Mutual Funds

What works and what does not in silver exchange-traded funds

Mutual fund houses have been rushing to apply for silver exchange-traded funds (ETFs) after the markets regulator, the Securities and Exchange Board of India (Sebi), allowed these instruments to be introduced in India. These ETFs are passively managed funds that will be investing a big portion of their assets in physical silver and tracking its performance as close as possible to the price of the commodity. We asked experts whether this new investment instrument will help home buyers.

Chintan Haria, head – product development and strategy, ICICI Prudential AMC: When it comes to investing in precious metals, globally investors opt for gold and silver metals through ETF or other investment formats. This is because they are considered as a store of value and have very limited co-relation with other asset classes. This could be seen even during the onset of the pandemic when equity markets corrected, inflows into silver ETF and silver related instruments, especially in the US, had improved owing to its role as a hedge in times of uncertainties.

In India, traditionally, people have been investing in gold and silver in the physical format. Since silver is bulky in nature and hence difficult to store, we believe the ETF form will be one of the preferred ways for investors. By investing through silver ETFs, investors need not worry about purity or quality of the underlying asset and is also free from storage related hassles. Also, liquidity and price efficiency is likely to be better as compared to traditional options.

Given its low correlation with other asset classes, investors can consider taking exposure to silver as a part of their portfolio diversification exercise. Investors can consider a 5-10% allocation to silver as a part of their portfolio.

Priti Rathi Gupta, founder, LXME: Silver ETFs can help in diversification of the portfolio as silver has been a precious metal, after gold, to hold the eyes of investors. This is because the asset management companies (AMCs) will have to invest at least 95% in silver and silver-related instruments. Investors that shy away from the complexities of futures contracts and the dangers that are associated with them could find this mode more comfortable. Since the norms continue with the same practice of making AMCs own 99.9% pure silver bars, this fund can eliminate the issues of contango and backwardation and give investors more realistic pricing of the metal it holds.

They will be able to buy silver ETFs without worrying about purity, risk, storage or insurance. There is now uniformity in these product specifications. This makes investing in silver easier, accessible and transparent for investors, who will benefit from professional fund management.

Among cons, since silver ETFs are new to the market, there may be chances of lower liquidity due to demand and supply conditions. Certain costs associated with purchasing an ETF, such as brokerage fees, the AMC’s expense ratio and tracking error, can all contribute to the investor’s costs and hence impact the overall returns. Silver ETFs brings a lot of positive changes to investors.

Chirag Mehta, senior fund manager – alternative investments, Quantum AMC: Silver is more a tactical allocation as opposed to gold, which is more a strategic allocation for portfolio diversification. It’s not poor man’s gold, it’s a very different exposure. This is because over 65-70% of the usage of silver is in industrial applications, which should ideally do well when the economy is doing well, and therefore, its demand, which brings to you a similar economy exposure that your equity allocation would provide.

Given the volatility and the resulting high bid-ask spread variations may need the enabling provision of tapping into exchange as a source of liquidity which has been provided for. Capping gross exposure to 100% helps as it will keep risks contained. On the other modalities, while LBMA silver daily spot-fixing price has been chosen as the benchmark for silver ETFs, the same hasn’t been stipulated for the valuation of the fund’s assets where it is expected to ascertain the fair market value which would largely be the price operational in the domestic markets. Many times there is a disparity between the LBMA equivalent Indian rupee-denominated silver prices and domestic prices. This differential might result in higher tracking error, which is nothing but an anomaly in comparison. Prices for both benchmark and valuation should be aligned. The regulator has proposed the appointment of a dedicated fund manager for commodity-based funds like gold ETFs and silver ETFs. We believe that since these products are passively managed there isn’t a need for a dedicated fund manager or the list of funds may not be restricted to only include commodity funds for that fund manager. However, we do agree that such fund managers should have adequate knowledge and understanding of the commodity markets.

Rishad Manekia, founder and managing director, Kairos Capital: In the last couple of weeks, a few AMCs have launched silver ETFs. But just because an AMC has launched a fund, does not make it a good idea for an investor to invest in it. There has been a rush to launch new fund offers to capture the recent boom in the markets. The question an investor needs to ask is whether such a fund fits into his or her assets allocation and can help achieve a financial objective or goal. When we think about portfolio allocation via asset allocation, a majority of the portfolio should be allocated to a diverse mix of equity and fixed income instruments with the mix being determined by the investors risk profile and time horizon. Gold also forms part of the portfolio sometimes, but the allocation is typically capped at 5-10% of the portfolio. A silver ETF or even a commodity fund can be thought of as a substitute or a complement to that part of the portfolio where gold is typically allocated. So, for the retail investor, given that the allocation to the overall portfolio is small, it might be better to stick with gold.

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