NEW DELHI: Investors in India now have a new investment option in Silver Exchange-traded Funds (ETFs). Silver ETFs will finally be a reality 14 years after the first Gold ETF was launched in 2007 by Benchmark Asset Management Company, which was later acquired by Goldman Sachs Mutual Fund.
The Securities and Exchange Board of India (Sebi) has paved the way for the Silver ETFs after it recently came out with operating norms for silver ETFs.
The basics norms
According to the new norms, the objective of Silver ETFs would be to generate returns that are in line with the performance of physical silver in domestic prices, subject to tracking error. A silver ETF scheme should invest at least 95% of the net assets value in silver and silver-related instruments. The ETFs should be benchmarked to physical silver of standard 30 kg bars with fineness of 999 parts per thousand (or 99.9% purity) confirming to London Bullion Market Association (LBMA) good delivery standards.
The new norms require physical verification of silver underlying the Silver ETF units be carried out by the statutory auditor of the mutual fund. The silver ETF norms further require that the tracking error -- the difference in daily returns between physical silver and the NAV of Silver ETF – should not exceed 2%. However, the tracking error may exceed 2% under unavoidable circumstances which are beyond the control of a mutual fund house.
Silver as an investment option
Unlike gold, which is considered a precious metal, and is stored for years in the form of bars by governments, central banks, and jewellery by individuals, silver is more an industrial metal (apart from also being a precious metal) used in the manufacture of solar cells, electrical and electronic equipment, industrial fabrication, medicine, etc.
Large-scale use of silver for industrial purpose as well as for making jewellery and other silverwares makes it an important metal with potential price upside in future. The global annual consumption of silver in 2021 is expected to be around 1,033 million ounce compared to total likely mining of 846 million ounce. Over the past 15 years, the silver mining capacity has not seen a significant jump. In 2005, total silver mined was 740 million ounce which increased to 800 million ounce in 2020.
Over the last 20 years, silver prices in India has moved from Rs 7,500 a kg to Rs 63,000 levels (as on 27 November 2021). This year in June silver prices had even crossed Rs 71,000 a kg before falling to Rs 63,000 levels. With Silver ETFs, now the investors would have a new avenue to invest in the metal apart from holding it in physical and e-silver forms. Hemen Bhatia, deputy Head - ETF, Nippon Life India Asset Management Ltd says, “With SEBI laying regulations for Silver ETFs, it will become very convenient for investors to have exposure to Silver as a commodity in a transparent manner, in addition to their exposure to Gold.”
“Through e-silver or silver ETFs, investors will be able to retain silver contract for long-term and they can accumulate silver in small amounts without having to keep it physically. In the 10% of the portfolio that one must keep for bullion investment, silver could be a good option and will add value surely.,” says Shivanand Pandit, a Goa-based investment advisor.
Silver ETFs vis-à-vis Gold ETFs
The allure for gold is known globally, more so in India. Therefore, gold ETFs have been very popular world over. As per the World Gold Council, global gold ETF holdings at the end of September were just under 3,600 tonnes.
Global gold ETFs added more than 1,200 tonnes to their holdings between 2019 and 2020. Despite fluctuations in the gold price and rising interest rates, global ETF holdings have since then remained relatively steady, declining by only 7% after peaking at just below 4,000t during fourth quarter of 2020.
Gold ETFs have been available in India for the past over 14 years. As per the data available with the Association of Mutual Funds in India (AMFI), there are 11 Gold ETFs currently available in the market. They together account for Rs 17,300 crore investments from over 26 lakh folios.
Could Silver ETFs be able to generate the kind of interest that gold ETFs does globally? Vijay Mantri, founder and chief investment strategist, JRL Money, says that though silver is consumed in a big way in India especially in rural areas, silver prices would be much more volatile than gold.
Fluctuation in industrial demand makes silver prices more volatile than gold. Gold is held more valuable by central banks, governments as well as investors as a hedge against inflation. Moreover, silver cannot match the love for gold that Indians as well as people in other parts of the world have. Despite the disadvantages over gold, silver ETFs would be an interesting addition to the portfolio purely for the purpose of diversification.
What you should know
Silver ETFs should be benchmarked to physical silver of standard 30 kg bars off 99.9% purity confirming to London Bullion Market Association (LBMA) standards
A maximum tracking error of 2% is allowed under silver ETFs. However, the tracking error may exceed 2% under unavoidable circumstances.
A silver ETF scheme should invest at least 95% of the net assets value in silver and silver-related instruments.
Physical verification of silver underlying the Silver ETF units be carried out by the mutual fund and it should be reported by the fund house every six months.