While silver has historically been touted as the “poor man’s gold,” owning silver ETFs or funds in other precious metals has long been an option for investors seeking a safe haven asset.
During volatile markets or uncertain geopolitical and economic climates, many investors turn to precious metals such as gold or silver. Some people view it as an alternative currency to the central banks while others see it as one way to hedge against dips in the stock market.
Interest in gold has arisen again with the recent declines in the market and also news that a new gold ETF with lower fees is being launched this year by the World Gold Council, which also created the SPDR Gold Trust (ticker: GLD) in 2004, according to Reuters.
Instead of buying the actual physical commodity, ETFs are a much cheaper way to own precious metals.
[See: 9 ETFs for Nervous Investors.]
“It is expensive to buy and sell the physical commodity because of the minimum size requirement, transaction cost and other storage costs,” says K.C. Ma, a CFA and director of the Roland George investments program at Stetson University in DeLand, Florida. “Silver is more of cyclical investment where you can find many other similar investment opportunities with less transaction costs.”
Since ETFs are baskets of stocks and can be traded throughout the day, are liquid and have very low trading costs, they are a better option, he says.
Investors should stick to owning one of the two physically based silver ETFs, either iShares Silver Trust ( SLV) or ETFS Silver Trust ( SIVR), says Robert Johnson, principal at the Fed Policy Investment Research Group in Charlottesville, Virginia.
The physically based silver ETFs have historically outperformed the futures-based ETFs. Silver bullion outperformed silver synthetic funds by a wide margin from January 2007 through December 2016 — silver bullion had a total return of 20.48 percent while the synthetic silver fund returned 7.87 percent. Gold outperformed silver by a large margin during the same period — gold bullion returned 74.31 percent, while synthetic gold fund returned 57.66 percent.
Stocks tend to outperform silver and are a better long-term investment.
“Neither was a good investment compared to stocks as the S&P 500 returned 94.88 percent over that time period and the Dimensional Fund Advisors Small Cap Stock Index returned 108.02 percent,” he says.
Since PowerShares DB Silver Fund ( DBS) and E-TRACS UBS Bloomberg CMCI Silver ETN ( USV) are futures-based, Johnson says he would rule them out.
“The leveraged and short leveraged silver ETFs — VelocityShares 3x Long Silver ETN ( USLV), ProShares Ultra Silver ( AGQ) and ProShares UltraShort Silver ( ZSL) are simply weapons of mass wealth destruction,” he says.
The two factors investors should consider when selecting a silver ETF are the annual expense ratio and the average daily volume, says Don Shelly, a finance professor at the Cox School of Business, Southern Methodist University in Dallas. The trading volume of the smaller ETFs is light and can present liquidity problems if an investor has a relatively large position.
Leveraged silver exchange traded notes or ETNS trade on exchanges like silver ETFs, but do not own any physical silver. They use futures contracts and leverage the position two or three times.
Owning them can be really tricky, he says.
“If you are right about your bet on silver prices, you can make big money fast,” Shelly says. “If you are wrong, the opposite is true.”
Silver ETFs should not be held as part of a permanent position and should be viewed as a trading instrument, says Bill DeShurko, president of 401 Advisor, a registered investment advisory in Centerville, Ohio.
[See: 7 ETFs to Ride the Gold Rally.]
“Investors think adding something like silver will boost returns,” he says. “Maybe it will in the short run, but not in the long run.”
While buying ETFs can be a no-brainer, selling them can be challenging, especially when the price is declining and volume is thin.
“This goes double because if you own gold or silver bars or coins and the market price falls, who is going to buy it from you?” DeShurko says. “No one will want to get stuck with an asset whose price is dropping. The spread or the difference between the current market price and the price someone is willing to pay will also widen and will possibly rob an investor of much of their gains.”
How much should an investor own? The majority of investors should only have 5 percent or less of their portfolio invested in silver, Shelly says. While some investors focus on the theories regarding the ratio of the gold to silver price ratio, which currently stands at 79 times, “trying to make a bet on silver being cheap or expensive to gold is a folly,” he says.
Since both of these precious metals tend to rise during times of political turmoil and rates of inflation increase, gold is probably the safer bet for either of these scenarios.
While Ma says he will allocate no more than 10 percent of gold hedge against inflation and a recession, silver is not a good asset to own under those economic conditions.
“Silver is used in industrial processes, so it has a cyclical nature in addition to precious metal properties,” he says. “Unlike gold, silver will react negatively in an economic downturn.”
Both gold and silver are not good additions to a portfolio because commodities do not generate any cash flow, Johnson says.
Alternatives to precious metals. Owning industrial metals such as steel and copper which will benefit from economic growth is an alternative to owning precious metals, Ma says.
Investors could also add mining stocks instead of silver ETFs, Shelly says.
“For most investors, owning a basket of stocks is a safer bet than trying to pick individual companies,” he says. “Owning the miners works better for gold than silver since today’s silver is a by-product of gold, copper and other metals mining. Most of the public companies that are classified as silver miners actually produce more gold than silver.”
For people who believe metal prices will rise and remain high relative to the current levels, mining stocks are the better bet since the “increased value of their unmined reserves provides significant upside for share prices,” Shelly says.
Instead of focusing on gold or silver ETFs, investors could broaden their commodity exposure by owning a fund that attempts to replicate the returns to a broader basket of commodities such as the Goldman Sachs Commodity Index, which tracks the performance of 24 different commodity futures contracts.
[See: 7 ETFs for Income Investors to Play it Safe.]
“For the investor with a long-term time horizon, it is difficult to beat an investment in a low-fee index fund,” Johnson says. “That is the surest way to build wealth over the long term.”
More from U.S. News
11 Steps to Make a Million With Your 401k
Artificial Intelligence Stocks: The 10 Best AI Companies
Silver ETFs Could Be a Safe Asset to Add to a Portfolio originally appeared on usnews.com
