What it means
Buying bars and coins of silver involves storage, insurance and the risk of paying a high markup. A silver ETF solves this by holding the metal in a vault on behalf of all shareholders.
Investors buy and sell shares through an ordinary brokerage account, just as they would buy shares in a company. The price of an ETF share follows the price of silver closely, but not perfectly.
Differences arise from the fund's annual fee, which is taken out of the assets, and from small gaps between the market price of the shares and the value of the silver behind them. Specialist firms called authorised participants help keep these gaps small by creating and redeeming shares.
Silver is both an investment metal and an industrial input, used in electronics, solar panels and jewellery. This makes its price more volatile than gold, since demand rises and falls with the economy as well as with investor sentiment.
Silver ETFs therefore tend to swing more than gold funds. For businesses, a silver ETF can be a way to hedge the cost of raw materials.
A manufacturer that uses silver in its products might hold shares to offset a rise in the metal's price. Accountants need to check how to classify the holding, which depends on what the company intends to do with it and on the accounting standards that apply.
Investors should look at the fee, the way the fund holds its silver, and the tax treatment. In some countries gains on physical metal funds are taxed differently from gains on shares, and the rules can change.
It is wise to read the fund documents before investing. Liquidity is another point to check.
Large silver ETFs usually trade in high volumes with narrow gaps between buying and selling prices, while smaller funds can be costly to trade. A quick look at the average daily volume and the spread tells you how much it will cost to get in and out.
In practice
Real-world examples.
Example
A retired nurse wants a small holding of silver as a hedge against rising prices. She buys $5,000 of a silver ETF through her usual brokerage account. She avoids the hassle of storing coins at home.
Example
A solar panel manufacturer uses silver in its production and worries about a price rise next year. The treasury team buys $1,000,000 of a silver ETF as a partial hedge. If silver goes up, the gain on the ETF will help offset higher purchasing costs.
Example
A pension scheme adds a small allocation of 1% to a silver ETF as part of a commodities basket. The investment team reviews the fund's fee and its holding method. It keeps the position small because silver prices are volatile.
Formula
Calculation
Net asset value per share = (value of silver held - fund liabilities) / number of shares
Suppose a fund holds 100,000 ounces of silver priced at $25 an ounce, so the silver is worth 100,000 x 25 = $2,500,000. It owes $50,000 in accrued fees and expenses. The net asset value is 2,500,000 - 50,000 = $2,450,000. With 100,000 shares outstanding, the value per share is 2,450,000 / 100,000 = $24.50.Case study
Seen in the real world.
Northgate Circuits is an illustrative, fictional electronics maker that uses silver paste in its products and buys about 20,000 ounces a year. The finance director was concerned that a price spike would squeeze margins.
She decided to buy shares in a silver ETF worth roughly half of the expected annual purchase, or about 10,000 ounces. When the silver price rose 20% over the next year, from an assumed $25 to $30 an ounce, the gain of 10,000 x $5 = $50,000 on the holding offset a large part of the higher cost of buying metal for production.
The hedge was not perfect, because the company's purchase prices included premiums and the fund charged a fee. The illustrative lesson is that an ETF can reduce price risk quickly and cheaply, but it does not remove the risk entirely.
Watch out
Common mistakes.
- Assuming owning the ETF is the same as owning the silver, when shareholders hold shares in a fund rather than metal in their own name.
- Forgetting the annual fee, which reduces returns every year the fund is held.
- Expecting the price to be as steady as gold, when silver is usually more volatile.
Questions
People also ask.
Does a silver ETF always hold physical silver?
No, some hold silver futures or other derivatives instead, so read the fund documents to see which method it uses.
Can I take delivery of the silver?
In most cases no, because shares can be sold for cash but not exchanged for bars, though large institutions may have special arrangements.
Why does the ETF price differ slightly from the silver price?
Fees, trading costs and small gaps between supply and demand for the shares cause minor differences.
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