Many investors looking to diversify their investments away from stocks and bonds have done so by adding exposure to commodities to their portfolios. Silver is a particularly interesting commodity, in that it straddles the fence between the precious metals and base metals. Like gold, it's commonly used in jewelry, yet silver's relatively low price allows it to be commonly used in a variety of industrial applications as well.

There are several ways to invest in silver, such as by buying physical  bullion or futures contracts. However, many investors prefer to use exchange-traded funds. Below, we'll look at three ETFs that focus on the silver market, with an eye toward helping you decide which one might best meet your needs.

Silver ETF

Assets Under Management

Expense Ratio

1-Year Return

iShares Silver Trust (NYSEMKT:SLV)

$5.46 billion

0.50%

(5%)

Global X Silver Miners (NYSEMKT:SIL)

$436 million

0.65%

(13%)

ETFS Physical Silver Shares (NYSEMKT:SIVR)

$350 million

0.30%

(5%)

Data source: Fund providers, ETFdb.com.

A direct link to silver

Some investors want an investment whose value will rise and fall in direct correlation with changes in the price of silver itself. The iShares Silver Trust and ETFS Physical Silver Shares funds are designed to do just that -- their prices move in sync with the bullion price.

The iShares is by far the largest silver-focused ETF. The fund holds  physical silver to back its shares -- currently more than 316 million troy ounces. Originally, each share was equivalent to a full ounce of silver. But because silver bullion doesn't produce any income, the fund has had to sell portions of its holdings in order to pay expenses over its 12-year history. With its current expense ratio of 0.50%, the steady erosion in value has taken each share's proportional value to about 0.942 ounces of silver. That's why the share price doesn't match up with silver's price per ounce, although percentage changes for the shares on a day-to-day basis tend to be quite close to the fluctuations in bullion prices.

Several kilo-sized silver bars piled on top of each other.

Image source: Getty Images.

Similarly, the ETFS Physical Silver Shares ETF owns about 20.36 million troy ounces of silver in vaults in London, backing its 20.9 million shares outstanding. That means each share represents roughly 0.974 ounces of silver, reflecting the fact that annual expenses of 0.30% have gradually eroded their value since the fund's inception in 2009.

It's important to understand that even though both funds hold physical silver, neither gives its shareholders any right to obtain physical delivery of that silver under any circumstances. The silver merely backs the shares; there's no implication that one can trade in shares for bullion.

Betting on silver miners

The Global X fund takes a different tack. Rather than investing in bullion, it invests in the companies that mine silver. Historically, the movements of silver mining stocks have correlated substantially with moves in the price of the metal, but at the level of individual mining companies, operational issues (or the threat of them) can cause  share prices to move out of sync from silver.

By holding 25 different stocks in the industry, the Global X ETF seeks to reduce its exposure to company-specific risks. However, the top four holdings make up nearly half of the fund's assets, which diminishes the impact of its diversification. By holding shares of silver miners, silver streaming specialists, and other mining companies that concentrate primarily on different metals but that have extensive silver production, the Global X fund has produced long-term results that are roughly in line with silver's price moves -- albeit with somewhat greater volatility.

Which silver ETF is right for you?

The decision between direct silver exposure through a bullion-holding ETF, or an indirect silver investment that focuses on mining companies rests on two factors: your tolerance for risk, and your belief in the ability of miners to grow their operations. Between the ETFS and iShares funds, the greater liquidity of the iShares ETF outweighs its higher expenses for some investors, while others will prefer the more cost-conscious approach of ETFS. But each of these funds is worth a closer look if you're interested in capitalizing on silver in the years to come.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.