Two common ways to invest in silver are purchasing shares of silver ETFs and buying and selling physical silver. Silver ETFs are a smart portfolio addition for some, but physical silver may provide more peace of mind and practical advantages for many investors.
What Is Physical Silver?
Physical silver refers to tangible forms of silver, such as coins, bars, rounds, and bullion, which investors can hold and store themselves. Silver is a tangible store of wealth and has been used as money, a medium of exchange, and a store of value for thousands of years across numerous civilizations.
It’s best to invest in physical silver when there is high inflation, low interest rates, or geopolitical instability. Investors should avoid purchasing silver collectible coins and instead focus on silver bullion coins, such as the American Silver Eagle or the Canadian Silver Maple Leaf.
Purchasing silver bars is another option for investing in physical silver. Silver bars typically carry lower premiums than coins or rounds. Bars are ideal for bulk storage because they are stackable and space-efficient. Larger silver bars are more cost-effective due to lower premiums over the spot price per ounce.
What is a Silver ETF?
Silver exchange-traded funds, or silver ETFs, track the price of silver and are bought like stocks. They invest primarily in physical silver, futures contracts, or silver mining stocks. Silver ETFs aim to mirror the price movements of silver by holding either physical bullion or securities related to the silver industry. They provide investors with a convenient and relatively low-cost way to gain exposure to silver without the responsibility of physical ownership or storage. Investors do not own the silver through an ETF, but rather through shares of a fund.
Silver ETFs typically come with annual fees, which are calculated as a percentage of your total holdings. Expense ratios typically range from 0.30% to 0.50% for most silver ETFs, covering storage, insurance, and administrative costs. Additionally, brokerage commissions may apply when buying or selling shares.
Physically Backed Silver ETFs & Authorized Participants
Physically backed silver ETFs, such as SLV, hold silver bullion in secure vaults. The value of each share is linked to the spot price of silver, minus the fund’s management and operating expenses. When investors purchase shares of these ETFs, they gain indirect exposure to silver through a fractional interest in the trust that holds the physical metal.
However, individual retail investors cannot exchange ETF shares for physical silver.
Redemption rights are reserved for Authorized Participants (APs), which are typically large financial institutions such as major banks, broker-dealers, or market makers. These APs have agreements with the ETF sponsor and can create or redeem shares in large blocks, usually a minimum of 50,000 shares. This structure helps maintain price alignment between the ETF and the underlying silver but limits access to physical metal for individual investors.
If tangible ownership is important to you, buying physical silver directly is a better option.
Silver ETF Risks
The price of silver can be highly volatile. Factors like industrial demand, currency fluctuations, and investor sentiment can lead to significant price swings and are subject to market risks, including changes in interest rates, inflation expectations, market prices, and global economic conditions.
ETFs might not perfectly mirror the price of silver due to fees, expenses, and the potential for slight discrepancies between the silver price and the ETF’s actual holdings or contracts.
Key Differences Between Silver ETFs and Physical Silver
Ownership
- Physical silver = full, personal ownership.
- ETFs = indirect exposure; ownership is mediated through institutions.
Security and Storage
- Physical silver needs to be stored securely in a home safe, bank deposit box, or private vault. You control where and how your silver is stored.
- ETFs have storage handled by custodians, which adds convenience at the expense of transparency.
Transaction Costs
- Physical silver typically includes premiums over the spot price, as well as possible shipping fees.
- ETFs may have lower upfront costs, but ongoing management fees (which cover the expenses of operating and managing the fund) and brokerage commissions (the transaction fee paid to your broker each time you place a trade) generate ongoing expenses.
Crisis Resilience
- Physical silver can be used or traded even in economic emergencies, power outages, or system failures.
- ETFs depend on market, broker, and digital access, making them vulnerable in high-stress scenarios.
Liquidity
- Physical silver can be sold online or in person. Investors should choose a platform they can trust.
- Investors can buy or sell silver ETF shares on stock exchanges at any time during market hours.
Historical Performance: Returns and Resilience
Value of Silver and Silver ETFs in Wartime Climates
Throughout history, silver has often been regarded as a safe haven during times of war and inflation. However, geopolitical influences can negatively impact the price of silver, and performance during each conflict varies. War can drive up the cost of silver due to increased government spending and industrial demand, as well as investor sentiment and supply constraints. Silver also has applications in military technology, including rockets, missiles, satellites, and nuclear systems.
Like physical silver, silver ETFs are generally considered safe-haven assets in times of war or stress events. If internet or digital access is compromised, however, only physical silver provides direct access to assets.
Market Crashes and Stress Events
High inflation and economic stagnation pushed silver prices from $1.75 per ounce in 1971 to $49.45 per ounce in 1980, partly due to attempts by Nelson Bunker Hunt and William Herbert Hunt to corner the silver market.
During the 2008 Global Financial Crisis, silver rose from $9 per ounce in 2008 to nearly $50 by 2011 as investors sought protection from inflation. In the COVID-19 Pandemic from 2020 to 2022, stimulus spending and inflation concerns drove silver prices to $28 – $29 per ounce in 2020, as demand for safe-haven assets surged.
Silver ETFs, whose value is based entirely on physical metal deposits, have maintained their value. These silver ETFs mirror price movements in silver, reflecting both gains and declines, as seen in 2008, 2011, and 2020-2022. Other ETFs or ETNs, designed to serve a specific purpose, such as leveraged ETFs, silver miner ETFs, or ETNs, have not always maintained their value, especially when compared to the performance of spot silver.
Why Some Investors Prefer Physical Silver
With physical silver, investors have direct control over storage and can physically hold their assets, which some prefer for transparency and security. In a world of increasing digital and financial uncertainty, many investors find value in owning something tangible.
For investors seeking a long-term hedge against economic uncertainty, physical silver can play an important role within a diversified portfolio.
If you do not want to manage assets through a brokerage account, silver ETFs may not be the best choice. However, if you prefer a hands-off online experience, ETFs can be a suitable alternative.
Adding silver, whether in physical or ETF form, can help diversify an investment portfolio and potentially reduce overall risk. Market performance varies, and all investments carry risks, so it is important to choose the best investment option for your financial goals.
