Silver ETFs - What Is Meaning, Features and Why Invest (2024)

We live in an age that is marked by choices, whether you wish to place an order for food or add assets to your investment portfolio, you will find yourself faced with a plethora of options. Amongst the investment options available at your disposal is Silver ETFsor Silver Exchange Traded Funds.

Silver exchange-traded funds (ETFs) have been standout performers in 2024, with gains of 19.7% so far this year. Over the last three months, they have surged nearly 21%, making them one of the top-performing asset classes in the market.

Silver ETFsare exchange traded funds that invest in physical silver of a high degree of purity. Therefore, by investing in a Silver Exchange Traded Fund, you can invest in silver without having to physically purchase, store, and protect the metal. In this article, we shall delve into the workings, features, taxability, and regulatory framework surrounding Silver ETF fundsin India.

What are Silver ETFs?

By investing in a silver ETF, an investor is basically investing in physical silver. Since silver is an industrial as well as a precious metal, it is used to establish stability for investors in times of market volatility. ETFs allow higher liquidity and can be traded easily. Silver ETFs track almost the same price as silver and are sometimes more liquid than physical silver.

Furthermore, as per SEBI (Securities and Exchange Board of India), a silver ETF must invest at least 95% of its net assets in silver or securities related to silver. This means the main focus of these mutual fund schemes should be to hold silver as their primary asset.

Additionally, SEBI has laid down several investment restrictions that must be followed by Silver ETFs. Let’s check them out:

• The silver or related securities that the silver ETF holds must be kept safe by a custodian. This custodian must be registered with SEBI.
• The funds in a silver ETF can only be used to invest in silver or silver-related instruments as per the specific objectives of the ETF.
• The mutual fund is allowed to invest a certain portion of its pooled funds in short-term deposits. However, these deposits must be with scheduled commercial banks.

How does Silver Exchange Traded Fund work?

The workings of Silver Exchange Traded Fundsare fairly simple: the market prices of such funds are directly driven by the spot price of silver prevailing in the market. Whenever the spot price of silver fluctuates, theNet Asset Value of Silver ETFsalso changes in response. Fund managersof Silver ETFs are required to purchase and safely store physical silver.

Should you wish to invest in a particular Silver ETF, you can purchase the required number of units from the exchange where it is listed and traded. By opting for Silver ETFs, not only do you get to invest in the precious metal and gain from appreciation in its market price, you do not have to invest in storage costs or insurance.

Features of Silver ETFs

In order to better understand Silver Exchange Traded Funds, let us discuss the salient features of such funds:

1. Purity:Whilst purchasing physical silver, you may have to worry about its purity and be dependent on the seller's credibility. There are, however, no such concerns with Silver ETFs since such funds invest in 99.99% pure silver.
2. Zero storage cost:Another striking feature of Silver ETFsis that you do not have to worry about the safekeeping or storage cost of physical silver. Such costs are borne by the fund managers while you get to enjoy a high degree ofliquidity on your investment in silver.
3. Hedge against Inflation:Since the value of precious metals such as gold and silver is relatively less susceptible tomarket volatility, investments in Silver ETFs can help protect you against inflation.
4. Reduction in overall portfolio risk:By investing in Silver ETFs, you can add stability and balance to your investment portfolio and reduce your overall exposure to risk.

Types of silver ETFs

Investors must note that there are two primary types of silver ETFs: Physically-backed silver ETFs and futures-based Silver ETFs. Each type has its own way of giving investors exposure to the price of silver. Let’s understand both of them in detail:

1. Physically-backed silver ETFs

These ETFs are backed by actual physical silver bullion. This means these ETFs buy real silver and store it securely. When you buy shares of this ETF, you are essentially buying a portion of the physical silver that the ETF holds. The main aim of this ETF type is to closely match the spot price of silver, which is the current market price for immediate delivery of silver.

2. Futures-based silver ETFs

These ETFs are backed by silver futures contracts instead of physical silver. These futures contracts have an expiration date, meaning they are only valid for a certain period. As the contracts near their expiration, the ETF sells them and buys new ones to keep its exposure to silver prices. The primary goal of this type is to track the price of silver by using these futures contracts.

Why invest in Silver ETFs?

There are various advantages of investing in silver ETFs. Some of them can be mentioned as:

• Speed:It is easy for investors to enter and exit in the silver market as compared to physical silver.
• Purity: The silver that fund managers invest in is 99.99% pure, hallmarked silver which is stored in vaults. Hence investors don’t have to be concerned about the quality of the silver they have invested in.
• Hedge against inflation:Since silver is an industrial as well as a precious metal, it rarely devalues. Due to this, silver provides a hedge against inflation.
• Reduce risk:By investing in Silver ETFs you diversify your portfolio and reduce the risk
• No storage cost:When you purchase Silver ETF, there is no storage cost for the physical silver. It is borne by the fund manager.
• Liquidity:Silver ETFs are considered more liquid due to the constant demand for silver in industrial as well as commercial spaces. This makes them easy to liquidate.

How are investments in silver exchange traded fundstaxed?

While considering Silver Exchange Traded Funds as a potential addition to your investment portfolio, it is pivotal to understand their tax implications. The taxability of Silver ETFs is contingent upon your holding period of the instrument.

1. Short term holding: If you hold your investment in a Silver ETFfor less than three years, any gains made from the sale of said investment shall be added to your income. Termed as a Short term Capital Gain, such a profit shall be taxed in line with the income tax slab applicable to you.
2. Long term holding:Should you hold your investment in a Silver ETF for a period exceeding three years and sell it afterwards, any gain thus made shall be considered a Long term Capital Gainand get taxed at 20%.

Also Read about the Income Tax Slabs of FY 2024-25for taxation.

What should you consider before investing in a silver ETFs?

Now that we have discussed the taxability ofSilver Exchange Traded Funds, let us turn our attention to the various key factors you must consider before investing in such a fund.

1. Compare expense ratios:Different Silver ETFscarry varying expense ratios; the higher this ratio, the lower your overall return on investment. Therefore, you must study the expense ratios of various available Silver ETFs before arriving at your investing decision.
2. Assess your risk appetite:Although investment in Silver ETFsis considered a low risk investment, the volatility in the prices of silver entails the presence of some degree of risk. You must take stock of yourrisk tolerance and accordingly make your investment decision.
3. Consider tracking error:Another key factor you must account for is tracking error, that is, the difference between the returns on an ETF and its benchmark index. Choosing a Silver ETFfund with a high tracking error is not advisable.

Pros of silver ETFs

There are several advantages that make silver ETFs an attractive option for investors looking to gain exposure to silver without the hassles of owning physical silver. Let’s have a look at some major ones:

• Cost efficiency

  Buying a silver ETF is usually cheaper than buying physical silver. When you buy physical silver, you have to pay for storage, insurance, and security. However, with a silver ETF, you avoid these extra costs ( although there might be some small fees related to the ETF itself)

• Liquidity

  Silver ETFs are easy to buy and sell because they are traded on stock exchanges. You can buy or sell shares at any time during the trading day at market prices. On the other hand, buying and selling physical silver can be more difficult and time-consuming.

• Flexibility

  Silver ETFs can be used for various investment strategies. You can buy them to bet on short-term changes in silver prices, protect yourself against inflation or currency fluctuations, or add silver to your diversified investment portfolio. This flexibility allows investors to use silver ETFs in different ways compared to owning physical silver.

• Dividend potential

  Some silver ETFs, especially those that invest in silver mining companies, usually pay dividends. These dividends come from the profits of the mining companies. Do note that not all silver ETFs pay dividends, but those that do can provide an additional source of income.

• Cons of silver ETFs

  Silver ETFs might prevent investors from the hassles of owning and maintaining physical silver, but they have several downsides that must be considered. Let’s study the major ones:

• Market volatility and price risk

  Silver prices can change quickly and unpredictably due to economic uncertainties, geopolitical events, and changes in industrial demand. This volatility affects the value of silver ETFs, which means you can lose money if silver prices drop.

• Tracking error

  Silver ETFs aim to mirror the performance of silver, but factors like management fees, operational expenses, and trading costs can cause the ETF's returns to differ from the actual performance of silver. Consequently, the ETF might not exactly match the price movements of silver.

• Counterparty risk with derivatives

  Some silver ETFs use financial instruments called derivatives to track silver prices. These derivatives rely on other entities (counterparties) to fulfil their obligations. If these entities fail, it can lead to losses for the ETF, as it doesn't own physical silver but contracts representing future ownership.

• Liquidity issues

  We mentioned liquidity as an advantage above, but it can also act as a disadvantage. Some silver ETFs may have low trading volumes. This less liquidity leads to wider bid-ask spreads, which makes it harder to buy or sell shares at the market price. Also, these higher spreads increase transaction costs for investors when buying or selling ETFs.

• Tax implications

  Investing in ETFs usually has tax implications, which largely depend on where you live and the type of investment vehicle you have opted for. When you sell silver ETF shares at a profit, you attract capital gains taxes. The tax rates at which you will be charged vary based on whether the gains are short-term or long-term.

SEBI guidelines for investing in Silver ETFs

One of the factors that make Silver ETFs a relatively safe investment option is the fact that they are highly regulated. Since such funds are traded on listed exchanges, the concerned fund houses have to actively and consistently ensure compliance with the regulations of the Securities and Exchange Board of India (SEBI). Here are the key SEBI regulations pertaining to silver exchange traded funds.

1. Purity of silver:Fund houses for Silver ETFs are required to purchase silver that is at least 99.99% pure. This is in accordance with the guidelines of the London Bullion Market Association.
2. Maximum permissible expense ratio:The expense ratio for a particular Silver ETF cannot exceed 1% of the total Assets Under Management(AUM) of said fund.
3. Minimum Investment in Silver:Silver ETFs’ fund houses are required to invest 95% or more of a particular fund's corpus in silver or silver-related investment instruments. In addition to physical silver, fund houses can also invest in Exchange Traded Commodity Derivatives.
4. Tracking error:The tracking error for any Silver ETFmust not exceed 2%. Should this variance be greater than 2%, fund houses must mandatorily disclose the fact on their official portals.

Risks of investing in Silver ETFs

• Market demand:Silver is a fluctuating asset. Due to this, the demand and prices can be volatile.
• Control:Since you will be investing in a group of assets, you might give up on some control
• Taxation:When it comes to taxation, Silver ETFs are treated the same as conventional mutual funds.
• Tracking error:Silver ETFs keep track of the price of silver in open markets. This might cause the recording of outdated prices.

Silver ETFs vs Gold ETFs

The nature of Gold and Silver ETFs is almost similar to each other. Silver is demanded across industries, especially electronics and automobiles. Whereas gold is considered a direct security against market volatility.

Growth in industries and the economy has always shown relevance in the increase in the price of silver. Whereas gold enjoys a greater demand as a personal asset.

Hence it is important that investors make their own research and take decisions accordingly.

Conclusion

Investments in Silver ETFsare an excellent alternative to investing in physical silver. Not only do such investments offer you a high degree of safety and liquidity, but they also enable you to benefit from the upward movements in the prices of silver.

You can also choose to invest in mutual funds to diversify your investment portfolio. With over 1000+ listed mutual fundson the Bajaj Finserv platform, you can surely find some options which meets your investment needs. You can easily compare various mutual fund schemesand use our SIP calculatorto decide your monthly investment amount.

Calculate your expected investment returns with the help of our investment calculators