An Exchange Traded Fund (ETF) is a pretty nifty investment vehicle. Much like a mutual fund, an ETF allows many investors to pool investment funds and buy shares in a professionally managed investment fund. What makes an ETF even more attractive is that shares of an ETF trade exactly like a stock: they can be bought, sold and shorted almost instantaneously.
Moreover taxation on ETFs are more favorable than with traditional mutual funds. Most ETFs specialize in particular groupings of companies and industries that have certain common characteristics. Moreover, expenses for ETFs are low and range between .1% to 2%.
SLV-New opportunity or new turkey? On August 28, 2006, after much controversy and scrutiny by the SEC, the first silver exchange traded fund- Barclays iShares Silver Trust (AMEX:SLV) – was launched on the American Stock exchange.
The fund was touted as a new vehicle for investors to help diversify risk across many silver industry companies and have their shares backed by physical silver in-ventory.
Nice idea. But thanks to some smart investors with some free time and a penchant for detail, some rather disappointing-and in some cases-shocking- facts have since been uncovered.
At first, one of the main concerns during SEC discussions before SLV was allowed to be brought on stream was the potential impact on silver prices. Most silver investors know that silver is in short supply and estimates place about only 5% of the available supply as “excess” and thus capable of becoming the “tail wagging the dog”.
And sure enough, even before the fund was approved, the rumor sent silver prices to their highest levels since the Hunt brothers cornered the market back in 1980. But despite this concern, the fund was given the approval.
After an initial run-up and sell-off (“buy the rumor and sell the news”), the fund’s share prices now seem to have stabilized and closely track silver prices. But other facts still cloud the fund.
James Turk, a knowledgeable silver investor and silver analyst, seems to have done silver investors a favor by taking out his magnifying glass and going over the required fund prospectus. (You can view his article at: http://www.financialsense.com/editorials/turk/2007/0305.html.)
In his article, he points out the fact that contrary to the hype, SLV fund shares are not totally backed by physical inventory. As a matter of fact, the inventory shortfall demonstrates another fear of silver futures investors- that they may not be able to get delivery of silver contracts if they are called for delivery if contracts exceed actual silver supply.
But what has become even more disturbing is the fact that the fund is not under the jurisdiction of the SEC! The fund is not subject to regulation by the SEC as an investment company.
Consequently, the owners of SLV do not have the regulatory protections provided to investors in normal investment companies. To add more suspicion, Turk uncovered the fact that the prospectus allows the fund to use a mechanism called SPEs (special purpose entities) which were used by Enron to defraud its investors. Incredible!
So far, Barclays- the owner of? SLV- has not made a formal rebuttal to these serious accusations.
As far as other Silver ETF opportunities, there are three other Swiss Silver ETFs but they are only available to Swiss citizens. So, for now, SLV is the only active silver ETF.
Considering the fact that there are some serious doubts that SLV? ? is not what it was designed to offer investors- a cost-effective means of making an investment similar to holding silver- investors are probably best advised to fully educate him or herself before investing in the Silver Exchange Traded Fund.