Why Silver ETF has turned an attractive investment opportunity

Adopting a multi-asset investment plan by taking exposure to various asset classes like equity, debt and commodities, is the optimal course of action for navigating through volatility and uncertain times. Commodities such as gold and silver provide excellent diversification options, as their price movements are less correlated to other asset classes, especially equities.

Why consider silver

Unlike gold, which is seen strictly as a store of economic value, silver plays a pivotal role as an industrial metal. Nearly 60 per cent of global silver consumption is for industrial purposes. The metal is used extensively in green energy technologies. Green energy transition and the evolution of EVs will continue to drive demand for silver. Already, roughly 50 per cent of the world’s silver is used in solar panels, electronics, electric vehicles (EV), pharma, 5G networks and for photography.

Newer technologies such as silver oxide batteries, silver conductive inks and silver-based nanotechnology in medical applications are quickly becoming standards in their respective industries. The opening up of China’s economy is expected to further drive up the industrial demand for the silver metal (which consumes the most silver among major economies).

As per the latest World Silver Survey by the Silver Institute, the silver market was undersupplied by 237.7 million ounces in 2022, a trend which may continue in the near to medium term, thereby opening room for potential further upside in silver prices given the demand supply mismatch. Weak US dollar and safe haven buying could also lend support to silver prices.

Historical price trends show that during times of rising inflation, there is an uptick in silver prices. Also, the metal being a precious commodity has delivered positive returns during the past three periods of crisis (Subprime mortgage, taper tantrum and Covid -19). At such times, silver has outperformed equity as an asset class. So, measured exposure to silver enables improving the overall risk-adjusted return of the portfolio.

Silver investment avenues

Traditionally, in India, investors have been investing in physical silver but the challenge is that silver is bulky in nature. Also, there is a danger of metal oxidising during storage. Hence, storage becomes a challenge and the purity of the silver holdings too becomes a point of concern. Given this setting, one of the easiest and cheapest ways to circumvent these challenges is by investing in Silver ETF (exchange-traded fund) or Silver Fund of Funds.

Silver ETFs were first launched in January 2022 and in just 18 months Silver ETFs have attained an asset base of Rs. 1,800 crore (March 2023). Silver ETFs invest in physical silver or silver-related instruments. Physical silver with 99.9 per cent purity conforming to London Bullion Market Association (LBMA) Good Delivery Standards are only permitted underlying by SEBI for Silver ETFs. Further, SEBI allows ETFs to invest in Exchange Traded Commodity Derivatives (ETCDs) with Silver as the underlying asset. The exposure limits towards Silver ETCDs by a Silver ETF are capped at 10 per cent of the Net Asset Value (NAV).

In effect, by way of investing through Silver ETF, investors need not worry about storage, purity, etc, thus enabling investors to invest in silver in a very efficient and frictionless manner. Another advantage of investing the ETF way is that one can buy one unit of Silver ETF for an amount as low as around Rs 74. This means one needs one wait to accumulate a sizeable amount to start investing in silver.

Since these are ETFs, they are held in a demat account and are listed on the exchanges. So, they can be bought or sold at any time during the trading hour. If you are an investor without a demat account, then you may invest in a Silver Fund of Funds (FoF). This FoF will invest in Silver ETF thereby enabling every profile of investors to take exposure to the silver metal. Investors may consider a 5 per cent to 10 per cent allocation to Silver as a part of their portfolio.

(The writer heads investment strategy at ICICI Prudential AMC)