More Silver Linings

By Brad Zigler

Silver traders continued to take profits in the overnight market early Tuesday in anticipation of the London fix. When City dealers settled at $10.85, the move seemed prescient.

Silver's technicals have softened a bit in the wake of last week's rally, but the cash market is still trading above near-term support at $10.43. Beneath that, buyers are dug in at $9.99-$10.00.

Of course, a little market backpedaling is a good thing if you're looking to buy the metal. We examined a case for silver in Monday's column ("Finally A Silver Lining?") and pointed out a way for investors to obtain physical metal through the wholesale market.

For liquidity-minded investors and traders, there are other options that can be exploited through a securities account. Four U.S. exchange-traded vehicles now offer long exposure to silver:

• iShares Silver Trust (NYSE Arca: SLV) - The granddaddy of silver products, SLV is a grantor trust that holds bullion. Buy shares of the trust and you own an unallocated chunk of vault holdings.
• PowerShares DB Silver Fund (NYSE Arca: DBS) - This fund tracks a subset of the Deutsche Bank Liquid Commodity Index through a portfolio of COMEX silver futures.
• E-TRACS UBS CMCI Silver ETN (NYSE Arca: USV) - Investors in this exchange-traded note (ETN), based upon a contango-battling index, trade off tracking error for credit risk associated with issuer Union Bank of Switzerland.
• ProShares UltraSilver Fund (NYSE Arca: AGQ) - The newest entry into the silver market, this exchange-traded fund [ETF] is designed to produce twice the daily return reflected in the daily London silver fix. The fund was launched in December 2008.

Looking at raw numbers, these products produced disparate results over the past month:

Long Silver Exchange-Traded Product Performance

(04-Dec-08 through 05-Jan-09)

Ticker	Type	Return	Volatility	Sharpe Ratio	Average Volume	Liquidity Index	Current Spread
London Fix	Cash	15.6%	49.2%	.32	--	--	--
SLV	Trust	18.4%	46.4%	.40	5,411,033	2,191,048	0.09%
DBS	ETF	16.3%	47.6%	.34	71,052	28,705	0.35%
USV	ETN	27.5%	58.2%	.47	843	515	4.31%
AGQ	ETF	37.4%	93.6%	.40	35,114	7,040	0.59%

Long Silver Exchange-Traded Vehicles

Some of that variance is due to price reporting. Lacking real-time access price reports, many investors base their returns and volatility readings upon last sale price, not the contemporaneous bid/ask market. For illustrative purposes, that's what we've done here.

For the liquid securities, there's really little difference between last sale and current market most times. The average daily trading volume for iShares' SLV, for example, is better than 5 million shares, making it one of the nation's busiest stocks. There's usually a very small time interval between SLV trades. For the USV notes, however, there can be weeklong gaps between trades. For this reason, it's always best to look at the real-time bid/ask spread to gauge the current return available.

Liquidity can be determined by either looking at the current spread (the smaller the percentage, the less variance between bid and ask) or by metering the security's liquidity index. The liquidity index represents the size of a trade necessary – all other factors held static – to move the market one percentage point. As liquidity measures go, the tighter (smaller) the spread and the higher (larger) the index, the better.

Comments

[adan:]

great info

there's been articles lately too on how well one can do w/some of the etf's as a trading vehicle vs longer term holding

maybe some follow ups in the future?

thanks!

Jan 07 08:41 AM

[Brad Zigler:]

I think you'll find the leveraged ETFs and ETNs more tactically useful as hedges or short-term exposures because of the compounding effect. As long term holds, the returns on the unlevered products will tend to mirror more closely the gains and losses realized by the underlying metal or futures.

That said, there'll be a drag on each product for its management/investment fee. In the case of SLV, the fee's subsidized by bullion sales, so there's a niggling erosion in the asset base.

For the futures-based products, there's the contango cost, too. When there's a big spread between the delivery month prices, the drag on returns gets heavier.


On Jan 07 08:41 AM adan wrote:

> great info
>
> there's been articles lately too on how well one can do w/some of
> the etf's as a trading vehicle vs longer term holding
>
> maybe some follow ups in the future?
>
> thanks!

Jan 07 09:24 AM