SILJ: Seeking Big Returns In Junior Silver Miners (NYSEARCA:SILJ)

“Silver is a precious metal, and has a high value in exchange; it is also very malleable and ductile, and thus very convenient for use.”

– Marcus Tullius Cicero

Introduction

The ETFMG Prime Junior Silver Miners ETF (NYSEARCA:SILJ) (the “Fund”) is an exchange traded fund (“ETF“) that provides exposure to the silver mining exploration and production industry (the “Industry“). Per its website, the Fund is “[t]he first and only ETF to target small cap silver miners…” and “is uncorrelated to most broad equity markets….” Before fees and expenses, the Fund seeks to replicate the price and yield performance of the Prime Junior Silver Miners & Explorers Index (the “Index“).

About the Index

The Index which the Fund seeks to replicate provides investors with a benchmark for tracking publicly traded, small-cap companies that are active in the Industry. The stocks included in the Index are screened for liquidity and weighted according to modified free-float market capitalization — (per the prospectus) the five stocks with the highest adjusted market capitalization are assigned a weight of 13%, 11%, 9%, 7%, and 5%, respectively, while the rest of the stocks are weighted pro rata based on their relative adjusted market capitalization, subject to a cap of 4.5%.

Thesis

For reasons noted herein, I am BULLISH on silver (SLV) and the Fund over the next six months and expect the Fund and its constituent holdings to perform well. I purchased shares of the Fund on January 5, 2023 at $10.96. While I expect the Fund to outperform, I will trade around this position aggressively since silver and silver equities are extremely volatile; indeed, I sold some of my position on January 6th, the very next day, as the Fund shot up more than three percent.

Trading volumes for the Fund are generally solid with more than 1 million shares usually changing hands each day.

Why Silver

Silver is among the most electrically conductive metals in the world and has significant industrial applications, as well as store of value qualities (think coins, bars, jewelry). Due to its unique properties, some of the main commercial uses of silver include:

1. Electrical conductivity: Silver is an excellent conductor of electricity of all elements, making it valuable in the production of electrical and electronic devices.

2. Bactericidal properties: Silver is highly effective at killing bacteria and other microorganisms, so it is often used in water purification systems, medical equipment, and wound dressings.

3. Jewelry and silverware: Silver is often used to make jewelry and decorative items such as silverware, ornaments, and coins.

4. Industrial applications: Silver is used in a wide range of industrial processes, including the production of mirrors, bearings, and printed circuits.

5. Photography: Silver is used in the production of film for photography and in some digital camera sensors.

6. Solar energy: Silver is used in the production of solar panels, as it is an efficient conductor of electricity and can absorb a large amount of sunlight.

These are just a few examples of the many uses of silver. Given its unique properties and its “green” applications, it is likely that silver will continue to be used for these and other purposes in the future.

Of course, beyond commercial applications, silver is a precious metal and is often referred to as “poor man’s gold.” As such, it frequently trades in sympathy with gold. Moreover, as noted in my article on the U.S. Global GO GOLD and Precious Metal Miners ETF (GOAU), I am very bullish on gold and precious metals for the following reasons, among others (quote from the linked article):

A number of factors bode well for [precious metals] in 2023, including inflation having peaked, interest rates on a declining trend and lower input costs as energy costs start to finally pullback. In addition, central banks are firming up their balance sheets by buying record amounts of gold. Moreover, operating cash flows for miners are strong according to Fitch Ratings.”

For further information regarding silver applications, demand, etc., see the Boox Research Seeking Alpha article on the Fund, as well as the Industry overview found here.

Top 10 Holdings

The Fund consists of more than the 50 holdings, and the top 10 according to Seeking Alpha (on January 6th) are included below. The Fund is rebalanced quarterly.

______________________________________

First Majestic Silver Corp 13.09%

Yamana Gold Inc 10.32%

MAG Silver Corp 7.77%

Pan American Silver Corp 5.61%

SSR Mining Inc 5.26%

Hecla Mining Co 5.22%

SilverCrest Metals Inc 4.13%

Capstone Copper Corp 3.84%

Harmony Gold Mining Co Ltd ADR 3.65%

Aya Gold & Silver Inc 3.17%

_______________________________________

While the Fund provides investors access to the Industry, per the most recent Fund Fact Sheet, more than 35% of the Fund is exposed to gold/gold mining. This is not surprising since silver is often found in conjunction with, or as a byproduct of, gold in gold mines (frequently silver is found in the same ore deposits as gold and extracted at the same time). Ultimately, the amount of silver that is produced at a gold mine can vary widely, depending on the ore body and the efficiency of the extraction process.

________________________________________

Fund Basics

TICKER: SILJ (NYSE)

CUSIP: 26924G102

EXPENSE RATIO: 0.69%

NUMBER OF HOLDINGS: 55

AUM: $740 MILLION+

INCEPTION: 11/28/2012

Risks

The principal risks of investing in the Fund are outlined in the prospectus (linked above) starting on page 4 thereof. As previously noted, the Fund, the price of silver and precious metals in general are very volatile. And in a volatile space, small caps are notably the most volatile asset class. As can be seen from the Fund holdings, the Fund is not as diversified as other ETFs (i.e., there is concentration risk). Moreover, small cap miners are frequently illiquid and dependent on financing (and financing costs are rising). Also, the Fund’s expense ratio is pretty high at nearly 70 basis points, which is high for a passive investment vehicle.

Concluding Thoughts

Mining equities and precious metals continue to break out to the upside and the current macro backdrop is supportive of future gains. Per my 2023 Forecast, my allocation to the space is nearing 10%.

The Fund has been around for over a decade, has been able to accumulate material AUM, and has reasonable liquidity. While I would look for a pullback before adding capital, I am bullish on the Fund, precious metals and the mining space, in general, over the next several months.

Do your own due diligence! Cheers!