Gold has done well as a core allocation for Indians who love the yellow metal but it’s time now to also add silver with the convenience of a Silver ETF. In 2024 and looking ahead, silver can play a risk-reducing, return-enhancing role in investment portfolios, deserving a portfolio allocation.
The Federal Reserve’s July 31 meeting signaled a likely rate cut in September and was followed by a weak US jobs report and rising unemployment data. This supports silver’s appeal as lower rates reduce its opportunity cost. In addition, ongoing Middle East tensions and the persistent Russia-Ukraine conflict may drive risk-averse investors towards safer assets like silver.
Silver has dual utility as a precious metal as well as an industrial one. For instance, silver has applications in electronics, semiconductors, and solar panels. With new-age technology like Artificial Intelligence and green technology like Renewable Energy seeing greater use and adoption going forward, the demand outlook for silver looks constructive. The demand for silver has been outpacing its supply since 2021, supporting prices.
Currently, the Gold to Silver ratio which describes the number of ounces of silver it takes to equal one ounce of gold is close to 85: 1. This is much higher than the long-term average of 60:1 indicating a potential appreciation in the price of silver, making now an opportune time to invest.
As we Indians have warmed up to financial assets and mutual funds in recent years, investment in physical commodities like silver too can be optimized using the mutual fund route. A Silver ETF or exchange traded fund is a passively managed mutual fund which invests in physical silver and silver related instruments with the objective of generating returns in line with domestic silver prices, subject to tracking error. Each unit of a silver ETF approximately equals to 1 gram of silver enabling investors to take exposure to the metal in small denominations. Units of Silver ETFs trade on exchanges just like shares which offers investors pricing transparency. Investors can buy or sell units of silver ETFs using a demat account during market hours. Holding the commodity in the form of ETF units provides the investor higher liquidity.
Silver ETFs offer investors an innovative and efficient way to invest in silver without the hassles of holding and storing physical silver. Silver ETFs also ensure the purity of the metal.
While choosing a Silver ETF, one should look out for the fund size and its trading volumes which can reasonably indicate the ease with which one can liquidate their ETF holdings at fair prices. One should also be mindful of the ETF’s expense ratio. Lower the expense ratio, the better it is for the investor as a larger part of the gains can be passed onto them. Last but not the least, one should check the tracking error of the Silver ETF before investing. Simply put, tracking error is the difference in returns of the silver ETF and the underlying silver it is tracking. While some tracking error is inevitable given the ETF’s expenses and other operating factors, ETFs with low tracking errors are preferable.
The recent tax changes announced in the Budget have brought down the taxation of Silver ETFs from marginal tax rates to 12.5% for Long Term Capital Gains which is at par with Equities. The holding period for gains to be classified as Long Term has also been set at 12 months, making Silver ETFs a smart way to invest in silver and diversify your portfolio.
While gold remains a core investment for Indians, silver is now a compelling addition. With likelihood of lower US interest rates, geopolitical tensions, and silver’s dual industrial and precious roles, Silver ETFs offer a convenient, tax-efficient investment. As part of asset allocation, we recommend investors to allocate 10% of portfolio in gold and 5% in silver.