Which is better investment bet: Silver ETFs or silver fund of funds? (2024)

Sebi’s nod to mutual fund companies to offer silver ETFs has opened up another investment avenue for investors. It brings further scope for diversifying portfolio into commodities beyond gold. But is it a must have in your portfolio? What lessons do gold ETFs hold for investors?

Till now, silver as an investment option was only available in the futures segment. Few are comfortable with its complexities. As such, silver does not find any space in most portfolios, apart from holdings in its physical form. But just like physical gold, holding pure silver comes with its hassles. Storage and security are a big concern, requiring a personal locker or one within a bank branch. Further, silver in its physical form may involve impurities that can affect its value. Also, buying silver ingots or other items may attract making charges. In the ETF form, these problems don’t arise. Just like in gold ETFs, every unit of silver ETF you hold will be backed by an equivalent quantity of physical silver, stored in secured vaults. “ETFs will provide a better way of owning silver with more realistic pricing and better liquidity,” asserts Ankur Maheshwari, CEO – Wealth Management, Equirus Capital.

Experts maintain that silver, like gold, can be used as a diversifier in your portfolio. But if you are expecting silver ETFs to offer similar diversification benefits to gold, you are mistaken. While both are precious metals, gold and silver prices are driven by different factors. For instance, 50% of the demand for silver comes from industrial use. “Being a cheaper metal compared to gold and having various applications especially in the industrial market, silver has maintained its demand over decades,” asserts Priti Rathi Gupta, Founder, LXME. Gold pricing, on the other hand, is guided by investors’ perception of strength in fiat currencies, mainly the US dollar. It is seen as a safe haven asset that can store value in times of economic upheavals.

Being exposed to different dynamics, silver and gold prices tend to move differently. Industrial use accounting for half its demand can work for or against silver, depending on pace of economic activity. Silver often tends to go for years without seeing significant price movements, and then see a sharp uptick within a short span of time. “Silver is cheaper than gold but since it is thinly traded, it is more volatile than the yellow metal,” observes Tarun Birani, Founder, TBNG Capital Advisors. Recently, silver has clocked 57% gains since March last year even as gold has fetched 13%. On the back of this sharp outperformance, the gold-silver ratio has narrowed significantly from a three-decade high last year. This ratio denotes the price of gold as a multiple of the price of silver. A lower gold-silver ratio typically implies the yellow metal is likely to outperform in the near term whereas higher ratio indicates that silver may perform better going ahead. Clearly, at current relative prices, the favourable phase for silver is behind it from the near-term perspective.

For these reasons, investors should treat gold and silver as separate investments, even if coming within the ambit of commodities. Most experts maintain that gold alone is sufficient as a diversification vehicle for anyone’s portfolio beyond equities and fixed income. Silver may be considered as an additional diversifier without overdoing exposure to commodities basket. Kaustubh Belapurkar, Director - Manager Research, Morningstar India, exhorts, “Investors should be judicious with their investment and allocation as silver prices like any other commodity can be volatile.” Experts recommend limiting allocation to commodities at 10-15% of the portfolio.

Further, if history is anything to go by, investors should not jump into silver ETFs right away. Liquidity in ETFs is critical to the entire return experience. To get an idea, investors can draw lessons from the way gold ETFs have been running over the years. Several gold ETFs suffered from poor trading volumes initially which hindered investors’ ability to enter and exit at desired price. If lacking liquidity, the market price of each unit can trade at a gap to the actual fund NAV. Gold fund of funds (FoF), which came in the wake of gold ETFs, offered a way out of this problem as units can be bought and sold directly with the fund house. “After initial hiccups, Gold ETFs are also now far more liquid and track spot gold prices closely,” points out Maheshwari. Investors can either wait for silver ETFs to build sufficient liquidity or wait for the launch of silver FoF to nullify illiquidity entirely. Birani cautions, “Investors should ideally observe how liquidity and tracking error plays out for at least six months before investing in any upcoming silver ETFs.”

In Video: Will silver ETFs be as promising as gold ETFs for investors? Here's expert take

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