Investors looking to diversify their portfolio with precious metals should consider the iShares Silver Trust (SLV) - Get Report, an ETF that tracks the value of physical silver held for the fund in a London branch of JPMorgan Chase (JPM) - Get Report. While silver shouldn't amount to a large segment of an investor's portfolio, a small position in silver helps to diversify stock-heavy holdings.

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If you want to go with silver, SLV is the place to be. It is large, with more than $4 billion in assets, and liquid, with an average daily trading volume of 9.4 million shares. The size of the fund facilitates trading and investors won't have a hard time getting in and out of SLV. While the PowerShares offering

DB Silver Fund

(DBS) - Get Report

tracks a pool of futures contracts, SLV tracks physical silver -- the kind you can pick up and look at. SLV's methodology skirts the difficulties that can arise with trading futures contracts and has the added benefit of actually having a physical stock of the commodity you're invested in.

Before SLV, retail investors were limited to using silver mining stocks and some precious metals mutual funds to gain exposure to the price of silver. The alternative was to buy items, like jewelry and coins, which can be impractical to buy and store. Institutional investors had the option of investing in silver futures contracts, like the ones that make up DBS, if they were not restricted from using derivatives.

A stronger dollar has recently caused a resistance level in gold and silver prices. The trend of a rising dollar and falling silver prices is one that prospective SLV investors should be attuned to. Consumer price index numbers released Wednesday may have temporarily eased inflation fear and the dollar fell in Wednesday trading while silver and gold rebounded. The inflation question is still at large, however, as investors worry that the unfurling of the stimulus package and subsequent flood of cash could drive inflation higher.

The downside to SLV is the potential volatility. Silver has more industrial applications than holdings like gold and will, therefore, be more susceptible to the tide of the economy. If the industries that use silver for their products falter, shares of SLV could falter along with the price of the commodity. It is also notable that SLV does not have the same tax benefits as many ETFs since it is taxed as a collectible. Investors who are used to paying a maximum capital gains rate of 15% might be surprised to find that SLV can be taxed at a maximum rate of 28%.

At the time of publication, Dion was long SLV.

Don Dion is the publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

Dion is also president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.