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Commodity ETFs

Commodity investing was all the rage at the start of 2011 as many worried about debt crises, a weakened dollar and inflation in emerging markets. Inflows into gold-based products were particularly strong and a number of other precious metals saw gains as well. This was especially true in the silver market as prices of the white metal surged to nominal highs close to $50/oz.

Yet, soon after this surge, prices of silver collapsed back to earth, plunging thanks to several margin increases by the CME which caused prices to tumble by close to $15/oz. in a matter of weeks. Then, later on in the year, a strengthened dollar and worries over emerging market demand pushed prices back down to below where they started the year. This trend was also seen in the prices of silver miners, although this segment had less pronounced peaks and valleys than its precious metal counterpart (also read Is USCI The Best Commodity ETF?).

This can best be demonstrated by taking a closer look at the most popular silver mining ETF on the market, SIL from Global X. The fund represents the broad silver mining industry and is the closest investable proxy we have for the industry today. The fund moved in a band of 4,000 basis points across 2011 while SLV, the most popular silver-backed ETF, saw a move of 7,000 basis points (which it nearly saw twice in the past twelve months). This suggests that the underlying commodity, at least in the short-term, has been much more volatile than its equity-based counterpart.

Nevertheless, SIL has actually underperformed SLV over the past twelve month period as the mining ETF has lost about 21.4% compared to a much more modest loss of 6.2% for SLV.  Yet, this trend appears to be reversing as SIL has actually outperformed SLV by a pretty wide margin over both the past three and six month periods. This suggests that when prices of silver are flat or even falling, as they have been lately, making a play on silver miners instead of the underlying mineral could be the way to go (read Is HAP The Best Commodity Producer ETF?).

Silver Mining ETF In Focus

For investors who are curious about this style of gaining exposure to the silver market, there are several key points to know about the popular product from Global X. First, SIL tracks the Solactive Global Silver Miners Index which seeks to give investors global exposure to firms that are in the silver mining industry including those that are engaged in refining and exploration activities. Currently, the fund consists of 31 securities in total and it charges investors 65 basis points a year in fees. SIL is also one of the more popular products in the commodity producer space, having amassed over $300 million in assets and changing hands close to 630,000 times a day (see Top Three Precious Metal Mining ETFs).

In terms of holdings, the fund has heavy exposure to international markets as just under 9% of total assets go towards American securities. Instead, top weightings go to three nations; Canada (54.8%), Mexico (15.5%), and the UK (11.9%), while much smaller allocations are given to Russia and Peru as well. For individual securities, three companies make up at least 11.9% of total assets—Silver Wheaton, Fresnillo, and Industrias Penoles—while Pan American Silver Corp (PAAS - Snapshot Report) and Polymetal round out the top five (read Three Best Gold ETFs).

So investors who want to gain exposure to silver over the long-term, SIL could be a better choice. While the fund is more expensive than its commodity counterpart, it is also far less volatile which could make it ideal for those with a lower tolerance for big swings in the market. Furthermore, although SIL has underperformed SLV over the long-term, both products are still up significantly and the Global X fund tends to do much better when silver is experiencing weakness, as it is now. Lastly, it should be noted that SIL also pays a modest dividend—approaching 1.1%-- so this cash payout, along with the fund’s more stable nature, could make it a quality but often overlooked choice for those seeking more commodity exposure in the equity corners of their portfolios.

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 Author is long silver bullion.

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