Silver ETFs

Let's start with the basics. An ETF or Exchange-Traded Fund is traded on an exchange much like a stock. And, just like stocks, their prices fluctuate constantly throughout the trading day.

This is where ETFs differ from mutual funds, where orders are aggregated throughout the day by the fund provider and executed only once, at the end of the day, based on market close prices, which are only traded once per day.  Also, when compared to mutual funds, ETFs tend to be more cost-effective and liquid.

Silver is valued as both an industrial metal and a precious metal. Introduced in the early 2000s, Silver ETFs are funds that focus on investing in physical silver. These assets are held in trust by the custodian or fund manager and are usually established as grantor trusts. This means that each share represented by the ETF has the specific right to a particular quantity of silver. Seen as a hedge against inflation, they allow for greater liquidity, are readily traded, and are more accessible for individuals than futures markets. In terms of cost, they closely track the price of silver. Silver ETFs can also be more liquid than silver itself.

Silver ETFs offer a number of advantages to individual investors:

Speed: Investors and traders can quickly enter and exit positions in the silver market. The same cannot be said for physical silver, which needs to be delivered to a buyer.

Purity: The silver purchased by fund managers is 99.99% pure. It is also stored in secured vaults. This means that you do not have to worry about purity when investing in Silver ETFs.

Hedge against inflation: The possibility of a good return on investment, even in volatile times, helps make silver a hedge against inflation.

Reduced Risk: Investing in Silver ETFs can help diversify your portfolio thereby reducing risk.

No storage costs: When you purchase Silver ETFs, you don't have to pay any storage costs. The procurement of physical silver, as well as its storage, is the fund manager's responsibility.

Liquidity: By design, as ETFs are readily traded on the stock exchange, Silver ETFs allow for greater liquidity than physical silver itself. 

Market Demand: The price of silver fluctuates and is driven by demand and supply, which can lead to volatility.

Control: You may give up some control, as you are investing in a group of assets instead of a single security.

Taxation: For tax purposes, Silver ETFs are treated the same as conventional mutual funds. This means that they incur capital gains tax.

Tracking error: Silver ETFs may have a tracking error as they track the spot price of silver in the open markets, which can fluctuate.

Gold ETFs are similar to Silver ETFs. They track physical gold. However, there are different factors that drive demand for gold and silver. A lustrous white metal, silver is used by industries such as electronics and automobiles. Historically, the value of silver has risen with growth in economy, which implies it has a high correlation with the equity market. Gold, on the other hand, enjoys greater demand, especially in the jewelry industry. It can be used as a hedge against market volatility as it has a low correlation with the equity market. As a commodity, gold enjoys greater stability than silver but is more expensive. The fact that silver comes with more storage costs can increase the expense ratio for Silver ETFs.

Before investing, it's a good idea to research the various Silver ETFs available to you. To explore the finer points of researching ETF's, check out How to select the best ETFs.

Who should invest in Silver ETFs?

For investors looking for diversification or exposure to precious metals, Silver ETFs can be a good fit. They also offer reduced risk as they are backed by physical silver at 99.99% purity. Physical silver needs secure storage, which can increase holding costs. With Silver ETFs, there are no associated storage costs for individual investors. Silver ETFs are more tax-efficient than physical silver and can also be tracked in real-time.

Should you invest in Silver or Silver ETFs?

Silver ETFs can be a cost-effective and hassle-free way to gain access to the silver market. However, they can be a risky proposition as the price of the underlying asset can be affected by multiple factors. If you purchase physical silver, the transportation and secure storage of the commodity becomes your responsibility.

What returns can I get with Silver ETFs?

While the expense ratio of ETFs is usually low, certain costs can apply. The usual costs of trading such as brokerage commissions, the ask-bid spread, and more can eat into your returns.

How are Silver ETFs taxed?

In Canada, Silver ETFs are treated like any other ETFs or conventional mutual funds for tax purposes. This means that you have to pay taxes on any income and capital gains generated from the sale.