Silver ETFs

While funds in general have their pluses and minuses, and while there are strength in numbers, there are also challenges, there is perhaps no asset more suited to funds than precious metals, especially silver.

With securities, one may choose to buy and sell them on their own, for instance with looking to build a stock portfolio. The advantage that funds present is that it makes diversification easier to achieve, as funds aware created to offer numerous ways to diversify, and can also be combined to easily achieve whatever diversification is sought by individual investors.

Strength in Numbers

Making changes in larger portfolios though are more difficult and costly, as you can move a smaller amount of securities more cheaply and much more quickly than large and especially very large holdings. This can really limit strategies which funds can use, and while many funds do seek to modify their holdings according to market conditions, it is not as simple as just placing orders to buy and sell like individual investors would, as this task becomes considerably more complex and difficult.

Silver ETFsMany funds seek to minimize this issue by simply seeking to replicate an index, managing them passively, holding a proportionate amount of all assets in the index. Due to management and trading costs, they don’t exactly replicate it, but they can come close enough to suit many investors, and these funds tend to outperform most actively managed funds.

Individual investors often lack the skill to actively manage their portfolio, and it also may not be large enough to merit hiring a professional to manage it for them. If they seek passive management by buying all of the assets in an index like funds to, they may not have the resources to do so, as this requires larger investments as well as having to maintain many positions, one for each of the component of the index.

It can therefore be advantageous for many investors to invest in funds of some sort, whether this be with a mutual fund or an exchange traded fund or ETF. There certainly can be power in numbers where investors pool their resources under professional management to seek to achieve more than they could have on their own.

The Real Advantages of Silver Based ETFs

ETFs present the advantage of not only having assets pooled in a fund, they also offer investors the ability to trade shares in the fund in real time on an exchange. While mutual funds do offer funds based upon precious metals, their penchant for diversification has them offering assets that are linked to the price of silver, as well as other precious metals.

Should one desire to invest in a fund that just holds silver as an asset, and actually owns the silver, one must invest in a silver ETF, which provides direct exposure to the physical silver market without having to go out and buy it on your own.

Silver based ETFs do buy and sell the actual silver, but due to the strength in numbers of a fund, they do this far more efficiently than investors can do on their own generally.

The trading costs of buying physical precious metals, including silver, are enormous percentage wise, and if you buy silver and turn around and sell it, without the price changing, you can lose anywhere between 10-40% of your investment just from the purchase and sale itself.

In spite of these huge trading costs, many individual investors will buy physical silver, often not being fully aware of the disadvantages of this method. The silver dealer isn’t going to explain this to you of course, and often people realize the implications of this only after they try to liquidate their investment, or if the silver market has moved substantially, they may not even be fully aware of how much of their profits they failed to realize or how much trading costs added to their losses.

Not long ago though, there was no real alternative to buying silver if you wanted to own silver, and investors sometimes insist on this, as opposed to investing in a general precious metal fund that may not even own any precious metal at all.

Silver ETFs are fairly new on the scene though and many investors aren’t aware of this option, although many are and silver ETFs are now a very popular way to own silver.

Even if one is planning on holding silver over a very long period of time, unless it is held forever, there will be transaction costs on both ends, the buying of the silver and the selling of it, and whatever net position that the investment settles for will be impacted fully by both.

This is something that many investors in physical silver don’t account for properly, and back when there was no other good alternative to this, buying silver could make a lot of sense in many circumstances, such as when we expect that the profit potential of the investment could considerably exceed the trading costs.

With ETFs being an option these days though, we can still participate in these run ups of the price of silver without having to pay the huge costs involved in personal silver ownership.

Silver ETFs Are Simply Much More Efficient

Not only do silver ETFs greatly reduce trading costs, they also allow silver investors and silver traders to enter and exit positions in the silver market in a flash, with a single mouse click instead of having to deliver the physical silver to a dealer for them to buy it back from you.

In a sense, buying a silver ETF allows you to instantly buy and sell silver online, by buying a piece of the fund. This is the efficiency of modern financial markets at its best, bringing together buyers and sellers in a way that is far more efficient than in the old days where all trades occurred in person.

The physical silver market operates much like trading in assets used to before financial markets came to being, and what financial markets and exchanges serve to do is to bring buyers and sellers together so that they can more easily trade assets between them.

If you want to buy physical silver on your own, you have to place an order with a dealer for the quantity desired, and then arrange payment and delivery. This is a time consuming process, and even if you have a place in your city that you can just drive to and pick up the silver in the same day, that still takes time and effort.

If you buy your silver on an exchange, and do so electronically, this can not only be done far easier, it also allows you to view and trade prices in real time. This allows for more efficient trading, and this is essential for shorter term trading of silver where you may only be looking to hold a position for a few days, a few hours, or even a few minutes.

Exchange traded silver, by way of silver ETFs, allow for any strategy to be used, as well as allowing for silver to be held for as short or as long as one desires.

The benefit to the silver market is that this brings in a lot more liquidity to the market, where many investors may participate in silver trading that would not have otherwise. For some investors, the old fashioned way may not be desirable, and for many silver traders, trading it in a manner they require to execute their trading strategies would not even be possible if not for electronic silver trading.

The more liquidity we have in a market, the better the price discovery, and the lower the trading costs. The physical silver market is in itself extremely illiquid, and this is why it’s transaction costs are so high, but electronic silver boasts a lot more liquidity and therefore greatly reduces trading costs.

While silver ETFs do trade like stocks, they are different than stocks insofar as the supply of the silver ETF shares are more flexible. With a stock, there is a certain fixed amount of shares issued, where with ETFs, new shares can be created upon demand.

If a lot of demand for a silver ETF is created, this doesn’t mean that the price for the ETF will rise in concert, as the price is tied to the overall silver market. New shares are simply created and new silver is bought to cover these shares.

This serves to keep the price of the silver ETF in line with the overall silver market, otherwise people would take advantage of these discrepancies by arbitraging it, buying the ETF and selling physical silver, or vice versa, to capture this inefficiency.

So, if the price does deviate by a meaningful amount, these people will swoop in and keep the price in line. This serves to not only back the shares with physical silver but also to ensure that the price that the shares are trading for in real time will be kept very close to the actual price of silver.

The share pool of an ETF can be reduced as well as required, by redeeming the shares if the supply of silver that the ETF holds exceeds the demand for it. This is all carefully managed to ensure that the investor’s experience will very closely approximate silver ownership.

There is still counterparty risk with silver ETFs, and some are run better than others, and poor management can affect the health of the fund and potentially impact investors. There are so many significant benefits to silver ETFs though that it is easy to see how so many investors these days have turned to silver ETFs, to take advantage of all the benefits of silver without the costs and hassle and lack of timeliness that physical silver ownership involves.



Monica uses a balanced approach to investment analysis, ensuring that we looking at the right things and not confined to a single and limiting theory which can lead us astray.

Contact Monica: [email protected]

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