Many investors who are interested in buying silver choose to buy the iShares Silver Trust (NYSEARCA:SLV) as a convenient alternative to owning physical silver bullion. There is little doubt that there is a certain appeal to the iShares Silver Trust. It is highly liquid, trading several million shares daily. It also trades like a stock, unlike physical bullion coins and bars, and so if you wish to buy or sell SLV shares it is as simple as buying or selling a stock. This is opposed to traveling to a coin store or going to an online coin dealer and then finding a safe place to store one’s valuable silver.
While I think there is no substitute for owning physical silver bars and coins, there is an advantage in owning something that is highly liquid. Nevertheless I think that there are better choices than the SLV.
The first is the Sprott Physical Silver Trust (NYSEARCA:PSLV). The PSLV is a better alternative in two respects. First, it is cheaper. It has a lower expense ratio (0.45 percent versus 0.5 percent). Furthermore, it is taxed like a stock, so that if you hold PSLV shares for longer than a year, then any gains one accumulates are taxed at the capital gains rate, which is 15 percent or 20 percent depending on your income. SLV, on the other hand, is taxed like a collectible, which means that gains are taxed at 28 percent.
Second, PSLV’s silver is held with the Royal Canadian Mint. However, it is unclear where SLV’s silver is stored. The prospectus lists JP Morgan (NYSE:JPM) as the custodian. But it also gives JP Morgan the right to give some or all of this silver to sub-custodians to hold. There is no specification as to which institutions can be deemed sub-custodians. This ultimately means that SLV has greater counter-party risk, and in an era in which counter-party risk has become a more important part of making investment decisions, I find this to be disconcerting.
The second option is Silver Wheaton (NYSE:SLW). A lot of investors don’t like to hold gold or silver because it doesn’t pay a dividend. Silver Wheaton offers a solution to this. Silver Wheaton makes its money by giving money to mining companies in exchange for the right to purchase their future silver or gold production at a fixed price that is well below the prevailing market price. Such deals are called streaming deals. For instance, Silver Wheaton has the right to buy 25 percent of the silver produced at Goldcorp’s (NYSE:GG) Penasquito Mine in Mexico for $3.90 per ounce.
While the company takes some of this money in order to make more agreements like the Penasquito stream, it has begun to pay a dividend equal to roughly 20 percent of its cash flow. While the company makes streaming deals for both gold and silver, about 75 percent of its revenues come from silver. Since the company’s cash flow mostly comes from silver and since Silver Wheaton pays a dividend based on its cash flow, it is as if Silver Wheaton pays a silver dividend. This makes Silver Wheaton appealing for investors who need dividend income but who are also bullish on the price of silver.
If we continue with the dividend theme, another option is the Credit Suisse Silver Shares Covered Call ETN (SLVO). This fund buys silver and then sells covered call options against it in order to generate income. This has been an excellent strategy while the price of silver has been consolidating, and it has generated a whopping 14.6 percent trailing dividend yield. The one problem with employing this strategy is that it will not perform very well if the price of silver rises a lot. Investors will be called away from their positions should the price spike, and so the upside potential is limited. Thus this fund is more suited for investors who believe that the silver price will trade with a lot of volatility in a range.
Ultimately it is easy for investors who want silver exposure to just go to their brokers and buy SLV shares, but as we have seen, there are better alternatives for those who are willing to dig a little deeper.