iShares Silver Trust

Moat: 1/5

Understandability: 1/5

Balance Sheet Health: 5/5

Silver ETF that aims to track the performance of the silver market and is backed by physical silver bullion stored in the custodian’s vault.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Explanation:

iShares Silver Trust (SLV) is not an operating company in the traditional sense. Instead, it’s an exchange-traded fund (ETF) structured as a grantor trust. Its primary function is to provide investors with exposure to the price of silver, without requiring them to directly hold the physical metal.

  • Revenue Distribution: SLV does not generate revenue from business operations. Instead, its income stems from interest income earned through the rehypothecation of its silver holdings and by selling part of the silver holdings. These revenues pay the expenses of running the Trust, including the sponsor’s fees, custody costs, administrative costs, and any other associated expenses.
  • Trends in the Industry: The demand for silver is driven by both industrial use and investment demand, both of which fluctuate with macroeconomic factors and investor sentiment. The demand for silver is influenced by its applications in industrial and technological contexts like electronics and solar panels. As a precious metal, it is also used for jewelry and silverware, which are less reliable demand drivers, but more stable. Investment demand for silver often rises when investors seek a safe haven asset in times of market uncertainty or high inflation.
  • Margins: As a grantor trust, SLV does not operate with margins in the traditional sense. Its income is primarily used to pay fees and expenses related to its operations. However, this relationship means the fund’s expenses impact its total performance.
  • Competitive Landscape: The competitive landscape is largely defined by other similar silver investment vehicles (both ETFs and physical bullion products) and more generally gold investment products. However, there is little competition when you think about the silver market, where price is driven entirely by the supply of silver, and demand of the commodity, not any one individual business. There are more than one ETF tracking silver prices.
  • What Makes SLV Different: Its main differentiator lies in its structure as a fully physical silver-backed investment product. Unlike some ETFs that track commodity prices through derivatives, SLV holds physical silver bullion in a secured vault.

Latest Trends: The latest report on SLV, provided through its 10-Q and 10-K filings reveal an ongoing trend in silver prices due to a mix of macroeconomic and geopolitical factors. A notable increase in net realized and unrealized losses in the last 6 months of 2023, is entirely linked to silver price and not to any operational failings of the company.

Financial Analysis:

SLV does not have traditional financial statements like an operating company. It produces a Statement of Operations (similar to an Income Statement) that reflects how silver is traded, costs, and changes in market price.

  • Assets: SLV’s assets primarily consist of physical silver bullion held at various custodians. In addition, they have assets associated with certain liabilities like the liability associated with unallocated silver.
    • At the end of December 2023, total assets equaled $10.9 billion.
  • Liabilities and Equity: SLV’s liabilities are limited to expenses, including the sponsor’s fees, custody charges, other operating costs, etc.
    • At the end of December 2023 total liabilies equaled 0.008 billion.
  • Net Assets: The difference between assets and liabilities is reflected in Net Assets.
    • At the end of December 2023 Net Assets equaled $10.93 billion.
  • Statement of Operations: The main items in the Statement of Operations are:
    • Expenses: Consists mainly of sponsor fees, but other expenses such as interest expense and transaction costs can exist. They also can include taxes. In the first 9 months of 2023, they were 46.7M USD.
    • Net investment loss/gain: is where the price fluctuation of the silver itself affects the statements. In the first 9 months of 2023, SLV posted a net investment loss of 46.8M USD.
    • Share redemption / Issuance: This affects the net assets of the fund and should reflect actual movements in investor activity. This can be either cash flow in or out of the company.
*   SLV experienced a decrease in Net Assets between Q1 and Q3 2023 as a result of negative net investments and a net investment loss, while still posting a total net gain from operations over 2022.

Moat Rating: 1 / 5

SLV does not possess a moat. It’s a vehicle for tracking silver prices, not a business that has any control of its profits or a competitive advantage. Therefore, its profitability will be heavily reliant on the underlying silver market. Any perceived “moat” can be attributed to factors that the vehicle cannot truly control, such as supply dynamics, demand, or investor sentiment. This rating is assigned due to the ETF’s reliance on external market conditions and its lack of sustainable competitive advantages.

  • No Control Over Pricing: SLV has no ability to influence silver prices, and is thus heavily reliant on the whims of the market.
  • No Product Differentiation: SLV is largely indistinguishable from other similar silver-tracking ETFs in terms of its holdings.
  • No Switching Costs: There is minimal difficulty for an investor to move from SLV to another silver ETF or any other instrument if he feels his needs or requirements have changed.
  • Limited to Zero Barriers to Entry/Scale: An ETF like SLV is easy to replicate. So, if there was a profit to be made by a rival ETF competing with SLV, it would be very easy to do. There is no economy of scale at play for this kind of investment vehicle.

Risks That Could Harm the Moat and Business Resilience:

SLV has no moat so it could be easily undermined by external market forces, or a rival ETF. The main risks it faces are as follows:

  • Fluctuations in Silver Prices: SLV’s value is closely tied to the volatile nature of silver prices. It is inherently sensitive to changes in supply and demand dynamics. Demand in particular is driven by various and sometimes contradictory factors like inflation/deflation, economic growth, supply constraints, and technological advancements. Any sudden drop in the price of silver would result in a loss to investors.
  • Market Sentiment: Investor sentiment towards precious metals can shift suddenly, causing sharp price fluctuations that may force some investors to liquidate.
  • Counterparty Risk: The risk associated with counterparties to the custodian of the silver is real. Although efforts are made to ensure the custodian is of good standing and has appropriate insurance, there’s still a (very remote) risk they could go bankrupt, making it hard to liquidate or sell the silver.
  • Regulatory and Political Risks: Changes in regulations around the trading of precious metals and any action taken by authorities could affect SLV’s ability to operate. Governments may take some actions which can materially impair the value of the silver which would be bad for SLV’s shareholders.
  • Tax Implications: Changes to the tax code might affect the price of silver and returns on investment. New taxes or regulations may suddenly arise making investment in SLV less attractive than other securities.

Understandability: 1 / 5

SLV is a very simple business to understand. It tracks the silver market and has no complex business structure, that a normal investor might not understand.

  • Clear and Simple Purpose: The fund’s objective—tracking the price of silver—is straightforward.
  • Transparent Operations: Its operating model is based solely on holding physical silver and it primarily has a single income component.
  • Limited Management Influence: There are very few decisions taken by the company’s management that can affect the performance of the investment. Performance is solely dependent on the price of silver.

Balance Sheet Health: 5 / 5

SLV’s balance sheet is incredibly healthy due to its nature of holding physical silver, which represents its primary asset.

  • High liquidity: The company has no long-term illiquid assets or debt
  • No Leverage: The company doesn’t use debt and it’s operations are not influenced by financial leverage.
  • Simple structure: Its balance sheet is essentially just the price of silver minus the fees that they pay to operate the fund.
  • Consistent performance: In the long term, the return of the company tracks the price of silver.

In conclusion, iShares Silver Trust is a simple but volatile investment vehicle.