The Definitive Silver ETF Guide: Silver ETF Investing 101
While most investors are well aware of gold’s unprecedented march to $1,900/oz., far fewer are familiar with the yellow metal’s often overlooked cousin, silver. Although silver has flown under the radar, many investors consider the metal to be a sound investment due to robust industrial demand, its traditional role as a store of value, and its current ratio compared to gold. These three factors will help to ensure that despite silver’s volatility, there will always be demand for this “forgotten precious metal.”
In any case, silver ETFs are an efficient way to invest in the metal without dealing with the associated “headaches” of holding a physical amount of silver in your possession. Below is a guide to silver ETF options for investors looking for precious metal exposure that goes beyond gold. [For more ETF analysis, make sure to sign up for our free ETF newsletter or try a free seven day trial to ETFdb Pro].
How a Silver ETF Works
Silver ETFs can either directly hold silver bullion (the iShares Silver Trust – SLV – does this), or invest in derivatives that track the price of silver (for instance, the PowerShares DB Silver Fund – DBS - holds futures contracts). Both types of ETFs will move with the price of silver, and similar types of silver ETFs usually have similar expense ratios.
|SIVR||Physical Silver Shares||Physical||0.30%|
|DBS||DB Silver Fund||Futures||0.50%|
|USV||E-TRACS UBS Bloomberg CMCI Silver ETN||Futures||0.40%|
- SLV: The most popular silver fund, SLV holds physical bullion for its investors. The fund has billions in assets and trades millions of times every day.
- SIVR: This fund aims to compete with SLV by also offering exposure to physical bullion, but at 20 basis points less. Note that SIVR is not nearly as popular as SLV despite its cheaper exposure.
- DBS: This fund utilizes front-month futures contracts to maintain exposure to silver
- USV: The sole ETN on the list has had a hard time gathering assets with its futures-based strategy, as many have turned to physical holdings instead.
Precious Metals ETFs
Aside from those that specifically focus their assets on silver, there are ETFs that offer a more broad exposure to those looking for a more diversified play [see Free Report: Everything You Need To Know About Commodity ETFs]
|DBP||DB Precious Metals Fund||21.88%|
|GLTR||Physical Precious Metal Basket Shares||38.90%|
|JJP||Dow Jones-UBS Precious Metals Total Return Sub-Index ETN||28.06%|
|WITE||Physical White Metal Basket Shares||61.78%|
|*As of 4/25/2012|
“Indirect” Silver ETFs
For investors who are uneasy about investing directly in commodities (or futures contracts on commodities), there are ways to gain exposure to silver prices while sticking to equities. Mining and exploration companies can make for an enticing play on silver, as they maintain heavy ties to the metal, while still offering an equity ticker to invest in.
Investors should note that these companies and related ETFs typically have high betas, making something of a leveraged play on the underlying metal. It should also be noted that the equity funds do not always trade in line with silver prices, as they have a very different set of price drivers that can sometimes have nothing to do with the commodity (i.e. rising fuel costs for transporting the commodity).
|Ticker||ETF||Expense Ratio||Inception Date|
|SIL||Silver Miners ETF||0.65%||04/19/2010|
|SLVP||MSCI Global Silver Miners Fund||0.39%||01/31/2012|
|PSAU||Global Gold and Precious Metals Portfolio||0.75%||09/18/2008|
|HAP||Market Vectors Hard Assets Producers ETF||0.49%||08/29/2008|
|GRES||IQ Global Resources ETF||0.75%||10/27/2009|
|EMT||Dow Jones Emerging Markets Metals & Mining Titans Index Fund||0.85%||05/21/2009|
Leveraged And Inverse Silver Exposure
The options for investing in silver through ETFs don’t stop with “plain vanilla” long funds. Speculators with strong opinions on short-term price movements of the “white metal” can utilize leveraged or inverse products to make a bet on the future of silver. Note that these funds can often be quite dangerous, so close monitoring and stop-loss orders are a must.
|USLV||3x Long Silver ETN||No||300%|
|DSLV||3x Inverse Silver ETN||Yes||-300%|
Silver has a wide variety of industrial uses, effectively establishing a floor for demand (something that gold lacks). Over 40% of all silver is used for industrial purposes, including uses in photography, batteries and CDs, and Plasma TVs. Silver is also fast becoming a critical component of emerging technologies that will undoubtedly be critical to life in the 21st century. Silver plays a crucial role in solar technology, finding its way into 90% of all crystalline silicon photovoltaic cells, as well as silver embedded bandages and water purification devices. Due to the extreme diversity of the applications for silver, it should be one of the metals least affected by a continued industrial slump. Since gold is primarily used for electronics, copper for housing and construction materials, and platinum with automobiles, their prices are much more correlated to individual industries, while silver has a wide variety of uses that stretches across all facets of the economy.
Poor Man’s Gold
As the emerging economies of the world continue to lose faith in the U.S. dollar, investors are looking to buy assets that are not dependent on the full faith and credit of the United States government. While many emerging markets have historically considered Treasuries to be a store of value, that is no longer the case. As emerging economies get richer, both individual citizens and governments are looking to reallocate their reserve holdings hard currencies. With a price that is currently less than $20/oz., silver is a relatively cheap and easy way to diversify assets out of fiat money without having to deal with buying 1/10 of an ounce gold coins. As such, silver should remain a popular choice for global investors looking for a safe haven and store of value.
Gold to Silver Ratio
In the 1972 Currency Act, the U.S. set the gold/silver ratio at 1/15, meaning that one troy ounce of gold would buy 15 ounces of silver. While banknotes are no longer convertible into silver, this historical ratio has become extremely distorted in the 20th century hitting an average of 1/47 for the past century. If the ratio were to return to its 20th century mean and gold prices did not change from their current levels of $1,110 an oz., that would require silver prices to increase to almost $24/oz. If the ratio were to go to its geological ratio, silver would have to rise to an unfathomable $74/oz. While it’s unlikely that the price of silver will hit this mark anytime soon, the fundamentals are certainly in the metal’s favor for continued price appreciation going forward (for a complete guide on Gold ETFs, click here).
Too High Too Fast?
While the price of silver has gone up tremendously over the past year, the fact remains that it can be a volatile precious metal susceptible to large price swings in a short period of time. As presented in the chart below, investors in silver have been on a wild ride over the past three years. With prices crashing nearly 50% from their highs in 2008, and then nearly rebounding all the way back to the 2008 highs, investors cannot assume that a similar situation will not happen again in the future. Should financial markets experience more upheaval in the future, and if investors lose even more faith in fiat currencies, expect silver to continue its roller coaster ride.
Further Reading on Silver ETFs
If you’re interested in silver ETFs, here’s some more advanced reading: