Is investing in silver ETFs a better bet?

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If you thought the season of mutual fund NFOs was winding up, the recent flurry of silver ETF launches should put all doubts to rest. On January 5, ICICI Prudential MF became the first AMC in India to launch a silver ETF (FoF opens on January 13).

Following close on its heels are a Silver ETF and a Silver ETF FoF (fund of fund), both from Nippon India MF and Aditya Birla Sun Life MF to be launched on January 13. HDFC MF and Mirae Asset MF are next in line. These launches have come about after SEBI’s November 2021 go-ahead for introduction of silver ETFs in India. The ETFs will track the domestic prices of silver.

Investors now have access to both gold and silver via ETFs. Those without a demat account can invest in an FoF which, in turn, will invest in the underlying silver ETF, albeit at a higher expense ratio.

Ease of ETFs

ETFs offer a convenient and cost-effective way of investing in silver. With an ETF, you can accumulate silver in smaller quantities over time and can be freed from the hassle of arranging or paying for a safe storage space. Liquidating your silver ETF units can be easy, provided there are adequate trading volumes. As with any ETF, this is something to watch out for.

With investing in silver set to become easier with ETFs, should you take exposure to this metal? Here are a few points you should consider.

Not really diversification

A comparison with gold can be a good starting point. Gold is a safe-haven, and does well in times of uncertainty as it did most recently in the post-Covid pandemic period. Between January 14 and March 23, 2020, while the Nifty 50 was down 38 per cent, gold rose 6 per cent. If we go back in time to the 2008-09 sub-prime crisis, then too, between January 2008 and February 2009, while the Nifty 50 fell 55 per cent, gold gained 45 per cent.

Gold typically does well in periods when equity underperforms (see table 1), making it good for portfolio diversification. The same, however, does not hold true for silver.

Data from the Silver Institute shows that around 50 per cent of the demand for silver is driven by industrial use, particularly electronic applications. This can help silver deliver well in years of strong or improving economic growth, the same as for equity, and vice versa. So, if your goal is diversification within an equity-heavy portfolio, silver may not serve your purpose.

Roller-coaster ride

You must also be prepared for a fair degree of volatility in returns while investing in silver. A rolling-returns analysis based on LBMA (London Bullion Market Association) silver and gold PM prices converted into rupee terms, rolled daily over the last 10 years shows that while gold returns can be volatile, especially over short periods of time, silver returns can be far more so (see table 2).

For instance, while 1-year returns (CAGR) for gold have ranged from minus 21 per cent to 50 per cent, those for silver have fluctuated within a wider band of minus 35 per cent to 111 per cent over this period. Even though the volatility in returns narrows down as the investment period goes up from 1 to 3, 5 and 7 years, the range of returns remains wider still for silver. Judging by past data, this higher volatility in silver has also been accompanied by lower returns on average, across different time frames (see table 2). For example, gold has offered, on average, 7-year return of 5.5 per cent versus 1 per cent for silver (both CAGR) during the period under consideration.

Going beyond average returns, as these can mask divergent underlying trends, also brings us to the same conclusion. During the last 10 years, 1-year returns from silver have been negative as much as 56 per cent of the time compared to 40 per cent for gold. Additionally, while increasing your period of investment in gold from 3 to 7 years vastly reduced the probability of negative returns, the same was not true for silver (see table 2).

So, if you want to hedge your portfolio from the volatility of equity, exposure to gold rather than silver can serve you better by providing some stability to overall returns. However, given the volatility in short-term gold returns too, be prepared to hold the precious metal for longer periods. Also, while an exposure of 10-15 per cent to gold can reduce the volatility in your portfolio, too large an exposure can make you miss out on the upside from equity in bull-market years, thereby lowering your overall long-term returns.