Why silver ETFs are trading at a premium, what should investors do?

Silver Prices Surge

Silver is on a tear. It has breached the $50-mark for the first time on October 9, spurred by high demand. Domestic prices hit Rs 1.63 lakh for a kg, drawing a wave of new investors.

Those who stayed away from the white metal are now rushing into silver exchange traded funds (ETFs), even if it means paying a hefty premium over indicative net asset values (NAVs).

"On the NSE, leading ETFs like SBI Silver, HDFC Silver, and Axis Silver are up 9–13 percent (9th October closing), trading well above their net asset values. Ironically, while ETFs have been soaring, MCX silver December futures slipped 0.6 percent, indicating that sentiment-driven retail enthusiasm, not fundamentals, is fuelling the chase," Apurva Sheth, head of market perspectives & research at SAMCO Securities said.

This is a textbook case of FOMO buying. Investors are piling into silver ETFs because they don’t want to miss out, even though the underlying spot market is showing signs of short-term overheating, he said.

Also read: Silver shines brighter than gold: What’s driving the rally and what lies ahead?

During sharp rallies, when physical supply tightens and market makers struggle to source silver, ETFs tend to trade at a premium. It’s a reflection of temporary demand-supply imbalances, not necessarily a sign of long-term overvaluation.

The rising demand prompted a fund house to take protective measures. Kotak Mutual Fund on October 9 temporarily suspended lump-sum investments in its Kotak Silver ETF Fund of Fund, citing “sharp spot premiums over import parity prices”.

Kotak AMC’s managing director Nilesh Shah called it a prudent step to protect investors’ interests, as new lump-sum purchases had become inefficient at current premiums. SIPs and redemptions, however, continue uninterrupted.

Kotak MF said the underlying Kotak Silver ETF remains open for trading and will reopen for fresh subscriptions once premiums stabilise. The fund house reaffirmed its bullish long-term view on silver, underscoring the metal’s role in the global energy transition and as a hedge against market volatility.

Sheth advised investors to be patient. “ETFs trading at a premium is not the best time to enter. Wait for prices to cool or for NAVs to realign with the market. The long-term story for silver remains strong but timing your entry is crucial.”