Silver ETF Investing – What You Need To Know

Many investors are seeking the ability to add commodity exposure to their portfolios. This can be difficult for most home-based investors to achieve through traditional methods. Since the advent of exchange-traded funds, anyone with a brokerage account can now easily jump into the commodities market. When it comes to trading commodities, there isn’t an easier method than by utilizing commodity ETFs.

Silver

Why Invest in Silver?

We live in economically uncertain times. Many investors are worried that their investments, and especially long term retirement investments, will be eroded by inflation and dollar devaluation. Commodities offer the ability to add protection to these future possibilities. Oil, natural gas, agriculture, and other precious metals, such as gold and platinum, are all good inflation hedge options for long term retirement portfolios. Silver is another example of this type of hedge, and adds a balance to other commodities investments.

Silver, often thought of as ‘poor man’s gold,’ has many uses in today’s economy. Because of silver’s industrial uses, it has demand beyond that of a currency hedge. Gold lacks this industrial demand. Over 40% of silver is used for industrial purposes ranging from photography to CDs and batteries. Silver is being implemented into some of the most high tech applications that will continue to drive this metal’s demand into the future. One example is the solar panel industry. Silver is use in 90% of all photovoltaic cells used in solar panels. Because silver is not just tied to one sector of industry (like copper to housing, platinum to cars, and gold to electronics) silver is more diverse and more able to withstand industrial slumps (like the housing bust we are going through).

Silver is a historically volatile commodity. Looking back just a few years at the range from 2007-2009 saw silver prices jumping from $13 per ounce to $21 per ounce, and then silver lost almost 50% of its value over just 7 months, only to gain most of it back over the next year. Since 2009, silver has systematically risen to a high of $46.88 per ounce, and sits today at around $33. An uncertain economic future could spell more volatility in silver going forward.

Is ‘poor man’s gold’ right for you? Are you asking yourself, “why should I invest in silver?” If you are looking to add diversity to your retirement portfolio, as well as dollar devaluation and inflation protection, silver is a good piece to add. The keyword here is diversity. Gold, copper, and silver make up a very well diversified precious metals commodity hedge.

How to Invest in Silver

Trading silver, or any precious metal for that matter, the traditional way meant gaining access to a pit trader who would then allocate money towards the commodity. Mutual funds that have positions in silver lack transparency and are riddled with fees. ETFs allow you the ability to bypass brokers and pit traders altogether, as well as increase the transparency in your investments.

Note: Exchange-traded notes (ETNs) are another vehicle to gaining silver exposure, but involve different credit-associated risks.

There are two categories of silver ETF investments:

  1. Direct
  2. Indirect

Investing directly in silver utilizes ETFs that track an index, silver contract futures, or physical silver holdings. This is what commodities investing is all about. Indirect silver investing involves ETFs or ETNs that buy equity in companies that deal with silver production and supply, namely the mining industry. Since the revenues of these companies are directly related to the price of silver, it is a good way to indirectly hold silver.

Below is a breakdown of the different types of silver ETFs (or silver ETNs) available.

Index Funds

Index ETFs are funds that track a specific index. For example, as the Deutsche Bank Liquid Commodity Index goes up or down, so do specific ETFs that track this index.

Silver Futures Funds

Some silver ETFs trade in futures contracts. The silver ETF or ETN purchases the front month futures contract on the NYMEX, for example. When the front month is within 2 weeks of expiration, they will ‘roll’ the contract into the next month (or sell the position from the front month and buy positions in the next month). This ensures that your position in silver will always be ‘long.’

Leveraged Silver Funds

Leveraging is one of the great tools that often comes with ETF or ETN investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the ProShares Ultra Silver ETF (AGQ) is leveraged 2x in an attempt to double your return on silver prices. It is not uncommon to find a 2x silver ETF or 3x silver ETF among the different leveraged silver ETF options on the market.

Inverse Silver Funds

What if you think that the price of silver has over-reached, and you want to bet against the price of silver and make money on it? There are two ways to go about doing this. You can short a silver index ETF or ETN (an ETF short silver, silver short ETF, or double short silver ETF option), which would mean that as the index price decreases, you can sell the stock short and make a profit. There are also inverse silver ETFs and ETNs available. These funds are basically doing the short selling for you, as they track the inverse of the index fund or price of the commodity. Leveraging can also be applied to this investing strategy (for example, you could buy a fund that tracks the inverse of the silver price or index, but triples the return of the short position).

Trading Silver ETF Options

Buying or selling call or put silver options is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in silver price, since you don’t actually have to allocate money until the strike price has been met.

Editor’s note – leveraged investing, margin investing, and options investing include substantially increased risk. Be sure you do your homework and understand exactly how you are allocating your money.

Gold ETF List Of Options

iShares Silver Trust ETF (SLV)

Founded in 2006, SLV seeks to reflect the price of silver. SLV is intended to constitute a simple and cost-effective means of making an investment similar to an investment in physical silver. Although the fund is not the exact equivalent of an investment in silver, they provide investors with an alternative that allows a level of participation in the silver market through the securities market.

Physical Swiss Physical Silver Shares Trust ETF (SIVR)

Founded in 2009, SIVR offers you the opportunity to invest in a silver ETF that has physical backing, or in other words, the fund actually physically holds silver. SIVR seeks to replicate the price of silver bullion. The shares are backed by physical allocated silver bullion held by the custodian. All physical silver held conforms to the London Bullion Market Association’s rules for good delivery. Because SIVR is a physical silver ETF, they are very transparent in their holdings, as they publish them regularly on their site.

PowerShares DB Silver Fund (DBS)

Founded in 2007, DBS tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Silver Excess Return. The index is a rules-based index composed of futures contracts on silver and is intended to reflect the performance of silver. DBS is an example of an index ETF, and the index fund utilizes a futures-based investing strategy rather than holding physical silver bullion.

E-TRACS USB Bloomberg Commodity (USV)

USV, founded in 2008, tracks the price and performance yield of the UBS Bloomberg CMCI Silver Total Return index. The fund is designed to be representative of the entire liquid forward curve of the silver contracts. The index measures the collateralized returns from a basket of silver futures contracts. It is comprised of the silver futures contracts included in the CMCI with five target maturities.

ProShares Ultra Silver (AGQ)

Also founded in 2008, AGQ seeks to provide daily investment results that correspond to twice (200%) the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. The fund invests in any one of or combinations of the financial instruments (swap agreement, futures contracts, forward contracts, option contracts) with respect to the applicable fund’s benchmark to the extent determined appropriate by the Sponsor. AGQ is an example of a leveraged 2x silver ETF.

ProShares UltraShort Silver (ZSL)

ZSL, also founded in 2008, seeks to provide daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of silver bullion as measured by the U.S. Dollar fixing price for delivery in London. The fund invests in any one of or combinations of the financial instruments (swap agreement, futures contracts, forward contracts, option contracts) with respect to the applicable fund’s benchmark to the extent determined appropriate by the Sponsor. ZSL is the exact opposite of AGQ and is an example of an inverse leveraged silver ETF.

PowerShares DB Precious Metals ETF (DBP)

Founded in 2007, DBP tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Precious Metals Excess Return. The index is a rules-based index composed of futures contracts on two of the most important precious metals – gold and silver. The index is intended to reflect the performance of the precious metals sector. DBP is an ETF option for an investor looking to add both gold and silver exposure to their portfolio.

iPath DJ-UBS Precious Metals Sub-Index ETN (JJP)

Another precious metals investment option founded in 2008, JJP seeks tracks the Dow Jones-UBS Precious Metals Total Return Sub-Index. The index is intended to reflect the returns that are potentially available through an unleveraged investment in gold and silver futures contracts as well as the rate of interest that could be earned on cash collateral invested in specified Treasury Bills. This is an ETN option, and has credit-associated risks. If you are looking for a combination of gold and silver exposure, JJP is an option for you.

In Conclusion

Adding commodity exposure to your portfolio through ETF or ETN investing is a great way to add diversity, as well as inflation protection. With the many advantages of ETF trading (intraday investing, low cost, transparency of assets), you can increase your bottom line with respects to investment results.

Silver, often called ‘poor man’s gold,’ has become a valued asset in recent years, and has proven to be an effective inflation hedge. While it’s price is quite volatile, silver offers a good balance to other precious metals such as gold, copper, and platinum. If you are looking for ways to hedge against inflation and devaluation of the dollar, utilizing a silver ETF or ETN to gain exposure to this commodity is a great option.

Disclosure

I have no positions in any ETFs or ETNs mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.

Investing In A Precious Metals ETF – What You Need To Know

Many investors are seeking the ability to add commodity exposure to their portfolios. This can be difficult for most home-based investors to achieve through traditional methods. Since the advent of exchange-traded funds, anyone with a brokerage account can now easily jump into the commodities market. When it comes to trading commodities, there isn’t an easier method than by utilizing commodity ETFs.

Why A Precious Metals ETF?

We live in economically rough times. In the wake of the most recent recession, jobs are scarce, home values have decreased, and many retirement portfolios have been severely depleted. One of the biggest problems that our economy could face in the near future is inflation. Inflation is normally tracked with the consumer price index, or CPI. This index tracks the price of common goods and services throughout the country, and is a good judge of inflation.

The real cause for concern is the devaluation of the dollar. As the Fed prints more and more money as a way to stimulate the economy (quantitative easing), the value of that money decreases. Increased inflation is a way to see this devaluation in action.

Many investors are worried that their portfolios won’t be able to keep up with inflation if there is a spike in the CPI. Very conservative investment strategies that yield under 5% return might end up being a wash if inflation reaches that number. This is especially troublesome for retirees that live off of their investment returns. There are a few different commodities that offer an inflation and a dollar devaluation hedge. These include oil, agriculture, and precious metals.

The precious metals category, when relating to commodities, includes gold, silver, platinum, and palladium most commonly, but also can include copper and nickel. These metals offer protection against dollar devaluation and inflation. In recent years, we have seen the prices of these metals skyrocket into almost unbelievable price ranges. Any investment strategy, and especially a retirement plan, should seriously consider adding exposure to precious metals through an ETF.

How To Buy Precious Metals

Trading precious metals the traditional way meant gaining access to a pit trader, or physically buying the commodity in question. Mutual funds that have positions in precious metals lack transparency and are riddled with fees. ETFs allow you the ability to bypass brokers and pit traders altogether, as well as increase the transparency in your investments.

When dealing with precious metals, it is not uncommon to find an ETN rather than an ETF. A precious metals ETN is basically a debt product similar to a bond that is issued by a major bank or other supplier as a senior debt note. This differs from an ETF, which is an actual security or commodity or currency derivative, such as options, forwards, and futures. ETNs have different risks associated with them than ETFs, the biggest being credit risk. Keep this in mind if you find a precious metals ETN that you are interested in.

ETFs in precious metals can be broken down into:

  • Broad precious metals ETF
  • Specific precious metal ETF

Broad precious metals funds include holdings in:

  • Gold
  • Silver
  • Platinum
  • Palladium
  • Nickel
  • Copper

The first four are the most common precious metals exchange options, and the later two are sometimes incorporated into a broad precious metals fund. The specific precious metal ETF is mostly exclusive with the type of metal you are intereted in. If you want to add gold exposure to your portfolio, look for the best gold ETF to add. If you want silver exposure, look for a silver ETF. Broad ETFs are nice because they allow you to add exposure to all the different metals in one trade, making it easy to diversify.

There are several different methods for trading precious metals ETFs. These methods are discussed below.

Index Funds

Index ETFs are funds that track a specific index. For example, the PowerShares DB Precious Metals (DBP) ETF tracks the Deutsche Bank Liquid Commodity Index – Optimum Yield Precious Metals Excess Return. As the index goes up or down, so does the share price of DBP.

Leveraged Funds

Leveraging is one of the great tools that often comes with ETF investing. There are many funds that attempt to double, triple, or quadruple your return. They achieve this through margin investing. For example, the ProShares Ultra Gold (UGL) ETF seeks to double the return on the value of gold bullion. It is not uncommon to find a 2x gold ETF or 3x gold ETF among the different leveraged precious metals ETF options on the market.

Inverse Funds

What if you want to bet against the price of precious metals and make money on it? There are two ways to go about doing this. You can short a precious metals index ETF, which would mean that as the index price decreases, you can sell the stock short and make a profit. There are also inverse ETFs available. These funds are basically doing the short selling for you, as they track the inverse of the index fund. Leveraging can also be applied to this investing strategy (for example, you could buy a fund that tracks the inverse of the precious metals index, but triples the return of the short position).

Trading ETF Options

Buying or selling call or put options for a precious metals ETF is another method for trading these funds. This is a great way to hedge against a future spike or severe drop in precious metal prices, since you don’t actually have to allocate money until the strike price has been met.

Editor’s note – leveraged investing, margin investing, and options investing include substantially increased risk. Be sure you do your homework and understand exactly how your are allocating your money.

Precious Metals ETF List Of Options

Broad Precious Metals ETFs

PowerShares Global Gold & Precious Metals (PSAU)

PSAU tracks the NASDAQ OMX Global Gold and Precious Metals Index. Founded in 2008, PSAU invests at least 90% of assets in the securities and ADRs and GDRs based on the securities that comprise the underlying index. It normally invests at least 80% of total assets in securities of companies involved in the gold and other precious metals mining industries. The index is designed to measure the overall performance of globally traded securities of the largest and most liquid companies involved in the gold and other precious metals mining industry. PSAU is an example of a broad precious metals ETF.

iPath Pure Beta Precious Metal  (BLNG)

BLNG tracks the Barclays Capital Commodity Index Precious Metals Pure Beta TR index. The index is comprised of a basket of exchange traded futures contracts, and uses an allocation methodology designed to mitigate the effects of certain distortions in the commodity markets on such returns. This ETF utilizes a different futures roll strategy to limit risks. BLNG is another example of a broad precious metals fund.

Gold ETFs

Direxion Daily Gold Miners Bear (DUST)

Founded in 2010, DUST seeks daily investment results of 300% of the inverse (or opposite) of the performance of the NYSE Arca Gold Miners Index. The fund creates short positions by investing at least 80% of its net assets in: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, provide leveraged and unleveraged exposure to the index. DUST is an example of an inverse leveraged 3x gold ETF.

FactorShares 2X Gold Bull S&P50 (FSG)

Founded in early 2011, FSG seeks to replicate twice the daily return of the Gold Bull/S&P500 Bear index. The fund is is designed for investors who believe that gold will increase in value relative to the large-cap U.S. equity market segment, in one day or less, by primarily establishing a leveraged long position in Gold futures and a leveraged short position in the E-mini S&P 500 Stock Price index futures. FSG is an example of a leveraged 2x gold ETF.

Silver ETFs

PowerShares DB Silver Fund (DBS)

Founded in 2007, DBS tracks the price and yield performance of the Deutsche Bank Liquid Commodity Index – Optimum Yield Silver Excess Return. The index is a rules-based index composed of futures contracts on silver and is intended to reflect the performance of silver.

ETFS Physical Silver Shares Tru (SIVR)

SIVR seeks to replicate the price of silver bullion. The shares are backed by physically allocated silver bullion. All physical silver held conforms to the London Bullion Market Association’s rules for good delivery. If you are looking for an ETF that actually physically holds the commodity in question, SIVR is a good example of such a fund.

Platinum and Palladium ETFs

First Trust ISE Global Platinum (PLTM)

PLTM tracks the ISE Global Platinum Index. The fund invests at least 90% of assets in common stocks that comprise the index or in depositary receipts representing securities in the index. The index is designed to provide a benchmark for investors interested in tracking public companies that are active in platinum group metals (PGM) mining based on revenue analysis of those companies. PLTM is a non-diversified ETF.

ETFS Physical Platinum Shares (PPLT)

Founded in 2010, PPLT seeks to reflect the performance of the price of physical platinum. This is another example of an ETF that physically holds the commodity, and is a great way for an investor to manage credit risk that is associated with other ETFs and ETNs.

ETFS Physical Palladium Shares (PALL)

Also founded in 2010, PALL seeks to reflect the performance of the price of physical palladium. PALL is designed for investors who want a cost-effective and convenient way to invest in palladium with minimal credit risk. Advantages of investing in the Shares include: Ease and Flexibility of Investment, Expenses, Minimal Credit Risk.

Copper ETFs

First Trust ISE Global Copper I (CU)

Founded in 2010, CU tracks the ISE Global Copper Index. The fund invests at least 90% of assets in common stocks that comprise the index or in depositary receipts representing securities in the index. The index is designed to provide a benchmark for investors interested in tracking public companies that are active in the copper mining business based on analysis of revenue derived from the sale of copper. CU is non-diversified.

Global X Copper Miners ETF (COPX)

COPX, founded in 2010, tracks the price and yield performance of the Solactive Global Copper Miners Index. COPX invests at least 80% of assets in securities and depositary receipts that comprise the index. The index is designed to measure broad based equity market performance of global companies involved in the copper mining industry.

Nickel ETNs

iPath Dow Jones UBS Nickel Subi (JJN)

Founded in 2007, JJN tracks the price and yield performance of the Dow Jones-UBS Nickel Total Return Sub-Index.  The note is designed to reflect the performance of nickel. The index is composed of the Primary Nickel futures contract traded on the London Metal Exchange. This is an example of an ETN, and has different credit risk associated with it than an ETF.

iPath Pure Beta Nickel ETN (NINI)

NINI is another ETN for nickel. NINI seeks to replicate the Barclays Capital Nickel Pure Beta TR index. The index is comprised of a single exchange traded futures contract, except during the roll period when it may be comprised of two futures contracts. NINI utilizes a specific roll schedule and futures strategy to limit futures roll price risk impact. NINI is another example of an ETN rather than an ETF.

In Conclusion

Adding commodity exposure through ETF investing to your portfolio is a great way to add diversity, as well as inflation protection. With the many advantages of ETF trading (intraday investing, low cost, transparency of assets), you can increase your bottom line with respects to investment results. Precious metals ETFs are an attractive asset to include for these reasons. Use the list above to start your precious metals research. As always, good luck!

Disclosure

I have no positions in any ETFs mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks, and is the opinion of the author.