ProShares Ultra Silver ETF: Bullish Leverage When Volatility Is Low

Feb. 26, 2021 4:26 PM ETProShares Ultra Silver ETF (AGQ)4 Comments12 Likes

Summary

  • The ProShares Ultra Silver ETF takes leveraged (2×) positions in silver futures contracts and has the potential to outperform the S&P 500 in the medium term.
  • Silver prices are in an uptrend because of supply constraints, new applications, and the Fed’s dovish policy.
  • The ETF reported a net income of $12 million in January 2021 and ended up redeeming 450,000 shares.
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Soros has taught me that when you have tremendous conviction on a trade, you have to go for the jugular. It takes courage to be a pig. It takes courage to ride a profit with huge leverage. - Stanley Druckenmiller

The ProShares Ultra Silver ETF (NYSEARCA:AGQ) takes a twofold-leveraged (futures contracts) position in silver and aims to deliver a 2× return compared to its benchmark index, the Bloomberg Silver Subindex. The ETF trades in silver futures regularly - it is not a buy-and-hold kind of player. The ETF is designed for traders, investors who are bullish on silver in the near term, and commodity players who love to ride on commodity cycles. Growth investors too can consider it as a medium-term pick.

As AGQ is all about silver, let us focus on the commodity's prospects.

01AGQ.jpg

Image Source: TradingView.com

Past monthly price action suggests that when silver breaks out of a groove and starts rising, the uptrend lasts for at least 2 years (see trendlines [1] and [2] in the image above). The current uptrend ([3] in the image above) is about a year old and I believe that it has the potential to last for at least 2 years.

Bank of America has nicked silver as a MIFT (Metal Important For Future Technologies) because solar power generation is expected to increase at an exponential pace and that will ensure that the demand for silver will keep rising (silver is used in solar panels). BofA has predicted that if the current spending trend on solar panels holds steady, silver will rally to $31/oz in 2021. It estimates that demand will increase from 2,285 tons in 2020 to 4,272 tons per year over the next 15 years. BofA also estimates that because silver's supply is limited, it is likely that the metal will rally to $50/oz in this cycle. The demand and supply situation in 2020 was tight and I reckon it will get tighter as solar power generation increases and new applications of silver are discovered.

Moreover, the Fed has confirmed that the economy is not out of the woods yet and that it will continue with its bond purchases, which too will help precious metal prices.

New applications, increasing demand from existing applications, a dovish Fed policy, and a tight demand-supply situation are likely to contribute to silver's uptrend in the current cycle.

AGQ v/s S&P 500

02AGQ.jpg

Image Source: Seeking Alpha

AGQ has delivered 63% gains in the last 5 years versus S&P 500, which gained 116.5% in the same period. The reason for AGQ's underperformance in the long run is that silver's uptrends do not last more than 2-3 years (check the standalone silver price chart above).

However, silver has outperformed S&P 500 in the last year by delivering gains of 67% compared to a 15% gain delivered by S&P 500.

03AGQ.jpg

Image Source: Seeking Alpha

Therefore, the point I am making is that the silver uptrend cycle can last for 2-3 years, and we are a year into it now. The current silver rally has strong legs and is likely to last for another 12 months at least, in my opinion.

Current Financials

04AGQ.jpg

Image Source: AGQ's Jan 2021 Financials

In January 2021, AGQ generated a net income of $12.4 million and redeemed 450,000 shares (net). It reported a NAV of $51.66 as of January 31, 2021, which has since appreciated to $53.15 as of February 25, 2021. The fund's expense ratio is 0.95%.

Summing Up

Given the current market dynamics, I believe that silver prices are likely to trend up in the next 1-2 years.

Leveraged buying strategies pay off in an uptrend situation, and therefore I am bullish on AGQ's growth prospects in the medium term, say 1-2 years. However, be mindful that the enemy of leverage is volatility, and if silver gets more volatile, you don't want that kind of exposure independent of trend.

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This article was written by

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