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How Do I Choose the Best Silver Exchange-Traded Funds?

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  • Written By: Geri Terzo
  • Edited By: Shereen Skola
  • Last Modified Date: 06 April 2014
  • Copyright Protected:
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    Conjecture Corporation
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Investing in commodities, including a precious metal such as silver, can be a volatile experience. Metal prices often rise and fall in dramatic fashion. Gaining exposure to silver exchange-traded funds (ETFs), which are indexes that contain multiple related securities, could help to mitigate some of the volatility. ETF managers do not attempt to outperform the broader markets but instead deliver average returns that reflect some other industry benchmark. The best silver exchange-traded funds should address the current opportunity in the markets, an investor's appetite for risk, and offer an expense structure that is reasonable based on returns.

To select the best silver exchange-traded funds, an investor should determine the conditions in the economy and the financial markets. If silver prices have been gaining momentum, and the economic backdrop is such that performance will continue, the best approach is probably to take a long position. This is to invest with the expectation that prices will increase over the foreseeable future. Typically, the best silver exchange-traded funds are those that have long exposure to the commodity.

If market and economic conditions are less favorable, there are strategies to invest during a downturn. Investors can take short positions in commodities, including metals, in order to prepare for further losses. Silver exchange-traded funds could deliver profits throughout price declines because they are designed to benefit from losses in the market. This approach is somewhat unconventional but it could be an ideal strategy for an investor seeking to capitalize in different business cycles.

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An investor who can handle some of the price volatility that is typical in commodities might consider silver exchange-traded funds that provide direct exposure to the metal. Performance in these funds is tied directly to the changing value for silver bars and coins. Economists suggest that returns tend to be strong when inflation is threatening the economy and other asset classes, such as equities and debt, are producing lackluster results.

There are ways to invest in silver exchange-traded funds and potentially avoid some of the price swings that traditionally accompany the category. Futures are financial contracts that allow traders to buy and sell commodities based on future prices instead of the current market value. Subsequently, price performance in these ETFs is not directly correlated to the current price for silver.

The fee structure for investing in any ETFs should be reasonable. Fund managers are not actively changing positions in securities on a frequent basis. The potential for profits exists relative to the performance in some other industry barometer. An investor might compare the price structure and historical performance in a silver ETF to select the best offering.

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