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Silver ETFs: Is It The Investor’s Silver Lining?

by tavaga
Silver ETF

By: Tavaga Research

Shakespeare’s play “The Merchant of Venice”, symbolized the ‘silver casket’ as ‘a more cautious greed’. Silver may not be as lustrous to our eyes as gold but it is no less either. In much antiquity, silver was highly valued and used to create jewelry, tableware, figurines, ceremonial artifacts, and rough-cut pieces known as hacksilver, which could be used in a trade or to store fortunes. Silver has maintained its status quo in the present times as well.

However, many people are unaware that we do not need to interact with physical silver to unleash its inherent value. Silver ETFs (exchange-traded funds), for example, is a great way to invest in silver’s ageless appeal. Silver ETFs are priced similarly to physical silver and do not have the downsides of physical silver.

In September 2021, SEBI permitted Indian mutual fund houses to invest in Silver ETFs. Several mutual fund companies such as DSP MF and HDFC MF decided to introduce their own Silver ETFs/FOFs. Aditya Birla Sun Life MF, Nippon India MF are ready to launch Silver ETF and Silver ETF FOFs from 13th January. ICICI Prudential MF started its NFO on 5th January 2022 and will close its subscription on 19th January. A minimum investment of Rs 100 is required for ICICI Prudential India Silver ETF FOF and in multiples of Rs 1 thereafter.

After closing with NFO, these ETFs will get listed on the stock exchange, and investors will be able to buy and sell using a demat account.

SchemeStart DateEnd Date
ICICI Prudential Silver ETF05th January 202219th January 2022
Nippon India Silver ETF13th January 202227th January 2022
Aditya Birla Sun Life Silver ETF13th January 202227th January 2022

These schemes will invest in silver and silver-related instruments to generate returns in line with physical silver performance. 

Exchange-Traded Funds (ETFs)

ETF is a type of investment fund that trades on an exchange. It is a passive investment that tracks indices, sectors, and commodities. 

Nifty 50 ETF tracks the NIFTY 50 index by investing in securities comprising the NIFTY 50 Index in the same proportion as the index. Usually, ETFs are in the form of an index fund and are similar to a mutual fund. The only difference is that investors can trade it live on stock markets throughout the trading hours.

Silver Exchange Traded Funds (ETFs)

Silver ETF closely tracks the silver price and is expected to be more liquid than the metal itself. It is favorable for those investors who want to hedge against inflation or opt for safe haven during equity market downturns.

Each unit of share in the Silver ETF fund corresponds to a precise quantity of silver, making it convenient for investors wanting to hold the underlying metal without worrying about theft, storage cost, and insurance charges. 

Silver ETFs hold silver metal or silver-related instruments, not the stocks of mining silver or related business companies. Consequently, the performance of Silver ETF is based on changes in the domestic price of silver (referred to as LBMA Silver daily spot-fixing price).

Silver Fund of Funds FOFs

Fund of funds, commonly FOF, is a fund that invests in other mutual fund schemes giving investors exposure to mutual funds via indirect way. Motilal Oswal Nasdaq 100 FoF, Kotak Nasdaq 100 FoF are examples of popular FoFs in India. 

Silver FoF invests in the in-house Silver ETF scheme. Silver FoF is a better tool for those who do not wish to use the demat mode to buy the silver ETFs. However, the expense ratio of Silver FoFs will be slightly higher than Silver ETF. 

Key Features of Silver ETF

  • Based on Physical Silver:  The funds collected from Silver ETFs will go towards buying physical silver commodities or silver-related instruments. Silver ETFs are benchmarked to silver prices based on London Bullion Market Association or LBMA’s daily spot-fixing prices. Mutual fund companies will buy 30 kg silver bars of 99.9% purity as per LBMA standards.
  • Expense Ratio: AMCs are most likely to charge around or below 0.5-0.6%.
  • Listed on Stock Exchange: Investors can easily buy and sell units of Silver ETFs from a stock exchange such as NSE and BSE. One needs to open a Demat account to start trading in the asset.
  • More Liquidity: Holding silver in ETF form is going to provide more liquidity than holding the commodity itself. Funds have to appoint market makers to ensure ample liquidity on the exchange.
  • 95% Silver Assets: Mutual funds that opt to offer Silver ETFs have to invest a minimum of 95% of funds proceeds to buy silver and silver-related instruments as per SEBI guidelines.
  • Tracking Error: It is the difference between the returns on benchmark and ETF scheme. This error should ideally not exceed 2 percent.
  • No Theft or Storage Hassle:  With the commodity held in paper form in Demat account the fear of theft or cost associated with storage of commodity doesn’t arise.
  • Hedge against Inflation: It can provide a hedge against rising prices as the price of silver moves along withinflation.
  • Diversification Benefits: Silver depicts low correlation with other asset classes hence providing diversificationbenefits.
  • Tax Rate: Income tax slab rate will be applicable on return of Silver ETFs if sold within three years of purchase. After which, 20% tax will be charged under long-term capital gains (LTCG) tax with indexation benefits.

Silver as a Commodity

Silver is considered a precious metal and is also used as an industrial metal for producing various goods. Industrial demand comprises more than 50% of the demand for silver. It can create confusion regarding investment in silver-related products.

Silver performs well when industrial demand rises or during an economic peak but suffers a loss when the market is facing turmoil. The demand and supply of silver determine its price in the market. Its demand can be affected by economic slowdown as because of the less production of goods in the economy, demand for silver slows down, leading to a downfall in its price. Its demand also depends upon geopolitical events, global financial situation, inflation, and discovery of mine or plant shutdown.

Diversification Benefits

According to a Morgan Stanley report, silver presents a moderately weak positive correlation to stocks, commodities, and bonds. On the other hand, Gold has less correlation with stocks and is considered a better diversifier. The correlation table below shows the movement of these instruments in the market. Correlation ranges from -1 to 1, 1 being a perfectly positive relation between the two assets, and -1 showing a perfectly negative relationship.

Silver can help reduce the portfolio’s overall risk by providing diversification benefits due to low correlation with stocks and bonds. It also hedges investors against the risk of inflation. During the economic revival, it gives better returns over a long period as compared to gold. 

Steps to invest in Silver ETFs

Step 1 – Open a Demat account with a broker by providing necessary documents for registration. Look for a broker with low brokerage and ease of transactions.

Step 2 – To start trading login to the Demat account and add funds

Step 3 – Choose the Silver ETF to buy (The silver ETF isn’t yet listed on bourses)

Step 4 – Select the number of units to purchase and place an order

Step 5 – Demat account will be debited for ETF trade and brokerage

Step 6 – Demat account will be credited with the units of Silver ETF 

Allocation and Investor Suitability

Gold ETF has been in Indian markets for a long time and is considered a safe haven by many. Silver ETF is somewhat new to the market. Both likely provide a hedge against volatility in equity markets and protection from inflation.

However, silver can be more volatile than gold. One of the reasons is that institutional investors such as central banks, government, pension funds, etc. hold a vast amount of gold worldwide. As it is held for a long period, it imparts stability to gold prices.

As silver is sometimes considered an alternative to gold, its prices get affected by gold prices. Further, fluctuation in industrial demand creates volatility; low cost could be one of the reasons for the same.

Silver futures’ returns are more volatile than gold futures’ returns. A conservative investor should invest less in silver vis-à-vis gold given the high risk in silver.

Monthly Returns on Gold vs Silver

Silver shows 2 to 3 times volatility compared to gold on a given day. Moreover, over a longer term, these commodities fail to outperform equities. 

Monthly returns on silver futures and Nifty 50

Silver and gold will serve different needs of the people; retirees looking for higher stability in return can opt for gold ETFs. To take diversification benefits, investing 5-10% of your portfolio in gold and silver together can be considered. Therefore, investors seeking long-term investment to benefit from silver’s future potential, and also seeking diversification can invest in Silver ETFs.

Given the safe haven feature of silver, conservative investors should invest more in silver ETFs as compared to aggressive investors. The beta of equity has been higher than silver hence silver would suit conservative investors more. However, the returns given by silver futures are getting more volatile starting 2019 and it’s becoming riskier to invest in silver. If conservative investors have allocated 10-20% of their corpus to commodity ETFs, then they can invest the majority in gold ETFs if they are risk-averse and a part of it can be invested in silver ETFs. 

Aggressive investors can allocate less or consider not investing in silver ETFs as taking an exposure to silver could dilute their overall portfolio. For aggressive investors, not more than 20% should be allocated to gold, fixed income, and silver. If there’s room for a new asset in the portfolio after taking into consideration the asset allocation model an investor follows, only then one should buy silver ETFs. 

Investors should maintain a cautious approach while investing in Silver ETFs as the demand for silver comes from industrial houses and it can affect silver prices during economic turmoil making it risky to invest in the asset. 

Moreover, it doesn’t provide much of the diversification benefits because of moderate correlation with equity stocks and has sometimes failed to protect from inflation. Therefore, following a cautious approach is the better way to deal with the uncertainties of the new asset class and the market.

Better way would be to consult a SEBI RIA before considering any investment in Silver ETFs/FoFs.

Disclaimer: The above write-up is only for informational purposes. Do not treat it as an advice to buy.

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