Introduction to Silver ETFS
ETFs Put Shine on Silver: Here’s How To Play Them
Silver is a hot commodity – literally – when the world is in political and economic turmoil.
Make no mistake, 2011 is no exception. With oil rising over $100 per barrel; geopolitical turmoil in the Middle East; and the U.S. dollar on its knees begging for mercy, precious metals like silver are in significant demand, particularly from investors seeking a hedge against inflation.One of the best “high-reward, low-risk” ways to invest in one of the world’s shiniest commodities is through a silver exchange traded fund (ETF).
For all the hoopla surrounding them, silver ETFs are rookies on the global financial investment stage. The first silver ETF arrived on the scene in 2006 – in the form of the iShares Silver Trust http://us.ishares.com/product_info/fund/overview/SLV.htm, managed by Barclays Global Investors.
Today, the ETF has over $13 billion in assets and has returned 25.17% in average annualized returns since inception. It’s not just the iShares Silver Trust.
The spot price of silver (per ounce) crested at $40 in April 2011, for the first time since 1980.
That explains why demand for silver ETFs is so strong these days. So far in 2011, silver ETFs have added 366 tons of silver in inflows, to a record 15,554 tons in ETFs across the globe.
Silver ETFs Defined: What is a silver ETF?
Let’s take a closer look. Silver ETFs offer investors an efficient way to invest in the precious metal without the problems associated with direct ownership.
Silver ETFs can hold physical silver bullion or invest in derivatives that track the actual spot price of silver on a daily basis.Most silver ETFs usually invest in raw silver – usually silver that’s held physically by fund managers or a custodian bank. In essence, silver ETFs grant the investor the right to a given amount of silver that’s usually measured in ounces. Fund managers aim to mirror the spot price of silver http://www.monex.com/liveprices that’s traded openly on the world commodity markets.
By and large, ETFs can provide investors with higher liquidity and greater safety than if they own the physical metal. In addition, access to silver ETFS is wide open – much more so than buying silver directly on the open market.
Why should you consider investing in a silver ETF?
Why a silver ETF? The larger question is “why not”?
Besides rising commodity prices (that means healthier returns for silver ETFs), silver-themed ETFs offer investors greater liquidity, increased flexibility, and the chance to cash in on the commodity upturn at a substantially lower price than via direct investing.Commodities like silver are also a popular hedge against rising inflation, which has risen from 1.63% to 2.68% in 2011. Getting into silver, and away from runaway inflation, is much easier with ETFs.
Fast Fact: Over the long term one ounce of gold is worth sixteen times that of one ounce of silver.
Through a silver ETF, you also get the following benefits:
- Investors get into a fund where the manager remains in possession of the silver. Sure, you can buy a lot silver for $25,000. The question is, where do you safely store it? Silver ETFs solve that problem.
- Silver ETFs enable investors access to a fund that mirrors the spot price of silver (i.e. when silver prices go up, silver ETFs rise exponentially).
- ETFs are designed to minimum your tax burden, especially when compared to direct investments in commodities.
- Silver ETFs have a lower correlation than other investments. On Wall Street, lower correlation equals lower volatility.
- Silver ETFs also provide investors with a much-needed does of diversification. Commodities like silver are not only a good hedge against rising inflation and a lower dollar, but also a weaker stock market.
- Compared to pricier commodities, especially gold, silver is relatively inexpensive.
- Heavy industrial use – Unlike gold, silver is actually widely used in global commerce. Silver is a major component of electronics, batteries, even water purification. Thus commercial demand for silver will always be relatively high.
Silver or Silver ETFs? Pros and Cons
What are the differences between owning a silver ETF or owning physical silver?
In a word, convenience is the biggest difference.
Fast Fact: Economists say that silver should comprise 15-20% of an investor’s precious metals portfolio.
Historically, owning silver meant buying it, often from a total stranger, on the open commodities market. After taking ownership, buyers had to find a secure place to store their silver, pay for that storage, and then hope the storage facility was strong enough to thwart criminals (many silver owners also bought insurance for their stored silver.)Of course, it’s not all one-sided. Owning silver directly does offer some key benefits:
- Direct ownership of silver bullion provides leverage. The owner can use the silver as he or she sees fit.
- Physical silver also gives the owner negotiating leverage. For example, direct ownership allows the owner to be able to use silver as currency, or even as barter for other goods and services from a potential buyer.
- In inflationary times, silver prices can rise dramatically, often selling for a premium for direct owners.
- If worst comes to worst, silver provides owners with amazing liquidity in times of great economic peril.
What about silver ETFs? What are the advantages of owning shares of a fund rather than own silver directly?
Here are some real advantages:
- Silver ETFS are much more liquid than physical silver. Buyers and sellers can easily trade shares in a myriad of silver ETFs on the market, often at the tap of a keystroke. Matching buyers and sellers of physical silver is much more complicated, and even potentially dangerous if the buyer isn’t familiar with the seller.
- With silver ETFs, there is no big price tag linked to the delivery or storage of physical silver.
- Silver ETF ownership is much less expensive than buying silver – or gold – directly. This opens the market up to a larger array of potential traders, increasing liquidity in the market.
Overall, silver ETFs are optimal for the casual investor who just wants to own a piece of the silver market and doesn’t want to have to worry about storing it safely or selling it on the open market.
Top Silver ETFs
There is no shortage of silver ETF options on the global financial marketplace. A quick “hit list” includes the following funds:
ETF | TRADING SYMBOL
- iShares Silver Trust Fund | SLV
- E-TRACS CMCI Silver ETN | USV
- ETFS Physical Silver Shares | SIVR
- PowerShares DB Silver Funds | DBS
- ProShares Ultra Silver ETF | AGQ
- ProShares UltraShort Silver | ZSL
- COMEX Silver Bear Plus ETF | HZD - TSX
- COMEX Silver ETF | HUZ - TSX
- ETFS Leveraged Silver ETF | LSIL - LSE
- ETFS Physical Silver ETF | PHAG - LSE
- EFTS Silver ETF | SLVR - LSE
Like any investment vehicle, some silver ETFs are more popular – and more profitable – than others. Here’s a more detailed look at the top-rated silver ETFs.
- iShares Silver Trust
With more than more than $13 billion in assets, iShares Silver Trust (StockQuote: SLV) is one of the most widely used silver ETFs. The fund strictly tracks the daily price of silver, and has returned 22% to investors so far don’in 2011. Its three-year average annual performance is even better – at 29.2%. - ETFS Physical Silver Shares
Like SLV, the ETFS Physical Silver Shares (StockQuote: SIVR), tracks the spot price of silver bullion, but the smaller asset size (about $500 million) provides more nimbleness in terms of trading opportunities. Otherwise, SIVR is very similar in structure to, but much smaller than the iShares Silver Trust (the funds even shares the same trustee, Bank of NY Mellon). - ProShares Ultra Silver ETF
With $1.7 billion in assets and growing fast, ProShares Ultra Silver ETF (StockQuote AGQ) is one of the highest trading silver ETFs on the market (trading volume has ranged from 600,000 to 1.6 million in 2011). Recent returns have been spectacular – the fund has produced 126% in returns so far in 2011. The ETF is aggressive in its management - the fund aims to provide daily investment results (before fees and expenses) that correspond to twice (200%) the daily performance of silver bullion. Swap agreement, futures contracts, forward contracts, option contracts are the types of exotic financial instruments used by managers to generate performance. As with any aggressive investment, it’s great to be in when silver prices are rising, but you can really get caught short if silver prices plummet with AGQ). - PowerShares DB Silver
With $546 million in total assets, the PowerShares DB Silver ETF (StockQuote: DBS) isn’t one of the biggest silver ETFs, but it does sport a giant-sized track record. It has a year-to-date performance of 55%, and a three-year record of 30%. The ETF seeks to track the price and yield performance, before fees and expenses, of the Deutsche Bank Liquid Commodity Index, making it one of the more fast-moving and volatile silver ETFs. - E-TRACS CMCI Silver ETF
The E-TRACS CMCI Silver ETF (StockQuote: USV) tracks the price and performance yield, before fees and expenses, of the UBS Bloomberg CMCI Silver Total Return Index. Returns have been stellar, as the fund is up by 25% through mid-May, 2011, and is up 99% over a one-year period. Watch out for some volatility, though. USV is structured to mirror the entire liquid forward curve of global silver contracts. Silver futures can be highly volatile, so investing in E-TRACS can be highly volatile.
Ride the Wave – But Expect Some Risk
Silver ETFS are definitely on a wild ride so far in 2011, mostly on the upside.
If you can handle the risk, and can afford to absorb some of that downside volatility that silver ETFs historically offer, the liquidity, value and flexibility of silver ETFs can put a nice, glossy sheen on any investment portfolio.
About the Author
Brian O’Connell is a Doylestown, Pennsylvania-based freelance writer with 15 years experience covering business news and trends, particularly in the financial, health care and career management sectors.A former Wall Street bond trader, O’Connell’s placed two business books in “The Book of the Month Club,” and his byline has appeared in dozens of top-tier national business publications, including The Wall Street Journal, CNBC, The Street.com, Yahoo Finance, CBS Marketwatch, and many more. He is also the author of the top-selling books “CNBC’S Guide To Creating Wealth” and “Generation E.”
The author of 14 books, O’Connell has also appeared as an expert commentator on business issues for CNN, Fox News, CNBC, C-Span, Bloomberg, CBS Radio, The LA Times, and other media outlets.
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