What works and what doesn’t in silver exchange traded funds

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Mutual fund companies rushed to apply for silver exchange-traded funds (ETFs) after the market regulator, the Securities and Exchange Board of India (Sebi), authorized the introduction of these instruments in India . These ETFs are passively managed funds that will invest a large portion of their assets in physical silver and track its performance as close to the price of the commodity as possible. We asked experts if this new investment vehicle would help homebuyers.

Chintan Haria, Head of Product Development and Strategy, ICICI Prudential AMC: When it comes to investing in precious metals, investors all over the world are opting for gold and silver through ETF or other investment formats. Indeed, they are considered as a store of value and have a very limited correlation with other asset classes. This could be seen even at the onset of the pandemic when stock markets corrected, inflows into silver ETFs and money-related instruments, especially in the United States, had improved due to its hedging role in uncertain times.

In India, traditionally people invest in gold and silver in physical form. Since money is large in nature and therefore difficult to store, we believe that the ETF form will be one of the preferred ways for investors. By investing through silver ETFs, investors do not have to worry about the purity or quality of the underlying asset and are also freed from the hassle of storage. In addition, liquidity and price efficiency are likely to be better compared to traditional options.

Given its low correlation with other asset classes, investors may consider gaining exposure to silver as part of their portfolio diversification exercise. Investors can consider a 5-10% allocation to silver as part of their portfolio.

Priti Rathi Gupta, Founder of LXME: Silver ETFs can help diversify the portfolio, as silver has been a precious metal, after gold, to gain investor attention. Indeed, asset management companies (AMCs) will need to invest at least 95% in silver and money-related instruments. Investors who avoid the complexity of futures contracts and the dangers associated with them might find this mode more comfortable. As the standards continue with the same practice of having AMCs own 99.9% pure silver bullion, this fund can eliminate carryover and carryover issues and give investors a more realistic valuation. of the metal it holds.

They will be able to buy silver ETFs without worrying about purity, risk, storage or insurance. There is now consistency in these product specifications. This makes investing in money easier, accessible and transparent for investors, who will benefit from professional fund management.

Of the downsides, since silver ETFs are new to the market, there may be chances of decreasing liquidity due to supply and demand conditions. Certain costs associated with buying an ETF, such as brokerage fees, AMC expense ratio, and tracking error, can all contribute to investor costs and therefore impact the overall returns. Silver ETFs bring a lot of positive changes to investors.

Chirag Mehta, Senior Fund Manager – Alternative Investments, Quantum AMC: Silver is more of a tactical allocation than gold, which is more of a strategic allocation for portfolio diversification. It’s not the poor man’s gold, it’s a very different exhibition. Indeed, more than 65 to 70% of the use of silver is in industrial applications, which should ideally do well when the economy is doing well, and therefore its demand, which brings you exposure to economy similar to that of your equity allocation. .

Given the volatility and the resulting high variations in bid-ask spreads, it may be necessary to use swap as the intended source of liquidity. Capping the gross exposure at 100% is useful because it helps contain risk. On the other terms, while the daily spot fixing price of LBMA silver was chosen as a benchmark for silver ETFs, the same was not true for the valuation of the fund’s assets where it is is expected to determine the fair market value which would broadly be the operating price in domestic markets. Many times there is a mismatch between the money prices equivalent in Indian rupee LBMA and the domestic prices. This differential may result in a higher tracking error, which is just an anomaly in comparison. The prices for the benchmark and the valuation should be aligned. The regulator has proposed the appointment of a dedicated fund manager for commodity-based funds like gold ETFs and silver ETFs. We believe that since these products are passively managed, it is not necessary to have a dedicated fund manager or the list of funds may not be limited to just commodities funds for that fund manager. However, we agree that these fund managers must have adequate knowledge and understanding of the commodities markets.

Rishad Manekia, Founder and Managing Director, Kairos Capital: Over the past two weeks, a few AMCs have launched silver ETFs. But just because an AMC has started a fund doesn’t mean it’s a good idea for an investor to invest in it. There has been a rush to launch new fund offerings to capture the recent boom in the markets. The question an investor should ask is whether such a fund fits into their asset allocation and can help achieve a financial goal or goal. When we think of portfolio allocation through asset allocation, a majority of the portfolio should be allocated to a diversified mix of equity and fixed income instruments, the mix being determined by the risk profile and the time horizon of investors. Gold is also sometimes part of the portfolio, but the allocation is usually capped at 5-10% of the portfolio. A silver ETF or even a commodities fund can be viewed as a substitute or complement to the part of the portfolio where gold is typically allocated. So for the retail investor, given that the allocation to the overall portfolio is low, it might be better to stick with gold.

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