See Why WSJ Says These Unique Gold & Silver Investments Are Best-In-Class

Diversification is a key element of any investing strategy. It minimizes risk, reduces volatility, and increases your exposure to potentially profitable investments. Unfortunately, if you’re working with limited capital, it can be difficult to build a highly diversified portfolio. The fact that you have to purchase a wide variety of different investments to achieve high levels of diversification makes it an expensive strategy.

That’s the reason why a unique type of investment vehicle has grown so much in popularity over the past several years. It’s known as the Exchange Traded Fund, or ETF for short.

ETFs are essentially bundles of different stocks and other investments that can be purchased as individual shares. For example, you might buy shares of an energy ETF that contains shares of the biggest companies in the oil and gas industry, but you don’t have to worry about picking out those companies. The pros do it for you.

Likewise, the precious metals sector has seen an explosion in ETF activity too. And the Wall Street Journal is reporting that gold and silver ETFs are actually beating out ETFs from almost every other sector.

Here’s more from the WSJ:

It has been a golden year for precious-metal ETFs.

This year’s top 10 nonleveraged ETFs by returns through July are focused on gold and silver, with all of them up at least 100% since the start of 2016, according to data from ETFdb.com, a site that provides information and analysis of the market. (Nonleveraged funds don’t use derivatives or borrowed money as part of their investment strategy.)

The funds take varying approaches, but they invest in mining companies. The top spot is held by PureFunds ISE Junior Silver (SILJ), which rose more than 250% through July. At the beginning of the year, it had assets under management of about $3.5 million, according to PureFunds Chief Executive Andrew Chanin,meaning the fund was costing more to run than it was generating in revenue. Its assets now exceed $91 million.

“It’s been a wild year,” says Mr. Chanin. “There were people who were trying to advise me to close the fund down last year. I had absolutely no interest in seeing that happen.”

The success of the mining ETFs is directly linked with the rise of gold and silver prices, which have bounced back strongly after a multiyear bear run. Gold is up 27% this year, and silver 44%.

Bond refugees

There are a number of reasons for this resurgence. First, investors see the metals—particularly gold—as a safe-haven asset in volatile financial markets, says Jay Jacobs,director of research at Global X, which runs the Gold Explorers (GLDX) and Silver Miners(SIL) ETFs. He points to volatility in the early part of the year when oil prices fell below $30 a barrel, and in June following the U.K.’s vote to leave the European Union.

But there is also a more unusual reason investors are seeking out these assets. Gold and silver historically have kept pace with inflation, but don’t pay any income, so many investors turn to government bonds instead for inflation protection. In these times of rock-bottom interest rates, gold in particular is looking more attractive, says John Ciampaglia, executive vice president and head of ETFs at Sprott, which manages theSprott Junior Gold Miners (SGDJ) and Sprott Gold Miners (SGDM) ETFs.

“The amount of capital that is now looking for more-attractive alternatives [to bonds] is really quite staggering,” Mr. Ciampaglia says. “Gold has been a big beneficiary.”

Some silver funds, though, have done even better this year. The three top-performing nonleveraged ETFs through July focus on silver. Silver gets a boost from its industrial uses, says Kiril Nikolaev, a financial analyst at ETFdb.com. He points to its use in solar panels as an example.

“More and more people are getting solar panels on their rooftops, which is increasing their demand. This in turn has some effect on the price of silver itself,” Mr. Nikolaev says.

ENLARGE

Why invest in a mining company, rather than simply buying the metal itself? One reason is that the companies’ profits have the potential to provide a bigger return. The miners tend to have fixed operating costs, so they remain the same no matter the price of the metal. That means profits can rise exponentially, says Mr. Jacobs. “As that commodity starts to rally, you can see the performance of these companies start to take off at a much faster rate than actually the underlying commodity.”

Also, investors in miners can benefit from the companies’ management, says Tushar Yadava, vice president on the U.S. investment strategy team at BlackRock’s iShares, whose iShares MSCI Global Silver Miners (SLVP) and iShares MSCI Global Gold Miners (RING) ETFs are both among the top 10 nonleveraged ETFs this year.

“When you invest in the equities, you’re getting a company as well, so you’re getting the ability to maneuver,” Mr. Yadava says. “When the outlook is getting a little weaker, they can cut costs and close some operations, which is what happened when gold was not doing so great.”

Stock-market risk

Miners usually outperform the underlying commodity, says Brandon Rakszawski,product manager at VanEck, which runs the VanEck Vectors Junior Gold Miners (GDXJ) and VanEck Vectors Gold Miners ETF (GDX). However, they can also underperform when things get rough.

“Generally speaking, as gold prices have risen—and this has played out this year—gold miners have risen to a greater magnitude. And when gold prices have fallen, sometimes gold miners have fallen harder,” he says.

He adds that investors should remember they’re still investing in stocks, so there is a general market risk. “These gold miners are not impacted by gold price and gold price only,” Mr. Rakszawski says. “There are certain macroeconomic and market risks that can influence general equities across the board, and gold miners are no exception.”

Do you have any experience with ETFs? How about gold and silver ETFs specifically?

Give us your thoughts in the comments.

Subscribe for Email Updates

Complete the form and click the Subscribe Now button. Thanks!

We respect your email privacy. Unsubscribe anytime.