Types of Liquidity in ETFs

ETFs or the Exchange Traded Funds are highly liquid forms of investment which allow investors to reap the benefits of the increase in the price of underlying securities or indexes. These funds are widely viewed as a more liquid alternative to mutual funds as they not only allowed the investors to diversify their investment portfolio but also be traded during market hours. Not only this, institutional investors can use them to quickly enter and exit positions, making them a valuable tool for situations where cash needed to be raised quickly. Although individual investors can do little when the liquidity decreases, institutional players who use ETFs can avoid liquidity issues by buying or selling creation units which are baskets of underlying units that make up each ETF.

What Are the Types of Liquidity in ETFs

So, all types of ETFs including silver ETFs have two sources of liquidity. One is the liquidity in the market as defined by the securities on issue and the depth of trading on the market. The second type of liquidity is the one which lies in the hands of the issuer and his ability to create or redeem ETF securities to meet investor demand. This type of liquidity reflects the open ended nature of the ETFs. The authorized participants or big investors can swap a basked of the fund’s underlying holdings for EZTF shares or vice versa. This process helps in arbitraging away the gaps between the ETF’s unit price and its NAV which is the value of the underlying holdings.

But if the underlying holdings are costly to trade and tough to obtain, authorized participants are less willing to round up that basked of securities. This can result in big gaps between the ETFs unit price and NAV. This in turn leads to decreased ability to trade an ETF profitably.

Factors that Affect Liquidity of an ETF

We all know by now that ETF including silver ETFs offer greater liquidity than mutual funds. The degree of liquidity however depends on several factors such as:

• The composition of the ETF. Generally ETFs investing in large cap domestically traded companies are the most liquid. In contrast ETFs investing in less liquid securities such as real estate are less liquid than ETFs investing in equities or fixed income.

• The trading volume of the individual securities or commodity that makes up the ETF

• The trading volume of the ETF itself.

• The economic situation in a particular country also helps in determining the liquidity of an ETF. An ETF which tracks the indices of emerging markets are generally considered less liquid than the ones tracking the indices of developed countries.

Liquidity in Silver ETFs

Silver ETFs can either hold physical silver bullion or invest in derivatives that track the actual spot price of silver on a daily basis. These funds may also invest in silver mining stocks. These funds grant the investors the right to a given amount of silver that is generally measured in terms of ounces. The fund managers of these funds aim to mirror the spot price of silver on the world commodity markets. These funds provide investors with a higher liquidity and safety than if they own the physical metal. The fund which witnesses higher trading volumes is a highly liquid source of investment for investors.

Why Should One Invest in Silver ETFs

Investors have several options such as bonds, mutual funds and currencies to diversify their investment portfolio. But it is always better to invest in real assets whose supply is short or limited and thus have a better potential of appreciating. Commodities like silver and gold which are in limited supply are one of the most attractive ways to invest over a long term period. Commodities like silver and gold are generally not correlated to the stock and the bond markets and thus serve as an attractive diversification tool. Also unlike the paper currencies, they are not at the mercy of government policy. Silver does have some applications as an industrial metal so its hedging properties are not as strong as gold. If a company using silver in their manufacturing process reduces its production levels, the silver prices are going to suffer.

Investors often wonder about the best way to invest in silver? Although investors can opt for purchasing physical silver or gold the cost associated with keeping them safe acts as a deterrant. An attractive and safe alternative is exchange traded funds or ETFs. Investment in ETFs does not require the investor to actually hold physically the chosen asset and thus worry about keeping it safely. Investment in silver ETFs should be preferred over buying physical silver because of the increased safety and liquidity available in the former. Apart from the trading flexibility, the ETFs offer investors instant portfolio diversification via investments in silver mining stocks. tax efficiency and transparency of cost and holdings. Another factor which works in the favor of silver ETFs is that the metal cannot be easily issued or mined so its value does not change overnight in response to monetary policy changes of the government.

In the current economic situation, when the European and US governments are facing deep financial trouble and are busy printing more money, silver and gold have attracted investor interest with gold and silver ETFs becoming popular. The year 2012 witnessed hectic activity in the SPDR Gold Trust (GLD) which is the largest commodity ETF in the world and the second largest exchange traded product and the iShares Silver Trust (SLV), the most popular silver fund. Both the funds are doing well and have outperformed each other over various time periods.

While gold investing has long dominated the precious metals space and become an integral part of an investor’s long term strategy long time ago, silver has gained ground in recent years. Silver ETFs have been performing well since the launch of SLV in 2006 which has enjoyed a volatile but higher run. The SLV is the biggest and the most liquid of all silver ETFs as it is backed by physical silver and truly reflects the metals’ price movement. Investors can also invest in the leveraged silver ETFs or ETFs investing in silver mining stocks.

Although silver prices have appreciated in recent years, they are far below the peak level of around $48 per ounce witnessed in 1980. So, there is a great potential for appreciation in silver prices and the uptrend witnessed in recent times is likely to continue in 2013 and thereafter.

Top Silver ETFs in the Market

Silver exchange-traded products (ETFs) as the name suggests are exchange trade funds or notes or closed end funds that aim to track the price of silver. Such funds or instruments do not necessarily hold physical silver but may also invest in silver mining stocks. These funds are traded on major stock exchanges in the world including the London and the New York Stock Exchanges. The emergence and popularity of these funds has played a key role in the increase in the prices of silver over the four year period of 2007-2011, according to the US Geological survey. Let’s look at some of major silver ETFs in the market and their valuations and trading volumes.

The first silver ETF was the iShares Silver Trust or SLV, launched in April 2006. Its objective was to mirror the price of silver after deducting a small management fee. This ETF has been highly popular largely because it offers investors to invest in silver, a high flying commodity which traditionally was done only via futures trading. Another reason for the popularity of SLV is that the fund is asset backed by the silver bullion. So a share of SLV is equivalent to the value of an ounce of silver which is actually in the possession of the fund owners. The asset backed model of SLV means that it needs to manage a physical inventory, in order to balance day to day demand and supply differentials.

The SLV ETF’s holding increased five-fold to 100m ounces within the first four months of its launch and the trend continued even during the time of silver consolidation in 2007 and the stock panic of the 2008. The substantial growth of the fund continued till 2011 when it reached its peak displayed the growing demand for metals by traders. The fund has had a significant impact on silver’s overall supply and it witnessed a huge growth during September 2010 and April 2011 when the silver prices also rose by about 150%. The total silver supply stood at around 1.0billion ounces in 2011 from all sources and SLV accounted for over 30% of this (366million in April 2011 which was its peak level.) The SLV saw a 70 million-ounce bullion build couple with a 150% increase in the price of silver. This resulted in a staggering 233% increase in the net asset value of SLV. Although the ETF’s valuation has come down since then, it has been relatively stable in the $10 billion range over the last 12 months. The current valuation of SLV is much higher than the biggest and best silver mining stocks and it is one of the best silver ETFs in the market today.

1) The price of SLV unit as on January 1, 2013 was $30.15 and it had assets worth $10.3 billion at the end of 2012. The fund is the largest and most popular silver EZTF as it exchanges hands nearly 13 million times a day. Its sheer size and high liquidity levels are its most appealing features.

2) Global X Silver Miner’s ETF (SIL) Traded on the Archipelago Electronic Communications Network (ARCX) this fund allows investors to invest in the equity of silver companies. Targeting some of the top names of the silver mining industry, this fund’s portfolio consists of roughly 35 individual holdings with three quarters of its total assets allocated to the top ten holdings like Fresnillo PLC, Silver Wheaton, Pan American Silver etc. The fund had total assets worth $349.90 million as on January 2nd, 2013. The fund traded at $23.35 and had average volume of 248,550 shares which makes it another highly liquid investment option.

3) UBS E-Tracs CMCI Silver STN (USV) is an Exchange Traded Note (ETN) listed on the US NYSE. Launched in April 2008, the fund measures the collateralized returns from a basket of silver futures contracts. The commodity futures contracts are diversified across five constant maturities from 3 months up to 3 years. The current price of this ETN is $43.31 as on January 2nd, 2013. The fund had assets worth $6.71 million as on January 2 and its average volume was 4405.

4) ETFS Physical Silver Shares ETV (SIVR) Launched in July 2009, this ETF is one of the best silver ETFs in the market. The fund unit is available at a price of $30.63 (price as of January 2nd, 2013). The fund is intended to provide investors with a return roughly equivalent to the movements in the silver spot price. The fund units were priced at $30.83 on January 2nd, 2013 and it had assets worth $551 million at the end of 2012. The average daily volume of this fund was 360, 013 on January 3rd, 2013. This fund also tracks the spot price of physical silver bullion like the SLV fund. But what distinguishes the two is that SIVR has a lower expense ratio and thus is more appealing for long term and cost conscious buyers.

5) PowerShares DB Silver Fund (DBS) Launched in January 2007, the fund is based on the Deutsche Bank Liquid Commodity Index-Optimum Yield Silver Excess Return and managed by DB Commodity Services LLC. The index is a rules based index composed of futures contracts on silver and is intended to reflect the performance of silver. The fund’s price as on January 2nd, 2013 was $53.25 and it had $62,34 million in assets. Its average volume was 14,710. A fairly liquid fund for investors who are thinking about how to invest in silver.

6) ProShares Ultra Silver ETF (AGQ) Launched in December 2006, this fund seeks daily investment results that correspond to twice the performance of silver, as measured by the US dollar fixing price for delivery in London. The fund’s current price is $45.79 as on January 2nd, 2013. Having total assets of $793.45 million, this fund recorded an average volume of 1.7 million.

7) ProShares Ultrashort Silver ETF (ZSL) Launched in December 2008 this ETF seeks daily investment results that correspond to twice the inverse of the performance of the silver, as measured by the US dollar fixing price for delivery in London. The current price of this ETF is $48.05. Having total assets of $94.47 million, this fund registered an average volume of 2.4 million.

8) COMEX Silver Bear Plus ETF (HZD) This ETF invests in financial instruments that have similar daily return characteristics as 2 times the inverse of the daily performance of the COMEX silver futures contract for a subsequent delivery month. Listed on the Canadian TSX exchange, this fund is managed by Horizons BetaPro ETFs and its current price is C$4.53. The fund had C$12.6576 million in assets as on November 30, 2011.

9) COMEX Silver Bull Plus ETF invests in financial instruments that have similar daily return characteristics as 2 times the daily performance of the COMEX silver futures contract for a subsequent delivery month. Listed on the Canadian TSX exchange this fund is currently priced at C$5.16. The fund had assets worth C$137.8717 as on November 30, 2011.

10) ETFS Leveraged Silver ETF is listed on British London Stock Exchange under the symbol LSIL. The fund is intended to change daily by twice the daily percentage change in the DJ-AIG Silver Sub-Index. The fund is currently trading at $40.19 (price as on January 1, 2013).

11) ETFS Physical Silver ETF is designed to provide investors with a return roughly equivalent to the movement in the silver spot price, less fees. Managed by ETF Securities, the fund is listed on the London Stock Exchange under the symbol PHAG. The fund’s price on January 1, 2013 was $30.15.

12) VelocityShares 3x Long Silver ETN is linked to the S&P GSCI Silver index. The fund was priced at $27.59 on January 2nd 2013 and it had assets worth $121.16 million. The fund’s average volume on that day was 780,733.

13) VelocityShares 3x Inverse Silver ETN is linked to the S&P GSCI Silver Inverse Index. The fund was priced at $25.23 as on January 2nd, 2013 and it had assets worth $16.87 million on that date. The fund had an average trading volume of 188,760.

What Are Silver ETFs?

Silver ETFs are exchange traded funds that invest mainly in raw silver assets and aim to track the spot price of silver on the open market. These raw silver assets are held in a trust by the fund manager or the custodian. Generally, these funds are established as grantor trusts where each share of the fund represents the right to a specific amount of silver, measured in ounces. These funds are traded on the world’s major stock exchanges like the NYSE and the London Stock Exchange.

The first silver ETF to be launched was the iShares Silver Trust, which was managed by the Barclays Global Investors. The fund is one of the best silver ETFs that exist today and its huge success was followed by the entry of several more players which played a key role in boosting the demand for silver. This in turn led to a sharp rally in the prices of silver.

Recent years have seen the introduction of several leveraged silver ETFs and funds that invest in silver mining stocks. Leveraged funds like the ProShares Ultra Silver ETF (AGQ) and the ProShares UltraShort Silver ETF (ZSL) aim to capture twice the average daily movement of silver bullion with the latter going for two times the inverse of the price of the silver. Both these funds do not own actual bullion, but own swaps, futures or other instruments in an attempt to meet their objectives. Such funds are good for short term trades and do not offer good returns over a longer time frame.

Apart from the funds that actually buy silver assets and the funds that are leveraged, investors can look to invest in silver via funds that put their money in mining companies. SIL is a silver ETF that invests in mining companies and is thus not directly exposed to the price of silver. This provides investors an attractive opportunity to invest in silver.

Features of Silver ETFs

These funds represent an attractive investment opportunity for individual and institutional investors, and allow them to hedge against inflation. Investors who hesitate to invest in silver futures due to the various complexities involved can instead easily access silver ETFs.

These exchange traded funds offer greater liquidity than holding the precious metal itself. If an investor chooses to invest in an ETF, he does not have to buy physical silver himself and worry about the changes in the cost of silver. This is done by the fund managers. The value of the ETF moves in tandem with the price of silver. An ETF can invest in silver in various forms such as silver bullion, silver coins, Canadian silver, silver mining companies or a combination of all these.

Silver ETFs and Taxes

Under the United States code, investments made in silver ETF are treated as though the investor is holding the silver himself. As such the investment in silver ETFs attracts similar kind of capital gains treatment as is given to collectibles. Such investments are subject to a 28% capital gains tax rate. However, silver ETFs held in IRAs are not subject to this higher gains tax as they have been given a special clearance by the Internal Revenue Service.