Silver ETF Draws a Crowd

The Global X Silver Miners ETF is only a month old but is already a hit with investors.
Publish date:

NEW YORK (TheStreet) -- Investors that are interested in playing silver now have another way to do so with Global X Silver Miners ETF (SIL) - Get Report. It's less than a month old and is already a popular trade with investors.

The fund no doubt looked to cash in on the popularity enjoyed by

Market Vectors Gold Miner ETF

(GDX) - Get Report


Market Vectors Junior Gold Miners ETF

(GDXJ) - Get Report

, and no doubt SIL's quick success may be due to investments from the same group of investors.

With SIL, investors have a way to access the companies that mine the metal. It's a popular angle for ETFs because the companies that explore and extract a commodity can sometimes be a more dynamic investment than the commodity itself.

That's because the industry has large fixed costs. For instance, if it costs a miner $15 to mine an ounce of silver, and silver is $20 an ounce, the profit is $5 per ounce. Ignoring potential changes to variable costs (inflation may be causing wages and energy costs to rise as well, for instance), if silver doubles to $40 an ounce, the profit quintuples to $25 per ounce.

However, mining shares can also be more volatile. A long-term comparison of GDX and a physically backed gold fund,

SPDR Gold Shares

(GLD) - Get Report

, shows that the dominant influence on GDX oscillates between gold and stocks. During the financial crisis, gold stocks tumbled, even though gold held up well. GDX peaked in March 2008, when gold was just over $1000 an ounce. Even though gold is over $1200 an ounce, GDX has yet to reach a new high.

SIL is likely to have a similar relationship with a physically-backed silver fund like

iShares Silver Trust ETF

(SLV) - Get Report

. Since silver is much more volatile than gold, expect SIL to be much more volatile than GDX.

From the March 17, 2008 high in gold, GLD eventually fell more than 20% during the crash of 2008. SLV lost as much as 50% at its lows. GDX briefly fell as much as 70% at the lows, while some of the top holdings in SIL plunged as much as 85%.

SIL seeks to track the Solactive Global Silver Miners Index. In addition to silver miners, the fund has exposure to companies involved in refining and exploring.

In terms of the index's global diversification, the companies come from five different countries. A significant wedge of the index's exposure is devoted to Canada, as 58% of the companies are based there. Next is Mexico at 24% and the United States at 10%. Peru and Russia account for 4% of the index each. Investors should note that this reflects the domicile of the companies, not the location of operations. Geographical diversification is actually broader than reported by the latter measure.

Looking at company diversification, there are a total of 26 holdings and the fund devotes 76.5% of assets to the top 10 holdings. SIL's top two holdings,

Silver Wheaton



Pan American Silver

(PAAS) - Get Report

account for 13.4% and 12.5% of the ETF, respectively.

Although the fund does not have a great amount of diversification, the fund will still be able to track the silver mining industry's trends without being swayed too much by company-specific issues. Its popularity means that it will also trade with sufficient liquidity for quick entry and exit.

Investors interested in silver miners as a way to invest in silver should take demand for the metal into account when considering how much exposure they want in their portfolio.

In comparison to gold, silver does not have as much status as an investment for times of market uncertainty, and the value of the metal decreased almost as much as the S&P 500 during the recession.

In addition to being used for silverware and jewelry, silver, more so than gold, also has industrial applications. For instance, the metal can be found in things from batteries and electrical appliances to photographic devices and fuel cells.

However, it snapped back in value and rose much faster once markets began to turn around. If, as the silver bugs believe, silver regains its monetary status in a manner similar to gold, it has much higher to climb before it catches up with gold. Although gold is at new all-time highs, silver is still more than 50% below its all-time high.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management was long Market Vectors Gold Miner ETF, iShares Comex Gold.

Don Dion is president and founder of

Dion Money Management

, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.