the fund more than 60% of its total assets in material firms, including close to 16% in Compania ia De Minas Buenaventura, one of the largest precious metal miners in the region. This suggests that while EPU isn’t be any means a pure play on silver, it could make for an interesting choice nonetheless and might have more direct exposure to silver than you may initially think [Emerging Market ETFs: Seven Factors To Consider].

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Disclosure: Long silver bullion.