Why silver ETFs sometimes trade above their iNAV and what it means for investors

If the underlying asset is up around 3 percent but the ETF is hovering around 7–9 percent, it signals aggressive buying interest rather than intrinsic value expansion

• Silver ETFs in India may trade higher during demand surges
• Premiums over iNAV often show short-term demand, not silver prices.
• Investors should check iNAV before trading to avoid overpaying

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Silver Exchange Traded Funds (ETFs) have seen a surge in investor interest amid heightened geopolitical tensions and rising bullion prices.

However, in the rush to participate, many investors may be ignoring a critical metric: the Indicative Net Asset Value (iNAV). When ETFs trade at a significant premium to their iNAV, investors could end up paying far more than the underlying value of silver warrants.

For instance, on March 2, the Groww Silver ETF had an iNAV of 43.05, while it was trading around 28.50 on the exchange. Similarly, HDFC Silver ETF had an iNAV of 252.62, but was trading near 273, highlighting the gap that can emerge between indicative value and market price during the trading day.

The divergence between the iNAV and the traded price of some of the Silver ETFs primarily reflects short-term demand-supply imbalances rather than movement in the underlying silver prices alone.

"Unlike large, highly liquid equity ETFs, commodity ETFs in India, especially silver ETFs, can experience temporary price distortions when investor demand spikes sharply," said Jayant Manglik, Partner, Fortuna Asset Managers.

During times of increased global uncertainty or momentum-driven buying, ETFs frequently trade at a premium to iNAV because secondary market demand exceeds the capacity of authorised participants to quickly create new units and arbitrage the difference.

Manish Jain, Deputy CEO of Choice AMC, explained, "In an ETF, investors trade at the market price on the exchange, not at the end-of-day NAV. That’s why checking iNAV, a frequently updated, intraday estimate of the ETF’s underlying value, is important. It helps investors determine whether they are buying at a premium or selling at a discount to fair value."

Additionally, factors such as liquidity constraints, market timing differences, creation and redemption cycle lags, and retail participation can temporarily widen the premium.

In certain silver ETFs, heavy investor demand can push the traded price well above the indicative net asset value. In the case of overseas funds, time zone differences can create distortions because the underlying market, such as the United States, may be shut while the ETF continues to trade in India, leaving the iNAV outdated. During volatile phases, authorised participants may also find it difficult to create fresh units quickly, widening the price gap.

"If the underlying asset is up around 3 percent but the ETF is hovering around 7–9 percent, it signals aggressive buying interest rather than intrinsic value expansion," said Manglik.

Manglik said over time, arbitrage mechanisms typically correct such mispricing, bringing the ETF price closer to its iNAV. "However, in the short term, premiums can persist in a strong momentum or risk-hedging environment, as is the case today due to the geopolitical situation," he added.

"ETFs traded in the secondary market can have limited liquidity and can result in significant bid-ask spreads intraday, particularly during volatile times, which may not be reflective of the current iNAV," said Kaustubh Balepurkar, Director - Manager Research, Morningstar Investment Research India. "It is important for investors to check the iNAV before buying /selling."

Point to note

• Always check the iNAV on the asset management company's or stock exchange website and compare it with the current market price. If there's a large difference, avoid trading or place a limit order.

• In many instances, this step can influence your returns more significantly than the ETF’s expense ratio.

• A simple discipline reduces surprises by consistently monitoring iNAV and spreads, especially during volatile periods.