ETF Spotlight: SLV Surfing Silver’s Wave in 2024

The largest silver exchange-traded fund, iShares Silver Trust ETF (SLV), has jumped 14% this year, hitting a 52-week high in the process, beating the gold market proxy SPDR Gold Shares ETF (GLD)’s 11% gain and the 9% gain in the stock benchmark SPDR S&P 500 ETF Trust (SPY). 

In this week’s ETF spotlight, we take a closer look at the high flying precious metals ETF, as well as the other top silver ETFs, and the potential benefits and risks of investing in them. 

How Does the SLV ETF Work?

The SLV ETF seeks to mirror the performance of the silver spot price as closely as possible. It does this by physically holding silver bullion in its London reserves. In theory, the price of one SLV share should reflect the value of the underlying silver that the trust holds. 

Investors can buy and sell SLV shares on the stock exchange like any other stock. The price of an SLV share fluctuates throughout the trading day based on supply and demand. 

Benefits and Risks of Investing in Silver ETFs

Investing in silver ETFs can offer several benefits, such as diversification and liquidity, but these funds also have associated potential risks including volatility and tracking error. Here are more details on the benefits and risks of investing in these precious metals funds: 

Benefits of Silver ETFs

• Diversification: Silver ETFs provide investors with exposure to the price movements of silver without the need to physically own and store the metal. By investing in a silver ETF, investors can diversify their portfolios beyond traditional asset classes like stocks and bonds. 
• Liquidity: Silver ETFs trade on major stock exchanges, providing investors with easy access to buy and sell shares throughout the trading day. This liquidity can be advantageous for investors who wish to enter or exit positions quickly.
• Cost-effective: Investing in a silver ETF is typically more cost-effective than purchasing physical silver. Investors can avoid costs associated with storing and insuring physical bullion, as well as potential markups and premiums charged by dealers.
• Dividends: Some silver ETFs may generate income through dividend payments if they invest in silver mining companies. While not all silver ETFs offer dividends, those that do can provide additional income to investors.

Risks of Silver ETFs

• Volatility: Silver prices can be highly volatile, influenced by factors such as economic conditions, geopolitical events, and changes in supply and demand dynamics. This volatility can lead to rapid price fluctuations in silver ETFs, potentially resulting in significant gains or losses for investors. 
• Market risk: Silver ETFs are subject to market risk, meaning that their prices can be influenced by broader market trends and sentiment. Economic downturns, interest rate changes, and geopolitical instability can all impact the performance of silver ETFs. 
• Counterparty risk: While silver ETFs hold physical silver or silver futures contracts as their underlying assets, they are still financial instruments that rely on the performance of counterparties such as banks and financial institutions. In the event of a counterparty default or insolvency, investors may face losses. 
• Tracking error: Physically backed silver ETFs aim to track the performance of silver prices, but they may not perfectly replicate the spot price of silver due to factors such as management fees, trading costs, and tracking errors. These deviations can impact the returns that investors receive compared to the actual price movements of silver. 
• Taxation of silver: The IRS classifies physical silver as a collectible for tax purposes. For ETFs that track the price of physical silver, it might inherit this collectibles tax treatment. This means any capital gains from selling physically backed silver ETF shares could be taxed at a higher rate (up to 28%) compared to the standard long-term capital gains tax rate.

List of Top Silver ETFs by AUM

Data as of April 3, 2024.

Bottom Line on Investing in SLV and Silver ETFs

Investing in silver ETFs provides exposure to the price of silver without having to directly hold the precious metal itself. These funds can offer diversification and liquidity benefits, but investors should be aware of the risks, including volatility, market risk and tracking error, as well as the potential higher taxation of silver ETFs.  

Investors should carefully consider these factors and conduct thorough research before buying shares of silver ETFs.