In order to enable individuals to invest in silver exchange-traded funds (ETFs), the Securities and Exchange Board of India (Sebi) has issued operating rules after amending mutual fund regulations to have a mechanism for silver ETFs. Asset management companies (AMCs) can now launch silver ETFs to provide investors with the opportunity to invest in a new commodity.
In India, investors invest in silver through silver bullion, silver coins, silver jewelry and some through silver futures. As in the case of gold ETFs, for silver ETFs, ETF houses will have to invest at least 95% of net assets in silver and silver related instruments. Exchange-traded commodity derivatives (ETCDs) with silver as the base are silver-linked instruments.
The investment objective will be to achieve returns in line with the performance of physical silver at local prices, subject to tracking error. The Markets Regulator has confirmed that physical silver must be a standard alloy of 30kg weight and a fineness of 999ppt (or 99.9% purity) confirming the London Bullion Market Association’s (LBMA) Good Delivery Standards. The NAV of Silver ETFs will be disclosed on a daily basis on the AMC website and the indicative NAV of Silver ETFs will be disclosed on the exchange platforms, where the units of these ETFs are listed.
Silver ETFs will be benchmarked against the price of Silver based on the Silver LBMA spot price. In terms of liquidity, the Silver ETF units will be listed on the exchange and the AMCs will designate authorized market participants/makers to provide liquidity to the Silver ETF units in the secondary market.
The regulator stressed that the tracking error — the annual standard deviation of the difference in daily returns between physical silver and the net worth of silver ETFs based on data reported for the past year — must not exceed 2% and must be disclosed on a monthly basis on the AMC website. Physical verification of the underlying Silver ETFs will be conducted by the mutual fund’s legal auditor and will report to the trustees every six months.
What does this mean for investors
While the introduction of silver ETFs will expand the options for investing in commodities through exchanges, investors should note that silver prices can be volatile. However, by investing in silver ETFs, investors will not have to worry about its purity or theft as the underlying assets will be managed by treasury managers.
Chintan Haria, Head of Product and Strategy, ICICI Prudential AMC, says that people invest in gold and silver physically because they are considered a store of value. “With funding growing, silver ETFs will be another tool besides gold ETFs through which investors can participate in the commodity markets in a meaningful way. Since silver is inherently bulky and thus difficult to store, we believe an ETF model will be one of the preferred methods. Investors to have exposure to silver in the form of a financial investment.”
Priti Rathi Gupta, founder of LXME, says that with the introduction of silver ETF standards, investors will be able to invest in silver in a more liquid way compared to traditional methods. This can help diversify the portfolio as silver has been a precious metal, after gold, to catch the eyes of investors. “There is now standardization in these product specifications. This makes investing in silver easier, accessible, and transparent to investors, who will benefit from professional fund management.
Therefore, investors who want to diversify their investment portfolio can invest in silver ETFs along with gold ETFs and benefit from price efficiency.