ETF Investors Miss Out on the Best Commodity Trade of the Year

  • iShares Silver Trust poised for fifth straight monthly outflow
  • Money pours out of silver ETFs, while miner ETF sees inflows

Exchange-traded fund investors are missing the silver party.

Instead of piling into the asset that’s offered the biggest gain among 22 raw materials on the Bloomberg Commodity Index this year, ETF investors are retreating. iShares Silver Trust, the biggest ETF backed by the metal, is poised for a fifth straight monthly outflow, a trend not seen since the fund listed in 2006. Holdings in all silver-backed ETFs tracked by Bloomberg have shrank by 6.2 million ounces and are near the lowest in seven months.

Silver is surging amid demand for haven assets and bets that industrial use will rise at a time of tightening mine supply. While investors in commodity ETFs have shied away the metal in favor of gold, hedge funds are reaping the gains. Money managers built their silver net-long positions every week this year, taking holdings to the highest since September. Buyers of mining-company ETFs including PureFunds have also benefited.

“We think this is a good year for silver,” said Mariann Montagne, a portfolio manager at Gradient Investment LLC, which added the metal to its endowment portfolio in January. “Constricted supply and increased demand -- that’s having an impact” on prices, she said in a telephone interview.

Investors favor gold because it’s more heavily traded than silver, making it more liquid, she said.

Silver futures have climbed 13 percent this year as their more expensive cousin gold rallied amid uncertainties over U.S. President Donald Trump’s policies, which have boosted demand for precious metals as a store of value. Anxiety over electoral candidates in the Netherlands, France and Germany who favor exiting the European Union is also increasing the appeal of havens. Adding to silver’s tailwinds are signs of improving demand as China’s economy stabilizes. The metal traded at $18.06 an ounce at 8:38 a.m. on the Comex in New York.

Output from mines was expected by CPM Group to fall in 2016 for the first time since 2011. Supply is declining at a time when demand is rising from industrial users including makers of jewelry, electronics and solar panels.

Biggest Return

PureFunds’ silver miner ETF, which delivered the biggest return for a non-leveraged fund among more than 1,700 U.S.-listed ETFs tracked by Bloomberg in the past 12 months through Friday, saw its assets jump 58 percent this year. The fund’s price soared more than 120 percent over the past year, helped by a surge in its biggest holdings, Pan American Silver Corp., First Majestic Silver Corp. and Coeur Mining Inc.

Until 2016, investors had been shunning silver and the companies that produce them, with prices falling for three straight years and languishing in a bear market. Mining companies’ access to credit dried up, forcing many to shut losing ventures and cut spending on exploration, leaving little room for them to ramp up output as demand picks up, said Chris Rhine, a New York-based portfolio manager at Cohen & Steers Capital Management.

“Silver is a very important industrial metal and it benefits from increased economic activity,” said Andrew Chanin, chief executive officer of PureFunds. “We’ve been seeing better financing opportunities for silver companies. All of these have really helped the general health of the small silver mining companies.”

This year, investors have poured $15.6 million into the fund. In the 12 months through Friday, the ETF generated returns of 142 percent, topping all its peers in the U.S., including those linked to fixed income, equities and commodities.

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