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Summary Those who consider investing in silver could consider using silver ETFs. The major ones follow the price of silver by stocking up on the precious metal. Other ETFs and ETNs follow silver by using forward contracts. The silver market has seen better days, but some still think silver could recover in the coming years and reach its former glory. The main idea in investing in silver is either for hedging purposes or for those who think silver will go up in the future. Let’s quickly examine the developments in the silver market and the main ETFs representing it. Up to the beginning of 2013, the rising demand for silver was fueled by people and institutions investing in silver via, among other ways, silver ETFs , in part, due to growing fear of a possible spike in inflation driven by the Federal Reserve’s monetary policy – mostly consistent of near zero interest rates and quantitative easing — and the devaluation of the U.S. dollar. These fears haven’t materialized, up to now. In fact, inflation has come down in past year and the U.S. dollar has appreciated against major currencies. The slowly recovery in the U.S. economy, the shift in the Fed’s policy, rise in mine production and little change in silver demand in the industrial sector drove down silver prices in the past few years. Some still expect the silver market to recover in the coming years on account of growing demand for silver in the industrial sector or slower growth in production (on account of the current low prices). Others may need a silver financial instrument to hedge their silver inventory. One way to take a long or short position on silver is via ETFs. Why choose silver-focused ETFs over other available silver instruments? The other possibilities include buying physical silver, silver contracts or silver companies. Buying a stock of physical silver, especially for speculators, may not be the best options. Silver companies are also one way to go long on silver. In this category, investors could pick silver producers such as Pan American Silver (NASDAQ: PAAS ) or silver streaming and royalty companies such as Silver Wheaton (NYSE: SLW ). But there are three issues to consider: These companies may incur risk that isn’t related to the movement in the price of silver such as growing debt and cash flow strain; Silver companies don’t only focus on silver (after all silver is usually a byproduct of other metals); they also have other metals in their portfolio – in most cases gold and copper – and as such bullion companies’ stocks aren’t only impacted by the movement of silver prices. For the most part, silver is strongly correlated to gold, but this relation isn’t consistent over time; The stocks of silver companies are also affected by these companies’ growth in operations (or lack of it); so if they expand their business — stocks tend to rise and vice versa. This is another variable, which isn’t necessarily related to the changes in the price of silver. These issues don’t mean the option of going with a silver company isn’t a good play, but it may not suit your investment needs. With that said, let’s review some of the available silver ETFs for hedges, investors and speculators and the main difference among the ETFs. Investors that have a long term investment horizon wishing to go long on silver or those that need a hedge for the future price of silver — if for example you plan to purchase silver for your business (e.g. for industrial usage) at a later date and need to lock the current price of silver to avoid risk related to fluctuations in the future – could consider the iShares Silver Trust (NYSEARCA: SLV ). This is also the largest traded ETF in this space with a market cap of $4.8 billion. The ETF follows the price of silver by holding the precious metal – as of September 24, the ETF holds 318.2 million ounces. The only caveat is the management fee, which is 0.5%, one needs to pay for holding this ETF. And just in case you were wondering, since this ETF holds physical silver and doesn’t buy future contracts each month – as oil and natural gas ETF tend to do – there is no Contango or Backwardation that lead to roll decay to worry about. Another ETF that follows silver in the same way as SLV is Physical Silver Shares (NYSEARCA: SIVR ), which has a slightly lower management fee of 0.3%. But the ETF is also smaller with a market cap of $280 million and 18.4 million ounces of silver. For speculators with a short term trading horizon (usually daily) and suspect the silver market is heading up may consider ProShares Ultra Silver (NYSEARCA: AGQ ). This ETF follows twice the daily return of the silver. For those who think silver is heading down may use ProShares UltraShort Silver (NYSEARCA: ZSL ), which follows twice the inverse return of silver. Both of these ETFs use silver contracts (forwards) and don’t buy silver bars. Therefore, these ETFs may face roll decay issues related to Contango/Backwardation. These ETFs also have a compounding issue that affects the returns of investments (e.g. if the price of silver rises by 10% in the first day and another 10% the next day, then the total gain is 21% due to compounding). That’s why these investments are mostly for short term investments. It’s also worth mentioning that besides ETFs there are also Exchange traded notes or ETNs . ETNs are structured products issued as senior debt notes. They are based on the future contracts. ETNs are highly volatility, tend to be riskier than ETFs (due to debt risk), and are mostly considered for short term holdings. For a leveraged long silver position, the VelocityShares 3x Long Silver ETN (NASDAQ: USLV ) offers three times the daily return of a silver index (S&P GSCI Silver Index ER). For those seeking to go short over short period of time, VelocityShares 3x Inverse Silver ETN (NASDAQ: DSLV ) is one way to go. Since these ETN are leveraged, they also have compound issues as listed above for ZSL and AGQ as well as Contango/ Backwardation issues. It’s also worth reading these ETNs prospectus to get a better sense of their risks ( pdf ). These ETNs are also very small cap and may include a liquidity issue. The following table summarizes the possible ETFs and ETNs that are currently available with market share and fees. (click to enlarge) Sources: ETFs’ and ETNs’ websites. The above ETFs and ETNs offer an array of investment possibilities for investors, day-traders and hedgers. Based on your needs and outlook, you could utilize the above-mentioned financial instruments. (For more please see: ” Will Higher Physical Demand for Silver Drive Up SLV? “) Scalper1 News
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