Saturday, April 24, 2010

Silver ExchangeTraded Funds: 3 Things to Consider Before Investing in a Silver ETF

By Shaun Connell.

The recent rise in precious metals during the past decade has led to a flurry of new investors into gold and silver and opened up a market for many new investment products aimed at participating in the rally. Before choosing to invest in a silver ETF, here are several points to consider.

1. How Liquid is Your Investment?

Exchange Traded Funds (ETFs) trade like stocks, with prices fluctuating minute-to-minute. However, the average trading volume on many ETFs tends to be low. This means greater price fluctuations driven by trading, and a potential decrease in liquidity due to low volume. This means you may not be able to sell as quickly as you want at the right price. Look for ETfs with good volume.

2. Be Aware of Tax Consequences.

Gold and Silver ETF dividends are taxed by the IRS at a 28% tax rate as they are deemed collectibles. This rate is substantially higher than the 15% dividend rate stock investors currently enjoy. For some investors, this may not be a major problem. But if you have tax concerns, an ill-timed Silver ETF purchase may up your tax liability.

3. It Might Not Be a Direct Silver Investment.

Most Silver ETFs do not physically hold silver in a vault or warehouse someplace. You are actually investing in an index of silver contracts, mining futures, companies with mining interests, and other underlying investments that are not transparent to the average investor. This means that the trading price of the ETF will not necessarily correspond to the price of silver reported in financial publications or on the evening financial news.

To complicate matters, ETFs do have fees. While they are not technically hidden fees, it never occurs to many investors that they are paying a fee to a company which is built into their share price somewhere. Before buying a silver ETF, take the time to compare and contrast it with competing products.

Within the prospectus for all ETFs you should be able to locate the ETFs stated Expense Ratio. This percentage measures the actual cost you are paying in fees to the manager or investment company. The Expense Ration does not account for potential tax liabilities.

For many investors, ETFs are a solid, convenient way to access the precious metals markets. Before investing in any product, however, it is important to explore the less favorable aspects and understand the prospectus.

Shaun Connell is the author of a gold coins blog, where he coaches readers on investing in precious metals, like through the gold ETF. The blog is updated daily.

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