Silver ETFs Are Outshining Gold


Precious metals have been surging this year, with the markets focused on the rise in gold as the U.S. dollar depreciates and market volatility sent traders to the safe-haven. Now, silver and related exchange traded funds are finally starting to outpace their golden counterpart.

A perfect storm of global central bank policies and market volatility has contributed to a surge in precious metals. Year-to-date, the SPDR Gold Shares (NYSE:GLD) rose 16.1% and iShares Silver Trust (NYSE:SLV) gained 16.9%.

Global central banks have shown that they are willing to adopt negative interest rate policies to stimulate stagnate growth. Consequently, in this new so-called NIRP environment, precious metals have shined and may continue to perform.

“We believe that the prolonged presence of low (and now even negative) rates has fundamentally altered the way investors should think about risk and may result in a broader use of assets like gold to manage their portfolios more effectively and preserve their wealth over the long run,” the World Gold Council said in a research note.

While gold has been the go-to precious metal for many investors, silver is finally beginning to step ahead. Over the past five years, GLD generated an average annualized return of -4.2% while SLV returned an average -18.3%. However, SLV jumped 16.5% over the past three months and increased 2.6% over the past month while GLD rose 13.1% over the past three months and dipped 1.7% in the past month.

Bolstering the appeal for silver, the precious metal enjoys heavy industrial demand that benefits from an expanding global economy. Over 50% of global demand for silver comes from industries like chemicals, medicine and technological appliances.

Along with SLV, investors interested in increasing their exposure to silver may look to a number of related ETFs, including ETFS Physical Silver Shares (NYSE:SIVR) and PowerShares DB Silver Fund (NYSE:DBS).

Both SLV and SIVR are bullion-backed silver ETFs - the funds' shares represent a physical holding in silver bars stored in London, U.K. bank vaults. Potential investors should be aware that physically backed ETFs are taxed as collectibles at a rate of 28% instead of long-term equity rate of 15%.

DBS, on the other hand, tracks silver futures contracts. Specifically, the ETF includes silver contracts that expire on January 27, 2017. Consequently, potential investors should be aware that the fund may come with a K-1 tax form. Additionally, since the ETF includes futures contracts, investors are susceptible to the effects of contango or backwardation in the futures market.

The outperformance in the precious metals commodities have also bolstered silver miner-related ETFs, which are among the best peforming ETFs of the year. For example, the Global X Silvers Miners ETF (NYSE:SIL) increased 65.4%, PureFunds ISE Junior Silver ETF (NYSE:SILJ) surged 118.5% and iShares MSCI Global Silver Miners ETF (NYSE:SLVP) jumped 72.8% year-to-date. In comparison, the Market Vectors Gold Miners ETF (NYSE:GDX), the largest gold miner-related ETF, gained 61.7% this year.

SIL tracks the Solactive Global Silver Miners Total Return Index, which is comprised of global silver miners. The ETF is top heavy with a hefty 11.9% tilt toward Tahoe Resources (NYSE:TAHO), 11.2% Fresnillo Plc, 10.8% Silver Wheaton Corp (NYSE:SLW) and 8.2% Industrials Penoles among its top holdings. The fund's country weights include Canada 48.1%, Mexico 23.1%, U.S. 21.7%, Russia 5.7% and Peru 1.5%.

SLVP reflects the performance of the MSCI ACWI Select Silver Miners Investable Market Index, which also has a large 62.6% position in Canadian companies, along with 13.1% in U.S., 11.7% U.K., 5.0% Peru, 4.5% Mexico and 2.0% Hong Kong. The fund's top holdings include a big 18.2% weight in SLW, along with 9.1% Fresnillo and 8.3% TAHO.

SILJ, on the other hand, follows the ISE Junior Silver Index, which is comprised of small-cap miners and explorers, with a heavy 88.3% emphasis on Canadian companies, along with 6.7% U.S. and 4.9% U.K. Top holdings include First Majestic Silver (NYSE:AG) 16.4%, Pan American Silver Corp (Nasdaq:PAAS) 11.6%, Mag Silver Corp 10.7% and Coeur Mining (NYSE:CDE) 5.8%.

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These silver miner ETFs may also be enjoying a double boost from the shifting foreign exchange markets. Silver bullion prices are affected by a weakening U.S., and the global silver ETFs also enjoy the positive forex effects of a depreciating greenback - a strengthening foreign currency means that returns are augmented when converted to a weaker U.S. dollar. However, potential investors should be aware that a strengthening dollar could contribute to a significant pullback in both precious metals and related miner assets.

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Full disclosure: Tom Lydon's clients own shares of SLV, GLD and GDX.