Reddit’s excitable gamblers and other retail investors suffering from delusions of grandeur (and I’m uniquely qualified to diagnose that, by the way), didn’t succeed in cornering the silver market, but they did manage to force a prospectus tweak in the iShares Silver Trust.
Whether this is “news” or not is largely in the eye of the beholder, but it’s unequivocally funny.
This was documented by Katherine Greifeld on Tuesday. When I saw it, I scribbled a note to myself to mention it. If nothing else, it’s good comic relief and depending on the circumstances, it could be material at some point. The following excerpt from the prospectus contains “updates,” Greifeld noted:
Market speculation in silver could result in increased requests for the issuance of Baskets. It is possible that Authorized Participants may be unable to acquire sufficient silver that is acceptable for delivery to the Trust for the issuance of new Baskets due to a limited then-available supply coupled with a surge in demand for the Shares. In such circumstances, the Trust may suspend or restrict the issuance of Baskets. Such occurrence may lead to further volatility in Share price and deviations, which may be significant, in the market price of the Shares relative to the NAV.
Is that something that’s worrisome? Well, maybe. It suggests the vehicle could conceivably cease to work “right” (to put it colloquially) should demand “decide” to take off again. Large premiums and/or discounts to NAV are an issue, in my view, although that’s probably not how the ETF industry would describe them.
The volatility of flows for the silver product was on full display recently. You might recall that SLV raked in a massive haul during the retail crowd’s initial offensive. That reversed in pretty dramatic fashion (red bar in the figure below).
I don’t know what you want to call that — if the initial inflows were an “offensive,” I suppose that’s a “retreat.”
Whatever the case, this kind of thing isn’t generally healthy, and the prospect of the product being forced to constrain “normal” functioning due to the whims of the crazed masses speaks to some of my longstanding concerns about ETFs more generally.
Please, I implore readers, don’t misconstrue my point. This isn’t an attempt to stoke fear about ETFs.
It’s just to say that there are limitations to what can be accomplished with financial engineering. We’ve all taken a turn singing the praises of ETFs at some point — or at least those of us who are honest about their unequivocal benefits, as long as we’re talking about products that aren’t facilitating undue speculation or exposing retail investors to risks they don’t understand.
The issue is just that all ETFs are, in some sense, derivatives. It’s all financial engineering. You can quibble with that characterization all you like, but it’s accurate. And it’s even more accurate depending on the ETF. In this case, a share of SLV is definitely not a piece of silver. Irrespective of what it potentially represents, a number on a screen is just pixels. And pixels aren’t hunks of white metal. What you’re buying in these products are abstractions.
Take that for whatever it’s worth.