Silver Junior Miner ETF Gains Following, Rises With Mining Shares
Mining stocks as a whole are strong in 2014, following mining companies’ spending cuts after the drop in precious metals prices in 2013.
Exchange-traded funds that follow the space, such as Market Vectors’ Gold Miners (NYSE: GDX) and Junior Gold Miners (NYSE: GDXJ), have shown outsized gains this year, up 26.3% and 35.59% year-to-date as of Friday. The Standard & Poor’s 500 is up 9.68% year-to-date, as of Monday.
So has a relatively new mining ETF, the PureFunds ISE Junior Silver (NYSE: SILJ), which is up 40.79% year-to-date as of Monday. The fund, which debuted Nov. 29, 2012, seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the International Securities Exchange Junior Silver Miners Index.
The ETF’s launch at the end of 2012 was probably the one of the most inauspicious times to start an ETF, given that in April 2013 precious metals prices began their price descent. That’s given the ETF a negative rate of return since inception, down 21.27%, but officials at both the ISE and PureFunds see the ETF as well-positioned for any rebound in metals prices, whether due to geopolitical concerns or because of a pickup in the global economy.
“It launched about four months before the meltdown. What do you do in the face of that? Nothing. You try to hold out and see if you can capitalize on a rebound. And assets under management went from about $1 million to $10 million now,” said Kris Monaco, head of ISE ETF Ventures.
Andrew Chanin, chief executive officer of PureFunds, said the strong gains mining stocks saw this year reflects how “beaten down” the shares became during the 2013 fallout in precious metals prices and mining equities.
“It really wasn’t surprising when gold and silver were moving up to start the year that the miners’ (gains) were almost more of a coiled spring. When optimism was being seen in the price of the metal, the mining shares reacted a lot more because of the higher beta,” he said.
Beta is a measure of the volatility, or risk, of a security versus the market as a whole.
Mining equities can have a higher beta because they are somewhat correlated to the commodity they produce. In turn, junior miners have a higher risk because they are in the exploration side of the industry. In the precious metals, silver is sometimes called “a high beta gold” because of the volatile swings it has compared to the yellow metal.
So since the SILJ is made up of junior silver miners, it can be considered a high-risk, high-reward play.
“When it comes to commodities, the volatility can be through the roof,” Monaco said. “Silver is really super-charged. I (think) the volatility is about three or four times the S&P 500, which is why we attract a lot of trading volume to it.”
Chanin said the ETF attracts different types of investors. There are some who are interested in the ETF because it can play a role in commodity asset allocation in a portfolio, some who are interested on the idea that precious metals prices might rebound or on their outlook for metals.
“That’s the beauty of an ETF, you can own it and sell it on the same day or hold it for years to come,” Chanin said.
For people interested in the junior miner space, owning them in an ETF offers a chance to add the sector to a portfolio without the risk of picking a single stock that does poorly, said Chanin and Monaco.
“There’s nationalization risk, government risk, company risk, all of these things that exist in the space are minimized by owing a basket of these companies. Plus all of these are at different stages in the lifecycle for a mining company,” Chanin said.
The index the ETF is based on is comprised of junior miners based in the U.S., Canada and the U.K. Hochschild Mining is the top holding, at 13.34% of assets, as of Sept. 22, with Mag Silver Corp at 12.25% and Fortuna Silver Mines rounding out the top three at 12.16%.
Monaco said they didn’t necessarily intend to only choose U.S., Canadian and U.K.-based miners.
“It’s more an issue of availability and liquidity. It’s not like there were hundreds of silver miners we could pick from. This is a very fine-tuned focus on junior silver. We were limited by the number of companies, but we wanted to make sure there was sufficient liquidity that an investment product can be,” he said.