Funds tracking silver have had an amazing run so far this year owing to weakness in the global financial markets. Sluggish growth in China since the beginning of the year and the global oil market turbulence lifted safe-haven demand. Plunging interest rates on a global scale also helped these metals after three subdued years. iShares Silver Trust (NYSEARCA:SLV) returned an astounding 32% in 2016 in the period between January and October.
However, the silver rally came to an abrupt halt with Donald Trump winning the U.S. presidential elections. Trump's proposed fiscal stimulus measures will boost growth, leading to higher interest rates and a stronger dollar. In fact, Fed raised the benchmark interest rates by a modest 25 bps to 0.50-0.75% a couple of days back, confirming the U.S. economy's growth momentum and the labor market's wellbeing. The Fed has also forecast three rate hikes in 2017, up from two guided in September.
An increase in rates will rob silver of its sheen since it is not a yield generating investment. The oil scenario has also not improved with oil prices recovering on the new output deal. In order to reduce oversupply and jack up prices, non-OPEC members have agreed to cut their output by 558,000 barrels a day. On November 30, the much-awaited deal on output cut was signed by the OPEC, per which it will slash production by about 1.2 million barrels a day from January.
As a result, silver has been steadily falling since the election. SLV is down 12.8% in the November 8 to December 15 time frame.
Will the Trend Continue?
The signs of recovery in silver prices in 2016 are slowly disappearing. However, there are still chances that silver will see a turnaround. Silver has high usage in industrial activities with about 50% of the total demand coming from industrial applications. With most of the key economies coming up with manufacturing data in the growth zone lately, silver definitely has some reasons to cheer for.
Additionally, conditions in the U.S. market are slowly improving and industrial demand for silver is expected to get a boost from stepped-up domestic economic activity. Additionally, silver supply could contract given the dearth in deposits faced by the silver miners, forcing producers to look for fresh projects.
Still, for ETF investors, who expect the sluggishness of silver to be short lived, the products discussed below could make for interesting choices.
iShares Silver Trust
The fund tracks the price of silver bullion measured in U.S. dollars. It is the ultra-popular silver ETF with AUM of over $5.8 billion and heavy volume of nearly 11.1 million shares a day. It charges 50 bps in fees per year from investors. The fund holds a Zacks ETF Rank #3 (Hold) with a High risk outlook and has returned 15.1% so far this year.
ETFS Physical Silver Shares (NYSEARCA:SIVR)
This fund has amassed $326.2 million in its asset base and trades in moderate volume of more than 121,000 shares per day on average. It tracks the performance of the price of silver less the Trust expenses and is backed by physical silver. Its expense ratio is 0.30%. The fund also holds a Zacks ETF Rank #3 (Hold) with a High risk outlook and has returned 15.4% so far this year.
PowerShares DB Silver Fund (NYSEARCA:DBS)
This product provides exposure to the silver futures market rather than spot market and tracks the DBIQ Optimum Yield Silver Index Excess Return index. It has an AUM of $32.2 million and average daily volume of less than 61,000 shares, increasing the total cost for the fund in the form of a wide bid/ask spread. DBS is the high cost choice in the silver bullion space, charging 79 bps in fees per year from investors. Like other silver ETFs, the fund holds a Zacks ETF Rank #3 (Hold) with a High risk outlook. In the year-to-date period, it has gained 14.4%.