An ETF for a Sliver of Silver

Investors looking to diversify their portfolio with precious metals should consider the iShares Silver Trust ( SLV), an ETF that tracks the value of physical silver held for the fund in a London branch of JPMorgan Chase ( JPM). 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.

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) 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.

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