Why should you consider silver ETFs over other options? 3 experts weigh in

Silver exchange traded funds (ETFs) have emerged as one of the best performers so far in 2024 gaining by an impressive 19.7% so far in the year. They have gained nearly 21% in the last three months, which is also one of the best among widely traded asset classes.

Silver ETF is the new kid on the block in the mutual fund (MF) investments landscape. The oldest fund in the group was launched only 28 months ago. But they have managed to attract the attention of investors within a short span. Two silver ETFs alone have garnered assets under management (AUM) of about ₹5400 crore.

Prices of precious metals such as silver have been on the rise this year due to geopolitical uncertainties and persistently high inflation. Silver, which is often referred as poor man’s gold, outshone the yellow metal this year by gaining about 19% on a YTD (year-to-date) basis in the Mumbai market. In contrast, prices of 22-carat gold have moved up by only 12.8% so far in the year.

Silver prices touched a record high of nearly ₹1 lakh per kg last week in the Mumbai market. “The positive momentum (for silver) is relatively stronger than gold, mainly because of latest data indicating improving industrial outlook in the US,” analysts at Religare Broking said.

“The white precious metal continues to gain from its use in solar panels, which is set to reach a new high this year, pushing the silver market into its fourth consecutive deficit (year). Silver in the present term appears relatively stronger than gold,” the analysts explained. Unlike gold, the white metal is widely used in industrial applications, which has been going up steadily over the past few years.

Investors had to watch from the sidelines whenever silver prices shot up in the past as the only way they could gain from any rally was to buy silver bars or ornaments. But with digital silver in the form of ETFs making its foray about 2 ½ years ago, investors can instantaneously benefit from any rally in the white metal now.

The category may be quite new but sees periodic spurts in prices followed by dips. So, what should investors consider before deploying funds in silver ETFs?

Be ready to take risks as silver is a commodity

Silver, despite its close connection with gold as a precious metal, is treated as a commodity and is prone to all the risks associated with the category. “Though it is a precious metal, it is more of a commodity and doesn’t have the benefits associated with gold that is used as a risk against uncertainties,” says Anil Rego, founder and CEO, Right Horizons.

Be watchful of the glitter

Silver has had a rollercoaster ride over the past few years. The white metal hit a new high in 2011 and followed it up by giving 12% returns in 2012. But it lost lustre in the next three years. Silver prices crashed 24.3% in 2013, its biggest tumble in a decade, fell 15.6% in 2014 and by nearly 8% in 2015.

The precious metal generated negative returns in five out of 10 years during the decade that started in 2010. Barring 2016, silver actually was a loss-making asset for investors between 2013 and 2018. The losses were in the range of 2.1% to 24.3%.

“When commodities are in an upturn, silver will do well. Investors have to be glued into commodity cycles to get good returns. There could be extended periods when it would be down,” Rego says. “If you miss a downcycle, you will miss all your gains. Silver is a high-risk investment. You must know when to get in and when to get out,” he says.

Look at industrial growth for signals

Silver is closely tied to industrial consumption. If there is an uptick in industrial production, silver will do well. So, investors in silver ETFs should keep a track of how the manufacturing sector is doing as it has a close correlation with the growth of the white metal.

“The medium-term outlook is positive for manufacturing industries. But investors should keep an eye on the metrics used for assessing industrial production,” say financial planners. “If the economy does not pick up, silver offtake will come down impacting prices,” says Suresh Parthasarathy, financial planner, partner, Fouress Finserv LLP.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.