Are silver ETF investors paying more than the value of the metal they hold?

A significant difference from NAV may indicate either a short-term constraint in supply or a high level of speculation

• Silver ETFs are trading at premiums to iNAV, showing strong investor demand
• Retail buying and speculation are driving price gaps in silver ETFs
• Experts say such premiums may be temporary and reflect market sentiment

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Many Silver ETFs are trading at a sharp premium to their indicative net asset value (iNAV) these days, highlighting strong buying pressure from investors. The gap between the market price and the iNAV widened throughout the day on Tuesday, pointing to heightened retail demand and speculative activity in the silver market.

For instance, HDFC Silver ETF closed at Rs 323, while its i-NAV stood lower at Rs 300.  Similarly, Nippon India Silver ETF closed at Rs 318, while its i-NAV stood higher at Rs 327. However, SBI Silver ETF closed at Rs 329, while its i-NAV was higher at Rs 345, indicating the unit traded at a discount to its underlying value.

Piyush Jhunjhunwala, founder and chief executive of Stockify, said, "If a silver ETF trades above its net asset value (NAV), it usually signals strong investor interest, driven by rising demand for silver as an investment."

ETF prices can be volatile and often reflect short-term investor sentiment more than the actual movement in the price of silver itself. A surge in retail buying is also a key driver of demand for commodity ETFs, which many investors view as a safer way to gain exposure compared with direct stock market investments.

Jhunjhunwala said, “When an ETF's share price is higher than both its indicative net asset value (iNAV) and its net asset value (NAV), that means investors are willing to pay significantly more for the ETF than the actual worth of the silver that it holds.”

The iNAV is calculated using the current market price of silver and updates continuously during the trading day. The NAV, by contrast, is calculated at the end of each trading session. In normal conditions, ETF prices tend to track their iNAV and NAV closely because of arbitrage activity. When an ETF trades at a premium, authorised participants can create new units by delivering silver to the fund and selling those units in the market, a process that usually helps bring prices back in line with the underlying value.

"A gap between the market price and the NAV of a commodity ETF may indicate that buying interest is stronger than what arbitrage mechanisms can absorb in the short term. This can create a temporary imbalance in the market," said Saurabh Bansal, founder of Finatwork Investment Advisor, a SEBI-registered investment adviser.

“The concept of arbitrage generally allows prices to catch up after short-term differences. However, large swings caused by heavy trading volumes can lead to temporary dislocations, which usually return to equilibrium over time,” said Bansal.

When an ETF trades at a significant premium to its iNAV or NAV, it reflects high demand for exposure to silver. Investors may be reacting to market sentiment, inflation concerns or speculation. Because of the relationship between ETF units and the underlying silver bullion, prices may not adjust immediately to changes in supply. This can allow a short-lived premium to emerge, particularly during periods of sharp price movements in the silver market.

“A significant difference from NAV may indicate either a short-term constraint in supply or a high level of speculation,” said Jhunjhunwala.

Although this is not a new development, it points to a rise in retail participation. Retail activity in commodity ETFs typically increases during inflationary periods, risk-off phases and times of rapid price growth, similar to what is seen in gold and silver markets.

“Over time, excess buying pressure usually fades and prices move back towards normal levels. However, investors should remain aware of liquidity conditions, the ease of trading in the underlying market, and the long-term behaviour of commodities compared with ETF prices,” Bansal added.