The Investor Allure of Exchange Traded Funds (ETFs)

It’s no secret: ETFs are hot. And with Wall Street pushing ETFs as the newest investment vehicle for all, it’s hard not to ignore the idea of using an ETF. It’s the low costs, liquidity, lower taxes, transparency, and specialization offered by ETFs that is making investors switch to ETFs.

Basically these ETFs are a liquid, low cost mutual fund, holding a pool of stocks within a specialized sector of the economy. For an example of such a specialized fund, think about an ETF of silver mining companies. This fund would be a holding–based on a certain percentage–of each major metal mining company. However, when compared to a classic mutual fund, the cost advantages of ETFs are huge.

Unlike ETFs, the costs run in the billions for mutual funds to hire analysis, accountants, and marketing firms. And a few of those billions could be money in your account. So, an ETF is an alluring alternative to a mutual fund. It’s the strong point of an ETF: lower fees and costs mean more money flowing to investors.

Also unlike mutual funds, ETFs can be more liquid. Many investors see mutual funds as a place to park money for a period of time, thus theses mutual funds aren’t nearly traded as ETFs. Because ETFs are bought and sold just like stocks, ETFs create trading opportunities that mutual funds just don’t offer. It’s this liquidity that draws many investors to ETFs over the traditional mutual fund.

What investor doesn’t like lower taxes? Exactly. These lower taxes provided by ETFs are also a big attraction for investors. Because ETFs don’t have trigger-happy managers running the ETF, the investor doesn’t have additional taxes to worry about. So far, taxes for ETFs are capital gains tax if you sell and some funds–but not all–have dividends.

It’s also the transparency drawing many investors into these funds because at any time you can see exactly what the fund is comprised of. The fund will usually have a set percentage in each investment. This kind of transparency is hardly found in either mutual funds or on Wall Street—that’s why investors are running to ETFs: complete transparency.

ETFs provide investors specialized segment of an industry. In this case well stick to precious metals. The iShare Silver ETF (SLV) holds a certain amount of bullion and prices closely follow the price of silver. On the other hand, streetTRACKS Gold Shares (GLD) is a fund of gold mining companies. Still, both funds are investments into the precious metals market.

On a side note, investors interested in leveraging returns will be glad to know that ETFs can be bought on margin, and options are available on ETFs. As cliché as this saying is, it is important to remember leverage is a double-edge sword: cutting out huge returns, as well as, cutting out the ignorant investors.

While ETFs are pushed by Wall Street and as other investors brag about her double digit returns, prudent investors remember: some investments–just aren’t made for everyone. So the dive into ETFs will depend on your investing personality and investment goals. So be sure to follow some sound advice: Eight Rules for Exchange Traded Funds.

Some investors will want the ease of investing in a specialized sector without having to sit down and pick the companies within that specialized sector. While other investors will want to research for hours and pick the best company within that sector, it depends on the investor weather ETFs are the right investment.

Tags: etf, silver ETF, silver investing

iShares Silver ETF (Exchange Traded Fund) Reviewed

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.

Tags: ishares silver fund, silver ETF, silver investing, SLV

Silver ETF (Exchange Traded Fund)

Silver ETF (Exchange Traded Fund)…information coming soon!

Tags: exchange traded fund, ishares silver etf, silver ETF