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ETFs such as SLV and GLD have garnered their share of buzz the past
few years. In Chapter 2 of our "Guide to Silver Investing"
David Morgan points out some of the pitfalls of the silver ETF. Don't think
you're actually buying the metal. It's a lot more complicated than that, and
carries more risk. Read on…
What is a Silver Exchange-Traded Fund (ETF)?
Investopedia defines
it well: "An exchange-traded fund that invests primarily in raw silver
assets, which are held in trust by the fund manager and/or custodian.
Typically, silver ETFs are established as grantor trusts, where each share of
the ETF represents the specific right to a precise amount of silver, measured
in ounces. Silver ETFs aim to track as closely as possible the spot price of
silver on the open market. The first to market was the iShares
Silver Trust (SLV), managed by Barclays Global Investors and introduced in
2006."
At this point in time (June 26, 2009) SLV has 280,510,676.900 ounces
of silver in trust and is selling at a -1% discount. SLV has a current value
of approximately $3.998 billion.
Here's a listing of
other silver ETFs.
It's important to note what an ETF like SLV is and what it isn't. SLV
is not silver but rather a security that trades on the AMEX. The ETF is
backed by trust assets consisting of silver held by the custodian on behalf
of the trust.
It is simple and cost-effective to invest in the ETF to gain exposure
to price movements in silver, but as stated above, the ETF is not an
investment in silver itself. For example, should the need arise, an investor
would not be able to exchange ETF shares for bullion other than through an
Authorized Participant, and then only in baskets of 50,000 shares.
Why Should an Individual Look at Owning a Silver
ETF?
I don't think an individual should consider SLV, as there are much
better silver investments than SLV for individual investors.
Are there advantages/disadvantages to owning a
silver ETFs versus owning physical?
Nothing, I mean nothing, beats owning the real thing. The only
"advantage" to owning the ETF is that many funds, money managers,
and institutions are prohibited from owning commodities so the ETF is traded
like a stock and therefore allows these types of entities to own silver. That
was the primary purpose in developing these ETFs, in my view.
John Rabio and James Turk have stated, and I
agree, that the "daisy chain" involved in SLV makes it complex and
convoluted because, as stated above, the SLV investor owns the iShares (not silver—silver can never be redeemed).
The shares are issued by the Trust (Bank of New York), which hires a
Custodian, which can have any number of Sub-Custodians, Agents or
Depositories, where the silver is purportedly held. Compare this "daisy
chain" with the true silver owner, who owns and controls his own silver.
What are Your Criteria in Choosing an ETF?
I think they can serve a purpose for brokers, and large institutional
clientele but I have no strict criteria. The structure of the gold and silver
ETFs are pretty clear that the underlying asset is not strictly accounted for
using the most basic understanding of "ownership."
Are There Tax Issues an Investor Should be Aware of in Owning ETFs?
Yes, in the U.S. the GLD and SLV are taxed at the highest tax rate
regardless of how long you own the investment. This does not apply to mining
equities that are held for more than one year.
Long-term gains in the silver ETFs are taxed as collectibles at 28%.
In comparison, Central Fund of Canada (CEF), which is located outside the
U.S., is considered a passive foreign investment company with shares not
convertible into bullion. CEF qualifies as a PFIC to enable the 15% capital
gains tax treatment, which can be an important factor for investors.
What Should Investors be Aware of When Buying
ETFs?
Know what you are doing, explore all other alternatives, and choose
wisely. The reassertion of counter-party risk is driving much of the risk in
the current markets. SLV doesn't allow independent audits, can lease your
silver out, and does not segregate or allocate your silver.
David Morgan
The Morgan Report
Mr.
Morgan has been published in The Herald Tribune, Futures magazine, The Gold
Newsletter, Resource Consultants, Resource World, Investment Rarities, The
Idaho Observer, Barron's, and The Wall Street Journal. Mr. Morgan does weekly
Money, Metals and Mining Review for Kitco. He is hosted monthly on Financial Sense with Jim Puplava.
Mr.
Morgan was published in the Global Investor regarding Ten Rules of Silver Investing, which you can receive for free. His book Get the Skinny on Silver
Investing is available on Amazon. You can subscribe to his private
Internet-only newsletter, The Morgan Report, by clicking here.
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