WHAT IS 'Silver ETF'

A silver exchanged-traded fund, or ETF, invests primarily in raw silver assets, which are held in a trust by the fund manager or custodian. Typically, silver ETFs are established as grantor trusts, where each share of the ETF represents the specific right to a specific amount of silver, measured in ounces. Silver ETFs aim to track the spot price of silver on the open market as closely as possible.The first to market was the iShares Silver Trust, managed by Barclays Global Investors and introduced in 2006.

BREAKING DOWN 'Silver ETF'

Silver ETFs, alongside with gold ETFs, were introduced in the early 2000s, opening up an attractive investment vehicle for individual and institutional investors. Precious metals like silver are seen as a hedge against inflation. ETFs allow for greater liquidity than holding the metal itself and are easier for individuals to access than the futures markets.

Silver ETFs held in taxable accounts are subject to a higher long-term capital gains rate on any holdings of more than one year. Because silver ETFs are considered to be investments in the raw metal itself, gains are assessed on silver as a collectible and are subject to a 28% long-term capital-gains rate. Silver ETFs held in individual retirement accounts are not subject to this higher gains tax, having been given a special clearance by the Internal Revenue Service.

Silver ETFs as a means of diversification

Market volatility tends to increase investor attention on the importance of diversifying their investment portfolios to weather market turbulence. Amid volatility, precious metals like silver tend to become more attractive to investors, given their haven status. 

An argument in favor of adding layers of diversification to a portfolio with commodities, such as silver, is that it is in high demand in many different industries, including consumer electronics, automobile manufacturing, solar energy and housing, to name a few. 

There are several silver and silver-mining funds that do a good job of tracking the metal's gains and losses. Examples of popular silver-related ETFs include the iShares MSCI Global Silver Miners ETFs, or SLVP, aims to track the MSCI ACWI Select Silver Miners Investable Market Index, and it is closely correlated to the price of silver.

iShares Silver Trust, or SLV, is not a typical ETF. As the prospectus notes, "The assets of the Trust consist primarily of silver held by a custodian on behalf of the Trust," which means that the fund will purely reflect the price movements of silver. Investors purchase shares in the physical silver held by the trust, and the fund charges a 0.50% annual sponsor fee to hold the silver.

Global X Silver Miners ETF, or SIL, offers a different take on silver. This ETF tracks an index of global silver mining companies. With average daily volumes of approximately $4 million, SIL has significant liquidity to reassure investors looking to enter this relatively volatile market. 

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