Anyone with a brokerage account can invest in silver indirectly through mining stocks and mutual funds. Investors who wanted direct exposure to the precious metal used to be limited to futures contracts and physical metal. But that changed with the 2006 advent of exchange-traded funds that hold physical silver. CME Group describes ETFs as investments that allow participants to trade benchmark indexes like a stock. These ETFs provide direct exposure to silver without the risks of futures or the headaches of physical ownership. Although several ETFs track the price of silver, only three are backed by physical silver.
ETF Securities Physical Silver Shares
ETF Securities manages the Physical Silver ETF (symbol SIVR), which has seen silver's price fluctuate widely since its start in 2007. One concern is that SIVR has an average daily trading volume of only 200,000 shares, making it hard to trade large lots with anonymity. Physical silver is held in vaults in London by a third party. SIVR is a passively managed fund, with an annual expense ratio of 0.30 percent of the net asset value. Each unit represents one ounce of silver. Although units are redeemable for physical silver, redemption can be made only in minimum basket sizes of 100,000 units. This could delay the redemption process for investors with smaller baskets and thus could expose them to changes in the price of silver.
iShares Silver Trust
BlackRock subsidiary iShares manages the Silver Trust (SLV). With an inception year of 2006, SLV is the oldest ETF containing physical silver. It boasts an average daily trading volume of more than 11 million shares and is backed with physical silver held by a third party in New York and London. SLV is passively managed, with an annual expense ratio of 0.50 percent of net asset value. Each unit represents one ounce of silver. Units are redeemable for physical silver in minimum basket sizes of 50,000 units. Investors with smaller baskets must wait until their redemption orders are combined with others to reach the 50,000 unit minimum, exposing them to price changes.
Sprott Physical Silver Trust
The Sprott Physical Silver Trust (PSLV) is managed by Sprott Asset Management LP. This is the youngest ETF in the physical silver group, opening in 2010. The average daily volume exceeds 1 million shares. PSLV is backed with physical silver held at the Royal Canadian Mint in Ottawa, Ontario. The fund charges an annual expense ratio of 0.45 percent of net asset value, plus an annual administrative fee of 0.20 percent of NAV. Each unit represents one-half of one ounce of silver and is redeemable for physical silver. According to the prospectus, redemption orders must be for at least 10 bars, each weighing approximately 1,000 troy ounces. Investors wanting to redeem less than 10 bars must wait until their redemption orders are combined with others to reach the 10-bar minimum, exposing them to fluctuations in silver prices.
Not all silver ETFs are the same. Investors wanting funds backed by physical silver should read prospectuses carefully, as some use futures and options to track the price of silver. While ETFs using silver derivatives can deliver returns similar to physical silver, they also come with unique conditions like backwardation and contango. Described by CME Group as a market condition where futures prices are lower in succeeding delivery months, backwardation can inflate ETF returns beyond that of physical silver prices. Alternatively, contango is a market condition where futures prices are higher in the succeeding delivery months and erodes ETF returns from that of physical silver prices. Other considerations include ultra shares, with which positions are leveraged to trade three times normal silver prices. By reviewing the ETF's investment objectives, investors can learn what underlying assets are used to achieve performance goals and can avoid investing in assets they don't understand.
- CME Group Glossary: Exchange Traded Funds
- ETFS Silver Shares Prospectus: Creation and Redemption of Shares
- iShares Silver Trust Prospectus: Redemption and Baskets of Shares - Withdrawal of Silver
- Sprott Physical Silver Trust Prospectus: Redemption of Units
- CME Group Glossary: Backwardation
- CME Group Glossary: Contango
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