Capital market regulator Securities and Exchange Board of India (SEBI) in its board meeting on September 28 approved the idea of launching silver exchange-traded funds (ETFs) in India.
At present, Indian mutual funds are allowed to launch ETFs tracking only one commodity - gold. Gold ETFs together manage assets worth Rs 16,349 crore as on August 31, 2021, as per data released by the Association of Mutual Funds in India. This is in addition to the money invested in sovereign gold bonds that track gold prices and are issued by the Reserve Bank of India on behalf of the Government of India. Precious metals, especially gold and silver, are an important asset class for many Indians.
The launch of ETFs tracking prices of silver and crude oil has been a long-standing demand of investors and the mutual fund industry. Silver has been an integral part of investors’ commodity portfolio globally. As per etfdb.com, five silver ETFs account for assets worth USD 13.7 billion. iShares Silver Trust is the largest ETF tracking silver prices, managing assets worth USD 12.4 billion. The ETF has lost 1.69 percent over the last one year. The expense ratio of these ETFs tracking silver ranges between 30 and 95 basis points.
Meanwhile, gold ETFs too have benefitted from the gold price rise in recent years; barring recent volatility where it has lost 8.69 over the last one year. Overall though, smart investors have benefited by gold price movements, but in a paperless way that gold ETFs and sovereign gold bonds offer, without the botheration of holding and storing physical gold.How do silver ETFs work?
In the developed markets, the asset management companies launch exchange-traded funds that track silver prices in two ways. While some schemes replicate the returns in silver by use of derivatives (investing in futures), others prefer to buy physical silver bars for the same. Some ETFs also offer leveraged exposure to the underlying metal. These schemes offer two times the returns offered by the underlying on either long or short side as defined by the scheme objective. The leveraged ETFs charge on the higher side of the expense ratio mentioned earlier.
Silver is more volatile in nature compared to gold. In India, mutual funds have to buy physical gold for the gold ETF they manage. The regulator is expected to continue with the same practice of making fund houses own physical silver bars for silver ETF.
Silver not only acts as a precious metal but also has many industrial uses. It is also used in the manufacturing of electronic goods and electric vehicles. Silver can be a proxy play on such emerging themes for savvy investors.As of now, buying physical bars and trading in commodity futures on commodity exchanges are the way to take exposure to silver. Some savvy investors can tap the silver ETF using the overseas investment route. However, an Indian mutual fund launching a dedicated silver ETF will make investing in silver truly accessible.