Digging For Returns In Silver ETFs

| About: iShares Silver (SLV)

Trading silver is easy due to the creation of several ETFs which allow for either matching index returns or attempting to capture bigger gains through leveraging.

The easiest and most reliable method of investing in sliver is through the iShares Silver Trust ETF (NYSEARCA:SLV). It is also the most popular silver ETF with an average daily volume of over 13 million shares, making it highly liquid, a huge advantage over owning the physical metal.

The fund does hold 100% of its assets as silver bullion, and so does an effective job of mimicking the price moves of silver on a daily and long-term basis, net of expenses of running the fund. As with the price of silver, the Fund has been very volatile in recent years, from lows around 10 in 2008 to highs near 47 in early 2011. The price on July 2 closed at $26.73.

Leveraged Silver ETFs

Proshares offers two companion leveraged silver ETFs, ProShares Ultra Silver ETF (NYSEARCA:AGQ) and ProShares UltraShort Silver ETF (NYSEARCA:ZSL). Both are 2X funds, which attempt to capture twice the average daily movement of silver bullion, with ZSL going for the two times the inverse of the price of silver.

Neither of these funds own any (or hardly any) actual bullion, but own swaps, futures or other instruments in an attempt to meet their objectives. A review of the historical performance shows that the funds do generally accomplish their objectives on a daily basis.

The problems with using leveraged ETFs as a long-term investment are well documented. A trader may get lucky over the period of days or weeks, but the inherent nature of the funds returns in deterioration of the price over time.

For instance, as of this writing on July 3, the year to date return for SLV was +0.7%. The AGQ lost 5.16% over that period, and the ZSL lost 13.09%.

Unlike stocks or bonds, there is no yield on a silver investment, so at best it is a hedge against declines in other investments. Options are traded in each of the three ETFs listed here, so there is the opportunity to gain some premium through covered calls.

Disclosure: I am short AGQ.

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