Eric Dutram: Silver has been quite volatile over the past couple of years. The price of the white metal has been declining moderately as of late despite the monetary easing measures of the Federal Reserve to stir up growth in the economy.
Currently, silver bullion is trading in the range of $27–$31 per ounce. It is expected to go up to $33 per ounce this year and again revert to $31 per ounce in the next, according to HSBC. This means that investors could get a decent return of 6%–9%, if they buy and hold the metal for one year, and possibly more if global trends continue.
This is because the demand for this precious metal will grow as we move further into 2013 due to low interest rates, and strong emerging market demand. Thus, silver bullion will not only continue to benefit from being a precious metal and a store of wealth, but also its several key industrial applications.
A pick-up in industrial activities and the consequent improvement in the global economic sentiments are also favorable for the price of silver as the metal has a number of industrial uses.
Countries like South Korea, Taiwan, China and the U.S. are seeing increasing growth in industrial output, an important factor considering about 50% of the metal’s total demand comes from industrial applications while 30% comes from jewelry, silverware, coins and medal manufacturers.
Further, the prices are poised to move higher due to the steady investor appetite for hard assets and robust coin and bar purchases, a factor that could act as another catalyst for the metal.
Investors seeking to play the bullish trend in the precious metal space through ETFs have a variety of options at their disposal (read: Invest Like Morgan Stanley with These 5 Commodity ETFs). Investors should note that silver metal ETFs are generally more volatile than their gold counterparts thanks to their high betas.
The 3 most popular ETFs in the silver bullion space are SLV, SIVR and DBS, each of which we have briefly highlighted below.
These products have shown signs of weakness of late and lost around 5% year-to-date. In spite of this, we currently have a Zacks ETF Rank #1 or ‘Strong Buy’ on silver ETFs, suggesting a stronger 2013 for these commodities:
iShares Silver Trust ETF (NYSEARCA:SLV)
Launched in April 2006, this is the largest silver ETF with AUM of $10.4 billion. The fund seeks to match the spot price of silver, net of fees and expenses and own silver bars to back the shares.
It tracks almost 100% the physical price of silver bullion measured in U.S. dollars, and kept in London under the custody of JPMorgan Chase Bank N.A. Each share represents about an ounce of silver at current prices.
The ETF is the most liquid and widely traded physically backed silver offering in the precious metal space. Though not a low-cost choice due to its 50 bps expense ratio, SLV has a lower bid ask spread, which could lessen total costs slightly for this popular fund (read: Time to Invest in Low Volatility ETFs?).
ETFS Physical Silver Shares (NYSEARCA:SIVR)
This fund offers simple and cost-efficient ways for investors seeking exposure to silver bullion.
It tracks the spot price of silver, net of fees and expenses, and owns silver bars to back the shares under the custody of HSBC Bank USA in London. Launched in July 2009, the product so far attracted assets of $580 million.
The product is the low cost choice in the silver commodity space charging investors a fee of 30 bps per year with relatively tight bid/ask spread. It trades in average volumes of more than 200,000 shares per day.
PowerShares DB Silver ETF (NYSEARCA:DBS)
This fund provides exposure in the futures market rather than spot market and tracks the DBIQ Optimum Yield Silver Index Excess Return index, before fees and expenses. The index comprises silver future contracts.
The ETF was launched in January 2007 and since then has been able to amass an asset base of $62.6 million (read: Zacks Top Ranked Silver ETF: DBS).
The product is a high cost choice in the silver bullion space, charging 70 bps in fees per year from investors. Additionally, it has a wide bid/ask spread given its small average daily volume of 16,000 shares that increases the total cost of the product for active traders.