Futures-Based Silver ETFs
These ETFs track the performance of the white metal using instruments such as futures. Investors seeking exposure to this category have a variety of options to choose from:
The top fund in the category is PowerShares DB Silver ETF (NYSEARCA:DBS) which 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 and the fund was launched in January 2007. Since then, the ETF has been able to amass an asset base of $37 million.
The product is the high cost choice in the silver bullion space, charging 79 bps in fees per year from investors. Additionally, it has a wide bid/ask spread given its small average daily volume of 14,000 shares that increases the total cost of the product. Not surprisingly, the ETF is extremely volatile given its focus on futures contracts which can be more volatile than spot prices.
Second comes the ETFs issued by ProShares – Ultra Silver ETF (NYSEARCA:AGQ) and UltraShort Silver ETF (NYSEARCA:ZSL) initiated in Dec 2008. These funds seeks to deliver twice (2x or 200%) the daily performance of the silver bullions in U.S. dollars, with the silver price fixed for delivery in London.
The former has a direct relationship with the price of silver while the latter has an inverse relationship. So ZSL makes a profit when the silver market declines and is suitable for hedging purposes against the fall.
AGQ has amassed $555 million in its asset base while ZSL has a relatively lower AUM of $107 million. These ETFs do not invest in silver bullion directly; rather, these use financial instruments (swap agreement, future contracts, forward contracts and option contracts) to gain exposure to the precious metal.
This indirect approach might introduce additional tracking errors leading to extra cost. Already, investors need to pay 95 bps in fees per year, which is expensive when compared to other geared options in the space.
Despite high costs, AGQ trades with a good average daily volume of roughly two million shares but performance has been quite volatile, to say the least (read: Guide to The 10 Most Popular Leveraged ETFs).
In Oct 2011, another issuer, VelocityShares, initiated two similar ETNs – 3x Long Silver ETN (NYSEARCA:USLV) and 3x Inverse Silver ETN (NYSEARCA:DSLV) but with three times (3x or 300%) exposure. The products seek to replicate the daily performance of the S&P GSCI Silver Index Excess Return plus returns from U.S. T-bills net of fees and expenses.
USLV, having AUM of $137.0 million, provides long exposure to 3x the daily performance of the index while DSLV, having AUM of $31 million, provides 3x the inverse exposure. The ETNs are the high cost choices in the silver bullion space, charging 165 bps in fees per year from investors.