Questions to answer before you invest in a Silver ETF

By Ravi Samalad |  26-01-22 | 
 
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About the Author
Ravi Samalad is Assistant Manager - Editoral for Morningstar.in.

Mutual fund investors now have one more asset class to diversify their portfolio in commodities beyond gold.

Securities and Exchange Board of India (SEBI) paved way for Silver ETFs in November 2021 by issuing operating guidelines for fund houses. Following this, a slew of fund houses have lined up Silver ETFs and fund of funds (for investing without a demat account).

What are Silver ETFs? Like Gold ETFs, Silver ETFs track the prices of silver. These ETFs will invest at least 95% of net assets in silver and Exchange Traded  Commodity  Derivatives (ETCDs) having silver as the underlying. These funds are benchmarked against the price of silver (based on London Bullion Market Association, or LBMA, Silver daily spot fixing price).

Price of silver ($) 

(Source: LBMA) Click on the image to enlarge.

The average price of silver is down from  30.41$ in December 2011 to  22.46$ in December 2021.

Tracking error

Just like other ETFs, Silver ETF will have a tracking error (the annualised standard deviation of the difference in daily returns between physical silver and the NAV of Silver ETF). A tracking error of 2% is permitted by SEBI.

Exit load

Like Gold ETFs, silver ETFs are listed on the exchanges and carry zero exit load.

Use of silver

Silver is used in a variety of industries and has diverse applications. It is used in making solar panels, medical instruments, switches, electronics, satellites, photography, silverware, coins/medals, jewellery, and so on.  The bulk of the demand comes from industrial usage.

Demand for silver

Chintan Haria, Head Product & Strategy, ICICI Prudential AMC, believes that the prices of silver could go up on the back of increased demand from economic uptick.

“As most of the world's economies are out of the lockdown and business activities have started gaining momentum, demand for silver has risen from all corners — be it investors, manufacturing, jewellery, or silverware industries. Industrial demand for silver, in particular, as a proportion of total demand has increased due to its increasing application in modern environmentally friendly manufacturing. Electronic mobility and appliances, for instance, account for the most consumption of Silver indicating increased future demand as more renewable energy and mobility solutions are adopted. The collective impact of all these factors is likely to push the prices of the white metal higher.”

Difference from gold 

How is silver different from gold as an asset class? While silver and gold both are classified as precious metals, silver’s demand is driven by industrial usage while gold is majorly used for making jewellery and gold bars.

Dev Ashish, Founder Stable Investor, explains, “Unlike gold, silver has a higher industrial usage and hence, is a lot more sensitive to economic cycles. When the economy sees an uptick, the silver demand tends to grow during that period. So we can consider silver as a portfolio diversifier with a small positive correlation to economic growth (and the resulting rise in equities). Gold on the other hand is practically uncorrelated to other major asset classes.”

Taxation 

  • Sold before three years: Slab Rate
  • Sold after three years: 20% LTCG with indexation

Should you invest?

Dev says that silver can be a tactical play or a long-term holding depending on the investment objective of investors but the allocation should be minimal. “My view for most of my clients (from conservative to moderately aggressive ones) is that precious metals should be part of their long-term portfolio. But the allocation should not be a very large one and should be limited to 5-15% of the overall portfolio.

Within this, gold should have a larger share as it’s a better hedge, has a lower correlation with other assets, and is much better insulated during slowdowns. So within the precious metals portfolio of an investor (lets’ say with 10% allocation), one can have 7-10% in gold and a nil-to-smaller 0-3% in silver. For aggressive clients and traders (who are sure about what they intend to achieve in the short-medium term), they can have higher allocations to silver. For them, silver is more of a tactical play due to its higher volatility which is better suited for short-term strategies.”

Some distributors are refraining from recommending silver to their clients.

Vinod Jain of Jain Privy Client says, “We are not recommending investing in Silver ETFs. Indians have invested in precious metals traditionally. They keep buying this metal on every occasion. People who don’t invest in precious metal can use this vehicle to diversify a small portion of their portfolio.”

“We are still in wait and watch mode because it is a recently introduced asset class in the mutual fund industry. We need to understand the client portfolio first and see if the positioning is possible or not. Silver is more volatile than gold. So we are not started recommending it right now. But as an investment option, hedging the portfolio around 5% can be allocated to silver. If you have 10% allocation to commodities, 5% can be allocated to gold and 5% to silver,” says Viral Bhatt, Founder, Money Mantra.

To sum up, silver should not be a core part of your allocation. It can be used as a diversifier.

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Ravi Samalad
Feb 4 2022 06:17 PM
 Hi Mr. Iyer,

Thanks for sharing your view.

Your investment horizon, risk appetite, and asset allocation should help you decide how long you wish to hold Silver ETFs. It can be used for both tactical and long-term investing to diversify your portfolio.

We advise you to consult your financial adviser to help you decide on the optimal exposure and the tenure of holding.

Regards
Ravi
Badrinath Iyer
Feb 3 2022 09:44 PM
 Comments Hi I read your note on Silver ETF. Could you please tell me more clearly as your blog is not that clear. You have mentioned Long term as well as short term. Does this mean Silver ETF 1) Can be added in portfolio for long term for a decent gains or 2) Can be used for short term small gains for day term traders. or 3) Silver ETF acts for both Long term around 3 years for decent gains and for day traders for short term transactions for small gains. Your blog is confusing.
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