Silver is a precious metal that can be a good investment, depending on the economy, and it will always be widely used in jewelry and electronics. As its use is rare when compared to other industrial metals, its value is primarily derived from long-term investors looking for a way to ride out a down market. Investing in silver usually entails allocating capital towards silver bars or coins, the direct production of silver, silver mining companies, or through exchange traded funds (ETFs).
The iShares Silver Trust (SLV) is an exchange traded fund (ETF) that tracks the price performance of the underlying holdings in the LMBA Silver Price as of August 2014. Prior, SLV used the London Silver Fix Price as their underlying benchmark. The SLV has total assets of $14.37 billion under management as of June 30, 2021, and has generated an average annual total return of 4.53% since the fund was started in 2006. The holdings of the fund represent silver, with the objectives to diversify one’s portfolio and protect against inflation.
Commodity ETFs such as SLV may be particularly risky as the price of precious metals can be impacted by changes in overall market movements, underlying index volatility, changes in interest rates, or factors affecting a particular industry or commodity.
The assets of the iShares Silver Trust consist primarily of silver held by JPMorgan Chase (JPM), the custodian institution, on behalf of the fund. The fund may hold a very limited amount of cash in special situations. The iShares Silver Trust is passively managed as it does not buy or sell silver to take advantage of market price swings. However, SLV sells silver from time to time to cover its operating expenses.
Buying SLV shares provides a simple, yet cost-effective way to invest in silver. Although the shares of the trust are not a direct substitute for actual silver, they still provide an alternative to participating in the commodities market. The fund offers a convenient way of obtaining exposure to silver without a need on the part of an investor to actually hold silver. Acquiring and storing silver can be very expensive and complicated.
The iShares Silver Trust is one of the ETFs administered by BlackRock. Each share of the fund represents a fractional undivided beneficial interest in the net assets of the iShares Silver Trust. SLV has a relatively low annual expense ratio of 0.5% when compared to its ETF peers from the precious metals sector. Brokerage costs for the fund to buy and sell shares are not part of the expense ratio. As SLV is an ETF, it has no front-end or back-end load. The shares of SLV are traded on the New York Stock Exchange Arca, and investors can purchase them like any other stock.
Investing in silver ETFs comes with significant risks. As of 2020, looking back over the last five full years, the supply of silver tended to exceed its demand, resulting in downward pressure on the price of silver worldwide. Demand for silver comes primarily from coinage minting and the jewelry industry, as well as the industrial sector, which uses silver to produce photography mirrors and electrical conduction materials.
Adverse changes in the economic environment can have a negative impact on the price of silver since it is used in industrial applications. Also, as discretionary consumer spending worldwide falls from a result of shifts in preferences or income decline, spending on jewelry can decrease.
Due to lowered expectations for inflation worldwide, the price of silver took a hit, negatively affecting the value of iShares Silver Trust shares. The attitude of speculators and investors matters a lot for the price of silver, especially in short-term horizons. Investors should be especially careful and cognizant of unique risks inherent to investing in silver.
Based on the above mentioned characteristics of the fund, investing in SLV is most appropriate for investors looking for speculative trading. Because of the persistent decline in the price of silver over the last decade due to overproduction, deflationary pressures, and the financial crisis of 2009, the fund consistently generated negative returns. Its five-year annual average return of -3.51% and a three-year standard deviation of 34.11% make investing in the fund very risky with negative returns.
The iShares Silver Trust is most appropriate for investors who are looking to gain exposure to silver or engage in speculative trading of silver without actually buying silver itself. Also, the fund is a useful tool for investors who want to diversify their portfolios and help protect against inflation.