The Comprehensive Guide to Silver ETF Investing

NEW YORK (Oct 10)  Precious metals like gold and silver have been performing quite poorly of late due to the continued strength in stock markets. The white metal has been beaten down significantly in 2013, underperforming broad stock markets by a pretty wide margin.
In fact, the white metal has plunged nearly 30% in the first nine months of 2013, pushing the commodity to fresh lows. Many feel that this weakness could continue too, especially if investors continue to look to stocks for exposure and shun commodities (read: How to Short Silver with ETFs).
Uncertain Global Trends
Silver prices will likely remain under pressure in the short term due to sluggish fundamental factors in the global markets. The U.S. economy is improving but China, which is considered the biggest industrial fabricator after the U.S., is still seeing sluggish economic growth.
Additionally, tepid industrial demand is impacting the price of the bullion as about 50% of the metal’s total demand comes from industrial applications. Further, the growing speculation over the early end of the Fed’s stimulus program (QE3) is lowering the demand for silver and silver ETF holdings (read: Commodity Slide Hits Silver ETFs).
Based on these negative fundamentals, Morgan Stanley slashed its 2013 and 2014 silver price forecasts by 19% and 15%, respectively. Another firm, Bank of America Merrill Lynch, also cut its silver target by 25% for 2013 and warns that the price could fall further below $20 per ounce in the coming months.
All these factors suggest a bearish trend for the white metal at least for the short term.
Silver’s Upside
However, the long-term prospects look tremendously bullish given the growing demand from emerging products, China's introduction of silver futures and high fabrication demand, which make up roughly 80% of silver demand.
Even the demand for traditional products like silverware and jewelry have been held steady during these hard times (read: A Safer Way to Invest in Precious Metal ETFs?).
Furthermore, continued government dysfunction is decidedly bullish for the metal, as it can act as somewhat of a safe haven during troubled times. Should government problems hit investor confidence, silver could be a solid, and safe investment.
As a result, investors should reap huge benefits from this beaten down metal, which has temporarily been held back due to a slowdown in demand and weak global fundamentals. For those seeking to take advantage of the dips in the metal, an ETF approach could be a great idea as it offers up an extremely liquid way to target the space.
Types of Silver ETFs
Silver ETFs are divided in three categories: futures, physically backed ETFs and mining ETFs. Each of these will be detailed for investors looking to play in this increasingly important bullion market:
Physically Backed Silver ETFs
These funds offer simple and cost-efficient ways for investors seeking exposure to silver bullion. The ETFs seek to match the spot price of silver, net of fees and expenses and own silver bars to back the shares.
Each share represents a fractional interest in the trust. The two largest and the most popular silver ETFs in the space are iShares Silver Trust ETF (SLV) and ETFS Physical Silver Shares (SIVR).
With total assets of $7.4 billion, SLV tracks almost 100% the physical price of silver bullion measured in U.S. dollars, and kept in London under the custody of JPMorgan Chase Bank N.A. Each share represents about an ounce of silver at current prices. On the other hand, SIVR has AUM of $390 million and is backed by physical silver under the custody of HSBC Bank USA in London.
Though not a low-cost choice due to its 50 bps expense ratio, SLV has a lower bid/ask spread which could make total costs slightly less for this popular fund. SIVR charges only 30 bps in fees a year making it the best low-cost choice in the silver commodity space. While this is good, the bid/ask spread is probably wider than what investors see in the iShares product.
Both the products lost significantly in the first half of 2013 due to weak performance by the white metal. However, these are expected to rebound in the long term thanks to a strong outlook for industrial uses.
Recently, Credit Suisse launched Silver Shares Covered Call ETN (SLVO) that seeks to give investors a new way to play the precious metals market. These employ a covered call strategy which looks to provide investors with a great deal of income while still offering exposure to the metal (read: Combine Silver ETFs and Covered Calls with SLVO).
This approach does cap risk, though big gains are unlikely with this ETN either. Still, the product has easily outperformed SLV since its inception, and if current trends hold, will sport a double-digit yield as well.
However, it is worth noting that this product has paltry volumes which could result in higher bid/ask spreads and increased trading costs. This makes the note a bit pricey as its expense ratio already comes in at an elevated level of 0.65%.
Still, in flat or down markets, a covered call strategy can be an interesting play, and one that can outperform ‘regular’ silver ETF investments.