Investors may not strike gold in silver ETF


Informist, Thursday, Dec 16, 2021

By Ajay Ramanathan

MUMBAI – Close on the heels of the Securities and Exchange Board of India issuing norms for launch of silver exchange-traded funds, several fund houses have queued up at the regulator’s doorstep with their proposals on such funds. 

Investment advisors, however, urge caution. For, all that glitters is not gold. And silver is definitely another story.   


SEBI had issued norms for silver ETFs last month. As per these norms, such ETFs must allocate at least 95% of their corpus to physical silver and silver-related instruments. 

These norms come 15 years after the securities regulator allowed fund houses to launch gold ETFs. 

Amid the euphoria around the new investment avenue, parallels have been drawn between silver and gold ETFs. Investment advisors have urged investors not to look at silver ETFs through the same lens, but understand the risks before investing. 

"Within the overall asset allocation of investors, there is only one commodity i.e. gold, in which investors can seek exposure via ETFs or fund of funds. Hence, silver becomes an additional commodity which can be included within 10-15% allocation to commodities," said Hemen Bhatia, deputy head – ETF, Nippon Life India Asset Management Ltd. 

The utility and appeal of gold and silver as an asset class differ sharply, which also means price movements may vary based on their distinct characteristics. While gold, which commands safe haven status, is not used industrially, 65-70% of silver usage is for industrial purposes and its demand is dependent on economic growth.

Being a monetary asset, the price of gold is influenced by interest rates and supply of money, whereas silver prices track industrial demand.

Since the COVID-19 pandemic broke out, most central banks, including the Reserve Bank of India, have increased their holdings of the yellow metal in the foreign exchange reserve basket.

As such, investors can allocate their portfolios to silver only if it is attractive from a demand-supply perspective, whereas allocation to gold is imperative during times of economic uncertainty. Simply put, silver should be considered part of the commodity investment mix by an investor, while gold is more of a hedge against inflation and other risks, and must have a distinct presence in the portfolio beyond commodities.

"During times of economic stress, gold tends to do well. That is the time when the central bank starts printing a lot of money to support the economy and therefore, gold tends to be in favour in those times," said Chirag Mehta, senior fund manager - alternative investments, Quantum Asset Management Co Pvt Ltd. 

"Today, the main usage for silver is in industrial and incrementally in solar technology, which is giving it the fillip. If there is a technology that emerges or any other metal that goes in to replace silver in solar panels/cells, silver may not do as well." 

Due to this volatile nature of silver, investment advisors say it is difficult to have more than a two- to five-year perspective on it, while one can have a long-term view on gold.

Since the beginning of this year, silver is down about 19% on COMEX. In comparison, gold is down 8%. This is also visible in the higher gold/silver ratio, which has risen to over 80, the highest since October 2020.

Over the long term, market participants expect gold ETFs to enjoy the lion's share of portfolio allocation to commodities. As on Nov 30, gold ETF assets in India stood at 181.04 bln rupees, according to data from the Association of Mutual Funds in India. Total assets under management of the mutual fund industry stood at 37.3 trln rupees. 

As of Wednesday, gold-focused schemes have generated trailing returns of 4.27% in the past 10 years, according to data from Value Research. 

In the US, assets in the silver ETF category are at around $16 bln, while gold ETFs are worth nearly $54 bln.

Some market participants say there is high investment demand for silver in India, especially in tier-II and tier-III cities, where jewellery and other articles made from the white metal are bought in large quantities.

By purchasing units of silver ETFs, investors will be able to invest in the precious metal at a lower price and can accumulate these units over time by way of systematic investment plans. Also, they do not have to worry about storage, insurance costs or the quality of the commodity, which is not the case if one were to invest in physical silver. 

"Silver is bulky and storing it is difficult for investors. Silver ETFs will have economies of scale; which will reduce storage and insurance costs and allow investors to participate in silver in a cost-effective manner," said Chintan Haria, head – product development and strategy, ICICI Prudential Asset Management Co Ltd. 

Nevertheless, there is scepticism on whether the product will be able to make a splash beyond the metro cities, especially because of the sentimental value attached to buying gold and silver; Indians tend to hold gold more in jewellery form than in coin or bullion form.

"Even for gold ETFs, assets under management are still a negligible portion of the physical gold held by households. Demat penetration, though improving, is still low for the majority of the population," said Kedar B., fund manager, Composite Investments Pvt Ltd.

"People's behaviour and preferences take time to change. Despite the advantages of investing in precious metals like gold and silver through ETFs, it is unlikely to have a major impact in the near term on consumption patterns and preferences," he added.

While the yellow metal has already shown the way to investing through the exchange-traded fund route, silver will have to attract investors on its own merit.  End

US$1 = 76.09 rupees

(With inputs from Sayantan Sarkar)

Edited by Avishek Dutta

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