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Silver ETFs Surge on Solid Industrial Demand

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This year has been pretty terrible for the precious metals—gold and silver in particular—thanks mainly to ‘tapering’ fears, lower demand from India and China and absence of inflationary concerns. However silver prices have begun to surge in the past few weeks on renewed worldwide demand from the industrial sector.

Silver is now around trading around $23 per ounce, up about 26% from its three-year lows reached in late June. The uptrend has mainly been a result of recent improvement in the global economic outlook. (Read: Gold Mining ETF Investing 101)

Unlike gold, silver is used in wide range of industrial applications and its price therefore is driven by the level of global economic activity. 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.

Recent pick up in the global manufacturing activity—particularly in the US, China and Europe—has been pretty supportive for the shiny white metal. The US manufacturing activity has been quite upbeat of late, as manufacturers have been expanding production and adding jobs in response to the increased demand. (Read: Natural gas ETFs rise as summer finally hits)

Reports from China, the world's top metals consumer, have suggested that economic growth is now picking up after slowing down in the first half of the year. The euro zone finally emerged out of its six-quarter long recession during the second quarter of this year. If the global economy can stay on its modest recovery path, silver will continue to find support. (Read: Copper ETFs surge on solid china trade data)

Thanks to improved investor interest, popular silver ETF SLV has added about $190 million in assets in the past one month, whereas in contrast the gold ETF GLD has continued to lose assets, with its AUM down by $860 million during the same period.

iShares Silver Trust (SLV)

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 $7.8 billion and charges a fee of 0.50%. The ETF has returned a decent 5.74% annualized since inception. It is currently ranked # 2 (Buy) by Zacks.

EFTS Physical Silver Shares Trust (SIVR)

SIVR is a relatively newer ETF; launched in July 2009, it currently manages assets of $412.4 million. It charges an expense ratio 0.30% annually. 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 slightly 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 by higher trading costs for this ETF (higher bid-ask ratio), due to lower trading volumes. SIVR is currently a Zacks Rank # 2 (Buy) ETF.

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