How to Invest in Silver With Mutual Funds, ETFs, and ETNs

What to Know Before Buying Into This Precious Medal

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Silver has enjoyed a long history in investing. Investors love silver because its reputation as a precious metal to invest in is second only to gold, and they see it as a solid hedge against inflation.

The best way to invest in silver is to gain exposure to the price of this precious metal through mutual funds, exchange-traded funds (ETFs), or exchange-traded notes (ETNs). But before investing in silver funds, investors should learn the benefits and strategies of buying precious metals.

How to Invest in Silver

Silver as an investment has similar purposes as gold. There are industrial uses for silver, such as jewelry, but the price is driven primarily by supply and demand, as well as investor speculation. Typically, precious metals such as gold and silver are in higher demand when there is widespread uncertainty about currencies, especially with that of the U.S. dollar.

Silver is often used as a hedge against currency fluctuation or as a store for cash during times of economic uncertainty and unrest.

The silver market is much smaller than the gold market, which makes for higher volatility (fluctuations) in price. Therefore, investing in silver can be risky for most investors, which is why investing relatively small portions—such as 5% or less of an investor's total portfolio—may be wise for diversification purposes. Some investors prefer to buy precious metals, such as gold, silver, platinum, and copper, in the physical form of bullion coins. Others prefer to buy shares of mining company stocks or mutual funds, ETFs, and ETNs.

Silver Investing With Mutual Funds, ETFs, and ETNs

Most mutual funds do not hold silver as a physical asset. Investors can get indirect exposure to silver in mutual funds by holding equity precious metals funds, such as Aberdeen Standard Physical Silver Shares ETF (SIVR) or Invesco DB Precious Metals Fund (DBP). ETFs like these typically have more exposure to stocks of gold mining companies than to silver and silver mining companies.

If you want the most direct exposure to silver, you will need to use a silver ETF, such as iShares Silver Trust (SLV). Investors can also use an Exchange Traded Note (ETN), such as VelocityShares 3x Long Silver ETN (USLV), as an alternative.

It is important to note that ETNs are debt instruments, like bonds, that do not invest in any asset. Although linked to the performance of a market benchmark, ETNs are not equities or index funds.

The Bottom Line on Investing in Silver Funds

Generally, the best way to invest in silver is through ETFs or ETNs, not mutual funds. The reason for this is that most investors typically want exposure to the price of silver, rather than stocks of companies associated with silver mining and manufacturing. ETFs and ETNs often track the price of silver. However, most precious metals mutual funds do not.

As always, investors should use caution with all investment securities, especially those that they do not completely understand. Also, because of the speculative nature of silver and other precious metals funds in the market, investors should avoid short-term market timing strategies. Precious metals funds can be best used as long-term diversification tools and should allocate small percentages, such as 5-10% of the portfolio, to such securities.

Disclaimer: The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.