Saturday, Oct 01, 2022

It’s Raining Silver ETFs: Three Things You Must Know Before Investing

Aditya Birla Sun Life MF, ICICI Prudential MF and Nippon India MF are all set to roll out their silver Exchange Traded Funds (ETFs) and silver ETF Fund of Fund (FoF) from January 13, 2022. Should you invest in them?

Two silver exchange traded funds (ETFs) and three silver ETF fund of funds (FoF) schemes are to be launched by three fund houses on January 13, 2022. Aditya Birla Sun Life MF and Nippon India MF are to launch one silver ETF and FoF each while ICICI Prudential MF will launch an FoF.  

Both the silver ETFs will invest in silver and try to generate returns that are in line with the performance of physical silver in domestic prices. The schemes may also participate in Exchange Traded Commodity Derivatives (ETCDs) with silver as the underlying asset. The silver FoFs will invest in the silver ETF of the parent company. Here are some key things you should know before investing in them.  

Dual Characteristics 

Silver, as a commodity, displays dual characteristics, that of a precious metal as well as of an industrial metal. More than 50 per cent of the demand for silver is industrial demand. This makes it difficult for the investor to decide why he wants to invest in silver and probably imparts a higher beta to the metal as compared to gold. 

“In high-growth phases and a commodity upcycle such as now, silver can gain from rising demand for industrial use but can suffer due to loss of safe-haven demand. Conversely, during periods of economic stress, while a precious metal like gold tends to gain, due to safe haven demand, any rise in demand for silver as a precious metal can be counter balanced by fall in industrial demand,” says Alok Aggarwala, executive vice president and chief research officer, Bajaj Capital. 


 More Volatile Than Gold 

Being an industrial metal, silver is more volatile than gold. Historical data shows that silver tends to outperform gold during economic expansion when industrial demand grows, but underperforms gold during periods of economic stress. Traditionally, gold is driven more by safe haven demand while silver is driven by industrial demand. 

 Negative Correlation With Equity 

Silver is not correlated with other securities such as stocks and bonds, thus reducing the overall portfolio risk. The metal offers good portfolio diversification and acts as a hedge against inflation. It gives better returns than gold during economic revival over a longer period. Experts believe that investors should take some exposure in silver, only to diversify. It should not be your core portfolio holding.