When it was launched, paper gold in the form of Gold ETFs was an effective way of transacting in the yellow metal eliminating the troubles that came with physical gold. Likewise, we would have the soon-to-be-launched Silver ETFs. Securities and Exchange Board of India (Sebi) on Wednesday announced the operating norms for silver exchange-traded funds (ETF). The norms include specified guidelines for investors regarding investments in silver ETFs including valuation, determination of net asset value (NAV), tracking error as well as tracking difference and disclosure requirements.
As per the new norms, a Silver ETF Scheme must invest at least 95 per cent of the net assets of the scheme in silver and silver-related instruments. Exchange-Traded Commodity Derivatives (ETCDs), having silver as the underlying asset, would also be considered a ‘silver-related instrument’ for Silver ETFs. “The exposure to ETCDs having silver as the underlying shall not exceed 10 per cent of the net asset value of the scheme. However, the above limit of 10 per cent shall not be applicable to Silver ETFs where the intention is to take delivery of the physical silver and not to roll over its position to next contract cycle” says the circular.
The physical silver must be of standard 30 kg bars with a fineness of 999 parts per thousand (or 99.9 per cent purity) confirming to London Bullion Market Association (LBMA) Good Delivery Standards. The metal would be valued based on the methodology provided in paragraph 3B of the Eighth Schedule to MF Regulations.
The circular mentioned that the units of Silver ETFs shall be listed on the recognized Stock Exchange(s). Asset Management Companies (AMCs) will appoint Authorized Participants (APs)/ Market Makers (MMs) to provide liquidity for the units of Silver ETFs in the secondary market on an ongoing basis. Moreover, APs/ MMs and large investors would be given the option of directly buying or selling the units with the Mutual Fund in creation unit size. The AMC will also have to share the details about the creation unit size of Silver ETF in Scheme Information Document (SID).
“We believe silver will outperform gold going ahead, more in tandem with industrial metals,” executive vice president and chief research officer of Bajaj Capital, Alok Aggarwal, told Outlook Money.
With regards to a probable tracking error, Sebi clarified that the annualised standard deviation of the difference in daily returns between physical silver and the NAV of silver ETF based on the past one year’s rolling over data-- will not exceed 2 per cent. The disclosure regarding the same will be made on monthly basis on the website of the AMC.
In case of unavoidable circumstances, if the tracking error exceeds 2 per cent, then approval of the board of AMC and trustees should be taken and their decision will be disclosed on the AMC's website.
Benefits for investors
Experts believe that investors should take some exposure in silver as it has scope for a lot of diversification. Moreover, silver prices will be driven mostly by its rising industrial demand and partly as a hedge against inflation. “Industrial uses of silver make silver more volatile than gold and offers a higher return than gold during periods of economic growth,” adds Vibhu Ratandhara, senior analyst at brokerage firm Bonanza Portfolio.
With silver ETFs, even small investors can participate and have access to a good price mechanism, as there are no purity issues and physical holding risks. “We believe silver will outperform gold going ahead, more in tandem with industrial metals,” Agarwal says.