ETFs for Recycling Gold and Silver: A Strategic Investment?

The escalating demand for precious metals, coupled with growing environmental concerns surrounding traditional mining practices, has sparked interest in alternative investment strategies. Exchange-Traded Funds (ETFs) focused on gold and silver recycling are emerging as a potentially strategic option. These ETFs offer investors exposure to the precious metals market while promoting sustainable practices. But are they a sound investment?

The Allure of Recycling ETFs

Recycling ETFs tap into the “urban mining” concept, recovering valuable metals from electronic waste (e-waste), jewelry scrap, and industrial byproducts. This approach addresses several critical issues:

Environmental Impact: Traditional gold and silver mining is notorious for its environmental consequences. It can displace communities, contaminate drinking water with dangerous chemicals like mercury and cyanide, hurt workers, destroy pristine environments, contribute to deforestation, soil erosion, and air pollution through the release of particulate matter, sulfur dioxide, and other pollutants. Producing gold for one wedding ring alone generates 20 tons of waste. Recycling, on the other hand, significantly reduces these impacts. Recycled gold is over 90% less carbon intensive than mined gold.
Resource Depletion: As easily accessible ore deposits dwindle, mining operations are forced to exploit lower-grade ores, increasing energy consumption and environmental damage. Recycling provides a secondary source of these metals, lessening the strain on virgin resources.
Economic Viability: The precious metal recycling global market was valued at $22.6 billion in 2020 and is expected to grow into a $34.9 billion industry by 2027, at a compound annual growth rate of 6.4%. Moreover, investors who have vision and foresight are able to realize a much bigger return on their investments than people who invest in bullion and coins.

How Recycling ETFs Work

While the concept is straightforward, the structure of recycling ETFs can vary:

Direct Investment: Some ETFs may directly invest in physical gold and silver sourced from recycling operations. The Royal Mint Responsibly Sourced Physical Gold ETC (RMAU), for example, aims to increase its use of recycled gold on a best endeavors basis, meaning a portion of the ETC will be backed by gold bars composed of 100% recycled gold.
Indirect Investment: Other ETFs invest in companies involved in the recycling process, including e-waste management firms, metal refineries, and technology developers focused on improving recycling efficiency.
Mining Company ETFs: Some ETFs provide exposure to silver indirectly through equities, offering potentially higher returns but also higher risk compared to physical silver ETFs. The Global X Silver Miners ETF (SIL) provides equity exposure to silver-focused mining companies rather than direct bullion ownership.

Potential Benefits of Investing in Recycling ETFs

Diversification: Precious metals ETFs provide investors with exposure to a diversified basket of precious metals, such as gold, silver, platinum, and palladium.
Hedge against Economic Uncertainty: Precious metals and other commodities can act as a hedge against inflation and economic uncertainty.
Liquidity: Precious metals ETFs are traded on stock exchanges, making them highly liquid. Investors can easily buy or sell shares during market hours at prevailing market prices.
Lower Costs: Precious metals ETFs typically have lower expense ratios compared to actively managed mutual funds. This cost-effectiveness can improve overall returns for investors.
ESG Compliance: Investing in recycling ETFs aligns with environmental, social, and governance (ESG) principles, appealing to socially conscious investors.

Risks and Considerations

Despite the compelling narrative, investors should carefully consider the risks associated with recycling ETFs:

Market Volatility: Like any investment, environmental ETFs can be subject to market volatility. Economic factors, changes in regulations, and fluctuations in the demand for sustainable goods and services can impact the performance of these funds.
Greenwashing: It’s crucial to scrutinize an ETF’s holdings and ensure that its “green” claims are legitimate. Some funds may exaggerate their commitment to recycling or invest in companies with questionable environmental practices.
Liquidity: Some environmental ETFs may have lower trading volumes compared to more established funds, potentially leading to liquidity concerns. Investors should consider the trading volume and liquidity of an ETF before investing.
Price Fluctuations: Silver ETFs are generally less volatile than individual stocks but can be affected by fluctuations in silver prices.
Concentration Risk: The Fund’s assets may be concentrated in one or more particular sectors or industries. The Fund may be subject to the risk that economic, political or other conditions that have a negative effect on the relevant sectors or industries will negatively impact the Fund’s performance to a greater extent than if the Fund’s assets were invested in a wider variety of sectors or industries.

Key Metrics to Evaluate

Before investing in a recycling ETF, consider the following:

Expense Ratio: This is the ETF’s annual fee, paid out of your investment in the fund. Look for a low one.
Holdings: Examine the ETF’s holdings and sector exposure to understand the types of companies and industries included in the fund.
Historical Performance: Review the historical performance of the ETF, including its returns, volatility, and risk-adjusted measures.
Sustainability Ratings: Check the sustainability ratings assigned by independent research firms or rating agencies to ensure that the ETF aligns with your environmental goals and values.
Underlying Index: The MVIS®Global Circular Economy ESG Index (MVCIRCTR) tracks the performance of companies contributing to the circular economy. This includes water purification and treatment products/services, waste-to-energy and biofuels, waste management services that include recycling services, metal recycling services.

Examples of ETFs in the Recycling and Precious Metals Space

abrdn Physical Silver Shares ETF (SIVR): Seeks to track the LBMA Silver Price. The trust holds allocated physical silver and aims for close price replication.
Global X Silver Miners ETF (SIL): This ETF benefits from the fact that these companies can climb when the silver price is rising. It also allows investors to avoid the risks associated with individual companies and lets them add geographical diversity to their portfolios.
Sprott Silver Miners & Physical Silver ETF (SLVR): Seeks to provide investment results that (before fees and expenses) correspond generally to the total return performance of the Nasdaq Sprott Silver Miners™ Index (NSLVR™) by investing at least 80% of its total assets in securities of NSLVR™.
VanEck Green Metals ETF (GMET): Provides investors with exposure to companies involved in the production, refining, and recycling of green metals, which are essential for the transition to a low-carbon economy.
VanEck Circular Economy UCITS ETF: Provides exposure companies that contribute to recycling or other forms of resource efficiency.

The Verdict

ETFs for recycling gold and silver present an intriguing investment proposition. They offer a way to participate in the precious metals market while supporting environmentally responsible practices. However, thorough due diligence is essential. Investors must carefully evaluate an ETF’s structure, holdings, and associated risks before committing capital. With informed decision-making, these ETFs can potentially serve as a strategic component of a diversified and sustainable investment portfolio.