Silver Miners ETF Outperforms Gold Fund, but Carries Double Risk

The Global X-Silver Miners ETF (NYSEMKT:SIL) provides leveraged-like exposure to silver through mining companies, whereas the Goldman Sachs Physical Gold ETF (NYSEMKT:AAAU) offers direct access to the spot price of physical gold.

These two funds allow investors to gain exposure to precious metals, but they do so through entirely different mechanisms. While one tracks a basket of companies that extract silver, the other reflects the value of bullion stored in vaults. Understanding these structural differences is key to managing portfolio risk.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The Goldman Sachs Physical Gold ETF is significantly more cost-effective for long-term holders, as its expense ratio is a fraction of the cost associated with the Global X-Silver Miners ETF. Lower overhead may help preserve capital over extended periods of time.

Performance & risk comparison

What's inside

The Goldman Sachs Physical Gold ETF endeavors to track the market price of gold by holding 100.00% physical gold. Because it is not an equity-based fund, it does not hold individual corporate stocks. This structure is intended to mirror the performance of gold bullion after accounting for the trust's expenses. The Goldman Sachs Physical Gold ETF provides an alternative to holding physical bars or coins by representing ownership of bullion held in vaults. The fund was launched in 2018.

The Global X-Silver Miners ETF tracks the Solactive Global Silver Miners Total Return Index and holds 39 holdings. It focuses exclusively on the basic materials sector, which represents 100% of the portfolio. Its largest positions include Wheaton Precious Metals Corp at 23.20%, Pan American Silver Corp at 11.42%, and Coeur Mining at 11.1%. The Global X-Silver Miners ETF provides investment returns that broadly align with the overall financial performance of its underlying index. This equity-based approach means the fund is susceptible to the operational risks of the miners themselves. The fund was launched in 2010.

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Which looks like the better buy

Investors looking to diversify their holdings and hedge against inflation often consider investing in precious metals. But buying, storing, and protecting gold and silver bars can be cumbersome, and seeking out funds that mirror the performance of these metals is a good alternative. If you're looking to invest in precious metals, which of the two funds above is the more attractive option?

There are two broad ideas to consider with this comparison: Do you want to invest in silver or gold? And do you want to invest in the material itself, or in companies that are in the business of mining the material?

Let's tackle gold first. The AAAU ETF holds nothing but physical gold. That means its performance should mirror the ups and downs in the market price of gold bullion, minus administrative fees. Gold has long been considered a store of value and a smart way to diversify an investment portfolio to protect against economic fluctuations.

SIL, on the other hand, invests in the silver market. Silver is also considered a store of value, but it also has certain uses as a material, for things like jewelry as well as technology applications. That means the metal is slightly more tied to supply and demand dynamics in the market. SIL also doesn't just hold silver the way AAAU holds gold. It holds silver mining companies, which have their own balance sheets, management teams, and operational risks that come from managing a mining business. So, not only is SIL a bet on silver, it's a bet on specific silver mining companies. The trade-off to this extra risk is that you'll also collect a small dividend payout for holding SIL. Over the last year, SIL has vastly outperformed AAAU, although its maximum five-year drawdown indicates it's also much more volatile.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.