2024-01-03 04:41:40 ET
Summary
- The ETFMG Prime Junior Silver Miners ETF provides concentrated exposure to junior silver producers and developers.
- Although I am bullish on precious metals over the long-run, I do not recommend the SILJ ETF as a long-term hold. Historically, SILJ has underperformed its peers.
- Instead, investors looking for silver exposure should consider royalty companies or the commodity ETFs, as they have outperformed over the long-run.
I came across the ETFMG Prime Junior Silver Miners ETF ( SILJ ) while looking for investment ideas that align with my long-term bullish view on precious metals.
The SILJ ETF provides concentrated exposure to junior silver mining exploration and production companies. While junior silver miners can provide exceptional leverage during rallies in the underlying commodity, over the long-run, they have delivered poor long-term returns as mining is a fundamentally tough business. For peace of mind, I recommend investors stick with the commodities themselves or royalty companies with advantaged business models.
Fund Overview
The ETFMG Prime Junior Silver Miners ETF aims to provide investors with exposure to silver mining exploration and production companies. The SILJ ETF is the first and only fund targeting small-cap silver miners.
Sale To Amplify Does Not Change SILJ's Mandate
Recently, Amplify ETFs agreed to acquire ETF Managers Group's ("ETFMG") exchange traded fund lineup, effectively doubling Amplify's offerings. However, this acquisition was only a change in the fund advisor and should not affect the day to day operations of the SILJ ETF.
Index Methodology
The SILJ ETF tracks the Prime Junior Silver Miners & Explorers Index ("SILJ Index"), an index that measures the performance of public small-cap companies active in the silver mining exploration and production industry.
Stocks within the SILJ Index are weighted according to a modified market capitalization methodology based on the percentage of a company's revenues generated from silver mining activities, with pure play silver companies receiving a positive 3x adjustment factor. A pure play company must generate more than 50% of its revenue from silver mining activities and its market cap is multiplied by a factor of 3.
The top five stocks with the highest adjusted market capitalizations are assigned weights of 13%, 11%, 9%, 7%, and 5% respectively while all remaining stocks are pro-rata based on their relative adjusted market capitalizations with a 4.5% single security cap.
The SILJ ETF has been fairly successful in gathering assets from investors, with more than $700 million in AUM (Figure 1). The SILJ ETF charges a 0.69% expense ratio.
Figure 1 - SILJ overview (etfmg.com)
Portfolio Holdings Reflect Lack Of Silver Pure Plays
The SILJ ETF is a very concentrated thematic fund with its top 10 holdings accounting for 64% of the portfolio (Figure 2).
While SILJ strives to focus on silver miners, we can see this is quite a challenge as there simply is not that many silver mining pure play companies in the public markets. For example, the SILJ ETF's 3rd largest weight, Harmony Gold Mining, is primarily a gold and copper miner based out of South Africa that produces silver as a byproduct of some of its polymetallic mines (Figure 3).
Figure 3 - Harmony Gold is primarily a gold and copper producer (Harmony Gold reserves report)
SILJ's 2nd largest weight, First Majestic Silver Corp. ( AG ), actually derives more revenues from gold than silver production (only 40% of 2023 estimated silver equivalent production is derived from silver, Figure 4).
Figure 4 - 60% of First Majestic's 2023 production is gold (AG investor presentation)
Even SILJ's largest holding, Pan American Silver Corp. ( PAAS ), produces far more gold than silver (Using gold/silver ratio of 86.5, PAAS's 2023 production is only 21.6% silver, Figure 5)
Figure 5 - Almost 80% of Pan American's 2023 production is gold (PAAS investor presentation)
Historical Performance Has Been Poor
Historically, the SILJ's performance has been poor, with 3/5/10 year average annual returns of -14.7%, 5.3%, and 1.5% respectively (Figure 6).
However, when gold and silver equities are 'hot', the SILJ ETF can produce some eye-popping returns like 139.9% in 2016 and 56.3% in 2019.
SILJ Vs. GDXJ And WPM
But is SILJ really the best way to play silver equities? Regular readers may recall that I have a fairly dim view of precious metal miners, having spent a decade investing in this space professionally. In my opinion, mining is a very tough industry where the list of risks is long and varied, ranging from geological risks with the deposit/reserves to operational risks with the mines and processing plants and macro risks like inflation and commodity price fluctuations. Increasingly, investors also have to contend with geopolitical concerns, as ESG initiatives can highjack seemingly good mines (see recent expropriation of the Cobre Panama copper mine in Panama due to ESG concerns).
That is why I have recommended investors gain exposure to precious metals via royalty companies like Wheaton Precious Metals Corp. ( WPM ). In fact, it is the only precious metals equity holding I have in my personal portfolio.
Royalty and streaming companies like WPM provide non-dilutive financing to mining companies in exchange for a royalty payment or the right to purchase a certain percentage of a mine's output at below market prices.
Historically, the SILJ ETF has been a poor way to gain exposure to precious metals, as its total returns have lagged WPM, the VanEck Junior Gold Miners ETF ( GDXJ ), the iShares Silver Trust ETF ( SLV ), and the SPDR Gold Shares ETF ( GLD ) on a 1 year (Figure 7), 3 year (Figure 8), 5 year (Figure 9) and 10 year (Figure 10) timeframe.
Figure 7 - SILJ vs. peers, trailing 1 year total returns (Seeking Alpha)
Figure 8 - SILJ vs. peers, trailing 3 year total returns (Seeking Alpha)
Figure 9 - SILJ vs. peers, trailing 5 year total returns (Seeking Alpha)
Figure 10 - SILJ vs. peers, trailing 10 year total returns (Seeking Alpha)
Unless one has perfect foresight and can predict bull markets in precious metals, like the 2016 bull market where the SLV and GLD rallied 14.6% and 8.0% respectively and SILJ massively outperformed with a 138.6% return, long-term investors should consider investing in the commodities themselves via SLV or GLD or royalty companies like WPM (Figure 11).
Figure 11 - SILJ outperforms only if timed perfectly (Seeking Alpha)
Risks To Cautious View
The biggest risk to being cautious on the SILJ ETF is 'missing out' on potentially large gains if/when precious metals rally. As we saw in Figure 11 above, if timed correctly, the SILJ ETF can deliver exceptional leverage to precious metal prices.
However, I believe over the long run, investments in superior business models and the commodities themselves will win out.
Conclusion
The SILJ ETF provides concentrated exposure to junior silver mining producers and developers. When timed correctly, the SILJ ETF can provide exceptional leverage to the underlying commodity prices. However, as mining is such a tough business, if investors are looking for long-term exposure to precious metals, I recommend they stick with commodity ETFs like SLV and GLD or royalty companies like WPM. I rate SILJ a hold .
For further details see:
SILJ: May Not Provide The Best Long-Term Exposure To Silver