iShares Silver Trust (ETF) (SLV), Sprott Physical Silver Trust ETV (PSLV): The Investor’s Guide to Silver ETFs

Futures funds

Futures funds are a little different. Rather than hold physical silver bullion in a vault, these funds hold futures. Futures are financial contracts that obligate the buyer to purchase an asset, in this case silver, at a predetermined time and price. Futures funds track the price of silver closely, but may deviate due to nuances of the futures market like contango or backwardation.

The benefit of futures ETFs is that they’re taxed at a blended rate between short-term and long-term capital gains. This blended rate is typically lower than physical bullion products.

Exchange Traded Notes

Exchange Traded Notes, or ETNs, represent unsecured debt from the issuer. But rather than paying a fixed rate of interest, returns are determined by changes in the value of an index.

The benefit of this fund structure – profits are taxed at a lower rate because they’re treated as capital gains rather than collectibles. The draw back – ETNs expose investors to the credit risk of the underlying issuer.

UBS E-TRACS CMCI Silver ETN : UBS is the only company to offer a silver ETN. But investors should be warned. This fund has less than $25 million in assets making it extremely illiquid.

Foolish bottom line

So historically, which type of fund has performed the best?

Let’s consider an investment period between January 31, 2010 and January 31, 2013. During that time, spot silver prices increased 92%.

At first glance it appears the iShares Silver Trust (ETF) (NYSEMKT:SLV) is the best investment choice. During that time period, the fund most closely matched the underlying commodity returning 91% for investors.

Of course Uncle Sam wants his cut. After factoring in taxes, the UBS E-TRACS CMCI Silver ETN actually outperformed its peers returning 72% for investors in the top tax bracket.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Robert is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article The Investor’s Guide to Silver ETFs originally appeared on Fool.com is written by Robert Baillieul.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.