Securities & Exchange Board of India (SEBI), the capital market regulator has issued guidelines for the exchange traded funds (ETF) investing in precious metals such as gold and silver. Here broad contours of the silver ETF you will soon get to invest into.
Tracking error
The silver ETF will aim to generate returns in line with that of physical silver in domestic prices. The fund houses have been told to contain the tracking error to 2 percent. Put simply, tracking error is the deviation between the benchmark’s returns and scheme’s returns.
If the tracking error crosses this threshold of 2 percent, then the fund house has to prominently mention the same on its portal, as well.
Benchmark
The fund house will buy physical silver standard 30KG bars with 99.9 percent purity confirming to London Bullion Market Association (LBMA). Silver ETFs shall be benchmarked against the price of silver (based on LBMA Silver daily spot fixing price).
Expense ratio
The regulator has asked the fund houses to adhere to the mutual fund regulations when it comes to expense ratio of the scheme, computation and disclosure of net asset value (NAV) of the scheme. Like any other ETF, expense ratio cannot exceed one percent of the scheme AUM.
The indicative NAV of the scheme will be displayed through the market hours on the stock exchanges where the units are listed. This will help investors to ascertain if the units are trading closer to the NAV of the scheme and trade accordingly.
Liquidity
Just like any other ETF, the silver ETF’s units will be listed on the stock exchange. Fund house are told to appoint market makers to ensure ample liquidity on the stock exchanges. The scheme information document will mention liquidity risk along with market risk as one of the key risks investors are exposed to when they invest in silver ETF.
Use of Derivatives
The ETFs investing in gold purchase physical gold to achieve the exposure to gold. In case of silver ETF, the regulator prescribe that the silver ETF should allocate at least have 95 percent of the assets to silver and silver related exchange traded commodity derivatives (ETCD). The scheme should restrict the exposure to ETCD to 10 percent of the assets of the scheme. However, if the scheme intends to take delivery of physical silver and do not intend to roll it over to the next expiry, then the exposure can go beyond this 10 percent norm. The AMC must ensure that the exposure to ETCD should not exceed 100 percent of the AUM of the scheme. To use ETCD the trustee and board of the asset management company (AMC) must put in place a written policy for use of ETCD.
Hemen Bhatia, Deputy Head - ETF, Nippon Life India Asset Management 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.”
The regulator has also asked the fund houses to appoint dedicated fund managers for commodity funds The norms laid down for the silver ETF will be effective from December 9, 2021.
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