PureFunds ISE Junior Silver ETF: Exposure to Silver Explorers and Junior Producers

Last week, Silver Investing News (SIN) published 5 Silver ETFs at a Glance, an article that takes a look at a number of different silver-focused exchange-traded funds (ETFs) worth taking a look at. 

To get a better understanding of the PureFunds ISE Junior Silver ETF (ARCA:SILJ), one of the ETFs that made the list, SIN got in touch with Andrew Chanin, co-founder of PureFunds.

In the interview below, Chanin explains what place the PureFunds ISE Junior Silver ETF holds in the overall ETF picture, also touching on what companies the ETF tracks and how those companies are selected. In closing, he offers his opinion on where the silver price is headed in 2014.

SIN: What led you to create the PureFunds ISE Junior Silver ETF? How does it fit into the overall ETF picture?

AC: I got my start off in finance right out of school, trading as a clerk on the floor of the American Stock Exchange with one of the largest ETF specialist firms at the time. As lead marketer, I started being given many new issues of ETFs being launched. The popular ETF concepts that were launching were natural resource ETFs, so I started learning a lot more about natural resources. As I stumbled upon the precious metals, I really dug into silver and found a great interest in it.

While still trading ETFs, I was speaking with different issuers to try to get them to bring other natural resource equity ETFs to market so that I could trade them. Eventually I decided that there were so many different ETF concepts I wanted to see that I should try to bring them to market myself.

From there, one of my partners at the time, Paul, and I decided that we would try to launch PureFunds; one of the first concepts we wanted to see come to market was a junior silver mining ETF. Our reasoning for that was based on the limited options in the market. You could invest in physical metals or futures ETFs, or you could invest in a silver mining fund. However, the silver mining funds really only had the large, senior producers, the mid-tier producers and streamers. In contrast, there was a gold mining ETF as well as a junior gold mining ETF. It always baffled me that there was never a junior silver play to complement the silver mining ETF, so I made it a priority to create one.

SIN: So just to be clear, are there any other ETFs that include silver juniors?

AC: We’re the only ones that try to focus on the junior silver space. GDXJ, a junior gold basket, includes some silver names, but it’s primarily focused on and marketed as a junior gold fund.

There is also a junior fund that has a whole hodgepodge of junior companies, it runs the whole spectrum of resources.

SIN: Your ETF exclusively tracks small-cap silver explorers and junior production companies, which are more high risk than established silver producers. Why should investors take on that risk?

AC: It can be a high-risk area of investment, but at the same time, it’s a very high-reward play. When dealing with an area that can be hit or miss, I think it makes sense to use a diversified fund that focuses on that sector.

For instance, It might be difficult to do all the research, or you might not know every single in and out of every company, but by investing in a fund of a basket of junior mining names, you’re able to minimize some of the risk — you’re spreading out your risks across multiple names as opposed to picking an individual company and having all the risk associated with that one company.

SIN: How many holdings does the ETF have? What are the top holdings at the moment?

AC: Currently, we have 24 underlying names. The fund rebalances twice annually.

The top holdings, as of last night, were Fortuna Silver Mines (TSX:FVI,NYSE:FSM), Endeavour Silver (TSX:EDR,NYSE:EXK), MAG Silver (TSX:MAG,NYSEMKT:MVG), and then Silvercorp Metals (TSX:SVM,NYSE:SVM) and Silvercrest Mines (TSXV:SVL,NYSEMKT:SVLC).

SIN: How do you select the companies being tracked? What are the criteria for choosing them?

AC: It’s our index provider that selects them. At the time of launch, what they were looking for was silver exploration or mining companies that derive a high percentage of their revenue from silver or have a high percentage of silver content in their reserves. They also had to have a market cap between $50 million and $2 billion.

SIN: I noticed that all the companies tracked are listed in Canada, the US or the UK. Is that due to those criteria?

AC: Exactly. The country where they’re listed isn’t much of a hindrance. Even though the companies in the basket are listed in those three countries, they still have projects in Peru, Chile, Argentina, China, the US, Mexico, Canada — lots of places where there are high concentrations of silver.

SIN: The PureFunds ISE Junior Silver ETF is up significantly since the beginning of the year. Could you tell me why that is?

AC: I think part of the reason is that last year gold and silver were two of the worst-performing asset classes. Typically, miners move with some correlation to the commodity they’re mining, and so the junior mining space was one of the hardest-hit sectors. Things got really overextended, and people were pricing a lot of miners below their book value.

At such a depressed level, things can snap back very quickly, especially when they’re extended to the downside, and particularly in the silver industry. So silver really started correcting towards the end of last year, in late December, and through this year. Now silver companies are coming back very strong because they’ve gone from a scenario where the price of silver is so low that, if they were to produce, they’d be producing at a loss, to potentially having the ability to be profitable.

Additionally, we’re seeing some M&A come back into the space — back in December there were even two names in the index that, within one week of each other, were both taken out by larger mining companies. I think a lot of investors are starting to plug in potential takeover premiums, not the full extent of what the takeover would be, but some type of discounted takeover premium.

SIN: The PureFunds ISE Diamond/Gemstone ETF and the PureFunds ISE Mining Service ETF have not fared so well lately I understand both traded for the last time in January. What would you say to investors concerned that your silver ETF will go the same way?

AC: It was a very difficult decision that we had to make. We looked at the amount of assets and attractions, the volume and the spreads in those two funds and realized that we may have been ahead of our time. Investor demand and education were overwhelming decision makers for us when we wound down those funds; we essentially decided that SILJ has the most potential to attract investor interest and wanted to put 100 percent of our efforts behind our best horse in the race.

SIN: Finally, everyone is of course wondering where the silver market is headed in 2014. What’s your take?

AC: I think that the metals saw an overextension to the downside last year, but at the same time, specifically in silver, we’ve seen a huge increase in investor demand. Last year was a great indicator for that, we saw record investment demand in silver. That’s in contrast to the early 2000s, when there was very little investment demand in silver — specifically, the driver back then was industrial demand for silver.

Now we’re entering an era where we’re seeing a tug of war between investment demand and industrial demand. I think what people aren’t even considering as a possibility is a potential supply shortage in silver as a result of this squeeze from demand. That could be a really strong catalyst for an upward move in the price of silver, especially if a company that actually uses silver in one of its applications decides it doesn’t want to be at risk of being in a supply crunch. If these companies start to stockpile to minimize the risk of having to deal with a silver shortage, I think you could even see that supply crunch exacerbated. If that happens, silver could be catapulted to high levels.

A lot of people look at $50 as being a ceiling for silver because it’s failed to cross that mark twice in the past. However, I think we haven’t necessarily seen a real ceiling yet for silver, and if we do see some sort of supply crunch, then it could rise to levels we haven’t seen it hit before.

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: The PureFunds ISE Junior Silver ETF is a client of the Investing News Network. This article is not paid-for content. 

The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.

Related reading: 

5 Silver ETFs at a Glance

PureFunds’ Paul Zimnisky Talks Diamond ETF Investing