A recent commenter inquired as to how the silver exchange traded fund (ETF) works:

If the ETF iShares Silver Trust (SLV) goes under, do the holders of the ETF shares still have their interest backed by bullion? Is there any chance of default?

According to the frequently asked questions about the fund provided by iShares, the trust’s objective is to reflect the price of silver at any given time (minus expenses and liabilities). Funds like these make it simple for investors to own silver without having to provide the storage space for it.

If the trust were to terminate, the assets would be liquidated and distributed to the remaining shareholders. The trust will terminate in 2046 on the 40th anniversary of its creation, if termination doesn’t occur before then.

In the event of termination, holders would still have their interest backed by bullion, as the assets of the fund are segregated from the bank assets at Barclay’s Bank (the ETF’s provider) or the trustee of the fund, which is The Bank of New York.

The custodian is JP Morgan Chase Bank N.A., London branch. Both the trustee and custodian oversee deposits of silver and at times may hold cash from the proceeds of the sale of silver to pay the trust’s expenses. If there is more cash than needed to pay expenses, it’s distributed to shareholders’ brokerage accounts.

Any investment involves a measure of risk. The value of the shares will be adversely affected if the silver held in the trust is lost or damaged in a situation where the trust isn’t able to recover the loss. The custodian of the trust doesn’t have an obligation to replace lost silver under circumstances beyond their control.

There are situations in which the fund’s authorized participant isn’t able to redeem a basket of shares, which will reduce the liquidity of silver for all of the shareholders in the secondary market.

The FAQ and prospectus for the fund can be found on the iShares website.