A Lode Of Silver ETP Choices

Last Updated: 16 April 2024

Whatever your view of silver, there’s probably an ETP out there to express it

The Easter roller coaster in silver helps remind everyone of the massive volatility difference between equity-backed funds and commodity ones. In truth, silver ETFs are actually exchange- traded commodity products (ETCs), which is a key difference.

But for investors with their eyes open, the variety of investment vehicles presents a rich vein of choices during this stomach-churning ride. This is key, as greater choice offers improved liquidity, something those behind the FSB/IMF/BIS reports should bear in mind along with the fact that exchange-traded instruments simply track an index (more on that later).

Until these various products were available, plain silver mining companies like Fresnillo (LSE: FRES) were the only available option. On April 28, the main silver fund, the iShares Silver Trust (NYSEArca: SLV), was up 30 percent in the month, compared with a 10 percent rise in the price of Fresnillo. So far, so good for those ETF traders—no individual company risk and a return that was three times higher.

Those that felt this difference in price was evidence of retail speculation could simply sell their holdings and walk away. As an alternative, they could have shorted the iShares Silver Trust or taken out protection in the options market. According to Data Explorers, there were 12 million shares short for SLV, or 3.5 percent of the market cap last week. Amazingly, so much insurance was being bought in the options market on April 27 that there were more silver-related contracts being struck than those based on the movement of the overall S&P 500!

On the above evidence, if you smelled a bursting bubble at this point and felt brave, you would have bought the ETF that went up when the price of silver went down. The ProShares Ultrashort Silver (NYSEArca: ZSL) goes up twice the value that silver goes down, and there were a few genius institutional investors out there who used ZSL to this effect. Data Explorers numbers show that funds that lend their assets increased holdings in ZSL from 200,000 shares to 1.55 million shares between April 18 – May 3, making a handsome return as silver fell.

As the situation calms down, the scores on the doors are as follows: SLV is down over 25 percent and we hear some leveraged funds are down almost three times that amount, whereas ZSL is up more than 70 percent. Meanwhile, back in the smooth and steady world of single-stock investing, Fresnillo is down around 7 percent. Some would argue the ETCs have created a wealth of choice.

We also need to remember that ETF providers simply offer a security that tracks an index. If this index swings wildly during moments of volatility, it is the index providers’ issue rather than the ETF. Conversely, it is the ETF’s fault if the instrument has a big tracking error with the index.

This is why we should expect to see more indexes that take a sampling of the constituents in a given benchmark, such as with the new Nasdaq 100 Data Explorers Optimized Index (Nasdaq:NDXOPT). The sampled version of the Nasdaq-100 eliminates hard-to-borrow names, thereby making it an easier index for firms like Source and ETF Securities to create. That, in turn, will result in cheaper costs for all, while retaining the performance of the original index.

As ETFs and ETCs have gathered more assets, questions are beginning to increase right along with investor interest. Many people are questioning the products’ composition, efficiency and ability to track their underlying indexes. They are asking whether the counterparty selection is probing in the right areas, and whether greater transparency will make the ETF industry stronger in the long term (assuming the providers continue to respond with more transparency).

Regulators need to consider that indexes are, and always will be, quirky. For instance, did you know that Switzerland’s main index basically reflects the movements of a single massive company, Nestle, which makes up around 20 percent of the index, as revealed in the comments posted to a lively IndexUniverse debate. The FTSE 100 is not a barometer of the U.K.’s economic health—it tells you how well financial and resources companies are doing.

Talking resources, the London market will be biased even further toward commodities with the upcoming IPO of Glencore (market cap expected in the $50 billion to 70 billion range). If you don’t have the stomach to invest directly in ETCs, perhaps an investment in the experts might do the trick?

  • Luke Handt

    Luke Handt is a seasoned cryptocurrency investor and advisor with over 7 years of experience in the blockchain and digital asset space. His passion for crypto began while studying computer science and economics at Stanford University in the early 2010s.

    Since 2016, Luke has been an active cryptocurrency trader, strategically investing in major coins as well as up-and-coming altcoins. He is knowledgeable about advanced crypto trading strategies, market analysis, and the nuances of blockchain protocols.

    In addition to managing his own crypto portfolio, Luke shares his expertise with others as a crypto writer and analyst for leading finance publications. He enjoys educating retail traders about digital assets and is a sought-after voice at fintech conferences worldwide.

    When he's not glued to price charts or researching promising new projects, Luke enjoys surfing, travel, and fine wine. He currently resides in Newport Beach, California where he continues to follow crypto markets closely and connect with other industry leaders.

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