PAAS - SIL: Not My Preferred Precious Metals Play

2023-11-02 12:00:00 ET

Summary

• The Global X Silver Miners ETF (SIL) is designed to give investors exposure to silver minders.
• SIL has underperformed other precious metals and mining vehicles since its launch in 2010.
• I believe investors should consider Wheaton Precious Metals (WPM) as an alternative to SIL due to its strong historical performance and strong business model.

ETF Overview

The Global X Silver Miners ETF (SIL) seeks to provide investment results that track the Solactive Global Silver Miners Total Return Index, which seeks to provide market capitalization weighted exposure to companies active in exploration, mining, and/or refining of silver.

SIL currently has net assets of ~$823 million and has an expense ratio of 0.65%. The fund currently holds 34 securities. SIL's characteristics include P/E ratio of 41.9x and a price-to-book value of 1.3x.

High Management Fee

SIL has a very high expense ratio of 0.65% for a passive product. To put that into context, the average equity ETF expense ratio is ~0.16%. Comparably, a similar ETF, the iShares MSCI Global Silver and Metals Miner ETF (SLVP) charges an expense ratio of 0.39% while the iShares Silver Trust (SLV) charges an expense ratio of 0.50%.

As an investor, I work diligently to avoid high management fees (active or passive), as I believe they are often an overlooked headwind when investing.

SIL's fee of 0.65% strikes me as particularly high given the fact that investors are not getting any active management but rather passive index replication. Moreover, the fund is fairly concentrated with the top 5 holdings making up ~55% of the total fund.

Weak Relative Historical Performance

SIL launched April 2010 and has significantly underperformed other precious metals and mining vehicles. Since inception, SIL has delivered a total return of ~-37.9% compared to a return of 20.7% delivered by SLV during the same period. Gold and gold miners funds have also outperformed SIL since inception with the SPDR Gold Shares ETF (GLD) delivering a total return of ~65.6% while the VanEck Gold Miners ETF (GDX) has delivered a total return of -33.1%.

Additionally, SIL has underperformed its close rival SLVP by ~3.5% since that fund launched in January 2012. This is not surprising given that SLVP charges a management fee that is 40% lower than SIL.

Holdings Analysis

As shown by the table below, SIL is highly concentrated with the top 5 holdings accounting for ~55% of the total fund as of October 31, 2023. Within the top 5 holdings, SIL is also highly concentrated with Wheaton Precious Metals (WPM) and Pan American Silver Corp (PAAS) accounting for a total of ~37.5% of the total fund.

One important thing to note with SIL is that the fund is not a pure play on the silver mining industry as a number of large holdings also have other significant businesses. Korea Zinc Co, which accounts for ~7.5% of the fund, derives just 25% of its revenue from silver with the bulk of its revenue coming from other products. Wheaton Precious Metals (WPM) derives just ~37% of revenue from silver while deriving ~57% of revenue from gold. Pan American Silver generates ~24% of its revenue from silver while generating ~64% of its revenue from gold.

Generally speaking, my view is that ETFs earn their fees when they offer investors an efficient way to do something they cannot easily do on their own. It would not be difficult for investors to simply replicate the 34 holdings and weights for SIL and avoid paying the 0.65% in annual fees. Investors who do not want to bother with 60 holdings could just scale up the weights of the top 2 holdings and still get reasonably well-diversified exposure to the intended risk factors. Moreover, individual investors have the ability to actively manage their tax position with stocks to a better degree than is the case with ETFs.

High Dispersion of Underlying Holdings

The chart below shows performance of SIL's largest holdings that trade in the U.S. since the inception of the fund. SIL's underlying holdings have exhibited a wide range of performance. The best performing of the top holdings, WPM, has returned ~192% while the worst performed Coeur Mining Inc (CDE) has returned ~-84.5%.

Given the high dispersion of the underlying holdings in SIL, I think it is worthwhile for investors to evaluate which stock or group of stocks from the index are worth owning vs simply buying SIL.

My Preferred Alternative to SIL

While I am generally not bullish on precious metals right now due to the high level of interest rates, I can understand investors may want to have precious metals exposure as a way to diversify.

One mining name that stands out above the rest is Wheaton Precious Metals.

WPM differs from most traditional precious metals companies, in that it is a streaming company. This allows WPM investors to participate in precious metals upside price exposure of precious metals without having to worry about rising mining costs. Moreover, another differentiator between WPM and traditional miners is that WPM is not a capital intensive business.

WPM is highly focused on precious metals with 57% of revenue coming from gold, 37% from silver, and 3% from palladium.

As shown below, both Seeking Alpha and Wall Street analysts currently rate WPM as a buy. In addition to that, WPM has a very strong track record of generating shareholder returns in excess of the S&P 500. WPM has also significantly outperformed SIL and other precious metal plays such as GLD, SLV, and GDX. Additionally, WPM currently trades at a trailing P/E ratio of ~38x compared to 41.9x for SIL. I find this valuation highly attractive on a relative basis given WPM's strong history of outperformance.

Conclusion

SIL represents a relatively unique ETF as it is one of the only ETFs to focus on silver miners. However, SIL charges a very high management fee for a passive product. SIL has a long history of relative underperformance compared to the other precious metals ETFs such as GLD, SLV, and SLVP.

While I am generally not bullish on precious metals right now due to the high level of interest rates, I can understand why investors may want to have some precious metals exposure to diversify.

Investors who want to consider expressing a bullish trade in the precious metals space may want to consider WPM as a viable alternative to SIL given WPM's strong long-term performance history along with bullish ratings from both the Seeking Alpha and Wall Street analysts.

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