GDX vs. SIL vs. CU: How They’ve Performed So Far In 2012

It has been an interesting year for investors and traders focused on the metals. While ongoing economic uncertainty and recent additional monetary stimulus from the Fed has kept gold in the news, silver has quietly had a strong run as well. Amidst that uncertainty, industrial metals like copper have not done nearly so well [for more commodity news subscribe to our free newsletter].

What has that background meant for the leading metal miner ETFs?

Silver Shines

Global X Silver Miners ETF (SIL) is the leader of this group of three, as shares are up almost 18.6% year to date. Relative to the names on this list, SIL has actually done pretty well compared to its physical bullion alternative, as the iShares Silver Trust (SLV) is up about 22.4% year to date [see also Silver, SLV’s Stealth Rally].

So why do the silver miners lag the metal itself? For starters, the popularity of physical bullion ETFs like SLV has drawn away investor interest and funds that would have once gone into these stocks. Second, silver mining companies don’t experience the same real-time impact of higher or lower prices – many of these companies hedge their production (so they receive lower-than-spot prices during periods of silver appreciation) and price growth is at least partially offset by production and exploration costs.

Gold An Unfamiliar Laggard

Although gold is usually the precious metal of choice for most investors, it has found itself lagging behind silver this year. Using the SPDR Gold Shares (GLD) as a proxy for gold, this year has seen a 13.2% gain to date. Unfortunately, it has been such good times for the miners – the Market Vectors Gold Miners ETF (GDX) is up less than 3.5% so far this year [see also Why No Investor Should Own GLD].

Why are the miners lagging? For starters, a few individual miners like Jaguar Gold (JAG) have had significant performance issues that have sapped investor confidence. Second, many major gold companies hedge extensively, meaning that they’re locked into receiving prices below the current spot rate for gold and not has leveraged to current gold moves. Last and not least, production and exploration costs continue to rise, pressuring the profits and cash flows of gold miners even in relatively good times.

Dr. Copper Still Coughing

Copper is widely regarded as an economically-sensitive commodity, and the declining industrial activity in Europe, China, and North America has worried investors for much of this year. As a result, copper (as measured by the iPath Copper Total Return Sub-Index ETN (JJC), which does tend to lag the actual performance of NYMEX copper) has only appreciated about 7.2% so far this year.

But the First Trust ISE Global Copper Index (CU) has lagged even further – falling just barely into negative territory for the year. While this fund’s slightly above-average expense ratio (0.7%) doesn’t help, that’s the real issue. For starters, this fund includes a lot of miners that rely substantially on minerals/metals other than copper for their performance – including names like Rio Tinto (RIO), Xstrata and Vedanta. With generally poor performance in other metals like iron ore, thermal coal, met coal and nickel this year, that has hurt the performance of these larger miners [see also 13 Ways To Invest In Copper].

Even the closer pure-plays have had challenges, though. Several copper producers have had labor difficulties (resulting in strikes and/or higher labor costs) and seen growing investor concern about foreign governments, like Freeport McMoRan’s (FCX) challenges in responding to Indonesian government efforts to increase its ownership and royalty rates on copper production.

The Bottom Line

This year’s performance among these leading metal miner ETFs highlights one of the major challenges with commodity investing – commodity producers don’t trade in tandem with their underlying commodities. While this can sometimes work to an investor’s advantage (the stock of hedged miners may not decline as quickly as the underlying commodity), the prevalence and popularity of physical metal/bullion ETFs gives investors more options and saps some of the vitality of these mining stocks.

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Disclosure: No positions at time of writing.

About Stephen D. Simpson

Stephen D. Simpson, CFA is a former Wall St. sell-side analyst who currently spends most of his time writing about investments, business, and the economy. He has worked as an equity analyst for both sell-side and buy-side investment companies in both equities and fixed income, and been a freelance writer for ten years. Stephen's consulting work has focused primarily upon the healthcare sector, while he has also written extensively for publication on topics pertaining to investments, security analysis, and healthcare. Simpson operates the Kratisto Investing blog.
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