In this article I compare the two largest silver ETPs traded in the United States:
Both are marketed as way for investors to get exposure to the silver market through their brokerage accounts. Furthermore both trade more or less in line with one another:
However as the chart illustrates the PSLV was the fund of choice when the silver market was in favor. The trading action illustrated above also reveals that there are fundamental differences between the two funds, which investors should be aware of when choosing one or the other. I will detail these differences below but they come down to the following:
- PSLV gives investors a stronger legal claim on physical silver than SLV, and this makes the fund more appealing to investors who are acutely concerned with the risks of owning silver derivatives, or "paper silver." This is a concern I bring up in my article on silver market manipulation.
- SLV is far more liquid than PSLV, and it more accurately reflects the spot price of silver at any given time. Thus for those who want to trade silver in whichever capacity SLV is preferable.
Specifically if you look at the objectives of each fund the difference becomes apparent. For SLV, the objective is: "to reflect, at any given time, the price of silver owned by the Trust at that time, less the Trust's expenses and liabilities" (SLV prospectus, p. 2). For PSLV the objective is: "to invest and hold substantially all of its assets in physical silver bullion" (PSLV prospectus, p. 1).
There are other issues such as management fees and taxation, but the difference in terms of each funds' appeal comes down to the above.
Advantages of PSLV
1: Management Fees
SLV has an expense ratio of 0.5%, whereas PSLV has a slightly lower 0.45% expense ratio.
The way SLV is structured the silver held it is treated as a "collectible," and gains on holding SLV, even for a time frame longer than a year, are taxable at 28%. Shares of PSLV are treated just as shares in a company: if you hold them for longer than a year then they are taxed at the capital gains rate of 15% or 20% depending on your income.
3: Custody of Each Funds' Silver
PSLV silver is held by the Royal Canadian Mint (i.e. "the Mint"). If the Mint chooses to hold the silver with a subcustodian, this subcustodian must be Brinks (through its Canadian subsidiary Brinks Canada Limited (cf. the PSLV prospectus, p. 51)
The custodial situation for SLV is more uncertain. For instance, SLV's silver may be held with subcustodians, which are chosen by the custodian (JP Morgan). There is no stipulation in SLV's prospectus that says that the subcustodian is limited to those parties specifically mentioned in the prospectus. Furthermore, subcustodians may employ additional subcustodians to hold SLV's silver. The trustee (The Bank of New York Mellon) has no say in this. If silver that is held by a subcustodian is lost, SLV shareholders have limited legal recourse (SLV prospectus, p. 25). Basically, if (1) the custodian gives some of the SLV's silver to a subcustodian to hold, (2) this subcustodian loses or steals some or all of this silver, and (3) the custodian can prove in court that (1) was a reasonable action (i.e., JP Morgan had reason to believe in the competence and integrity of the subcustodian), then the custodian is not responsible for SLV's shareholders' losses.
4: Redemption of Shares for Bullion
The security that I highlight as the appeal of PSLV is reflected in the shareholders' right to redeem shares for silver bullion. SLV shareholders do not have this right.
Advantages of the SLV
1: Price to NAV Differences
SLV trades in line with its NAV. We saw in the chart above that PSLV does not. This can reflect many things.
- PSLV has favorable tax treatment and it should therefore trade at a premium.
- The market's valuation of the aforementioned strengths of PSLV (i.e. its stronger legal claim on physical silver than that of SLV) fluctuates.
Ultimately those interested in trading silver will find that accounting for these complexities of PSLV cumbersome, and SLV is a simple, straightforward alternative.
SLV trades several million shares daily, with each share representing slightly less than one ounce of silver. PSLV trades only a few hundred thousand shares daily, with each share representing a little more than a third of an ounce of silver. In a chaotic market the bid/ask spread and the supply/demand of PSLV shares will be far less certain than the bid/ask spread and the supply/demand of SLV shares. Thus for shorter term traders, or for investors who value the flexibility of liquidity, SLV is a superior silver trading instrument.
There is an active and liquid options market for SLV. This is not the case for PSLV.
Clearly there are various benefits and detriments to holding each of these funds. Traders will want to purchase SLV shares whereas longer term investors will want to buy PSLV shares, or perhaps a combination of both in order to trade around a core position more efficiently.