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ETF News And Commentary

 

Gold has had an excellent run so far in 2012, returning more than 13% year-to-date. However, the metal that has handily outshined gold is its so-called poor cousin-silver, which has returned a whopping 27% year-to-date.

Some of the factors that have supported precious metals’ excellent run in the current year are rising inflationary expectations due to continued easing policies from the central banks, and heightened macroeconomic uncertainty in many countries. Precious metals act as inflation hedge and also as safe haven assets. (Read- Gold ETFs May Continue to Shine in 2012)

Interest rates in developed and many emerging markets remain very low, leading investors towards precious metals for better store of wealth. Investment demand for the precious metals has been rising as a result. Unlike gold, which also derives its importance from being a reserve asset, silver is generally not recognized as a reserve asset. Consequently, there is a very limited amount of silver stocks held by governments or central banks.

Historically, silver has had a low correlation with most asset classes and helps in diversifying a portfolio. Further like platinum, silver is used in wide range of industrial applications and its price therefore is affected by the level of global economic activity. (Read- Gold ETFs Surge On Fed Outlook)

About 50% of the metal’s total demand comes from industrial applications whereas demand from jewelry/silverware/coins & medals manufacturers accounts for ~30% of the demand.

As the overall global manufacturing has continued to improve slowly, the demand for silver has been on the rise. If the US economy can stay on its modest recovery path, silver and platinum will continue to find support. As such both these metals should be a part of the portfolio. (Read- Time to Invest in Platinum ETFs?)

While gold has been on the rise for eleven years in a row, silver had a negative return of about 8% last year as the fears of global recession led to drop in industrial demand for the metal. In general, silver metal and the ETFs are more volatile than gold. As a result, the investors may find suitable investment opportunities in silver on any pull-backs.

ETFs present a cost-effective, secure and convenient way to get exposure to silver metal.

iShares Silver Trust (SLV - ETF report)

SLV is the largest, most liquid and widely traded ETF. It seeks to track the spot price of physical silver and its share price reflects the market price of an ounce of silver less trust’s expenses.

The custodian of the trust holds physical silver bullion in London on behalf of the trust. Started in April 2006, the trust currently has net assets of $10.7 billion and charges a fee of 0.50%. The ETF has returned 37.04% in last three years and 15.29% since inception. The sponsor intends to get the vaults audited annually and the inspection certificates are available on the website.

EFTS Physical Silver Shares Trust (SIVR - ETF report)

SIVR is a relatively newer ETF; launched in July 2009, it currently manages assets of $637.6 million. The sponsor of the fund has waived a part its fee until July 2012, which had lowered the expense ratio to 0.30% from gross ratio of 0.45%. Like SLV, this trust holds physical silver bullion in London and the shares represent beneficial interest in the trust. The price of SIVR is based on the spot price of silver less trust’s expenses.

The silver bullion held by the trust is inspected biannually and the silver bar numbers held by the trust are published daily.

So, basically SIVR fulfills the same investment objectives as SLV at a lower cost but we may add that though SIVR is cheaper in terms of its expense ratio that it charges to the investors, a part of the saving may be taken away due to higher trading costs for this ETF (higher bid-ask ratio), since it is much less liquid than SLV.

 

 

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