You may soon get to trade Silver ETFs; Sebi considers nod

Mumbai: Silver-backed Exchange Traded Funds (ETF), one of the most popular products globally, may soon find their way into India. The capital-markets regulator will consider a proposal allowing mutual funds to launch bespoke plans that mimic the price moves of silver, creating an affordable and liquid investment proxy for the precious metal that has robust local demand.

The proposal was discussed in a recent meeting of the Mutual Fund Advisory Committee, appointed by the Securities and Exchange Board of India (Sebi). The regulator may soon accept the recommendations of the panel, unless there are legal or operational hurdles.

“There is a lot of demand for Silver ETFs but there are fewer investment options for investors. Sebi and the (mutual fund) industry want to address that,” said a person privy to the discussions. An email query to Sebi went unanswered till the time of going to print.

Introduction of Silver ETFs has been a long-standing demand from market participants. Currently, domestic investors and traders must either buy the metal physically or use commodity derivative instruments to trade in silver. Savvy investors buy Silver ETFs listed overseas through various broking platforms, but many of them are not comfortable with this alternative.

Furthermore, it is inconvenient to purchase physical silver as it tends to be bulkier than gold. Purity is a concern and storage a hindrance. Betting on the metal through derivatives is risky since silver, as an asset class, tends to witness wild price swings.

“Silver ETF is the need of the hour because there is immense demand for precious metals and a cheaper alternative to gold will see sizable volumes,” said Navneet Damani, research head, commodities and currency, Motilal Oswal Financial Services. “If it is introduced in India, I will not be surprised if silver ETF volumes exceed those of gold over a period of time.”

Worldwide, Silver ETFs have been more popular than Gold ETFs. In times of growing demand for precious metals, silver tends to outperform gold, resulting in higher speculative interest. But price reversals tend to be sharp and brutal as well.

“In a bull market, silver ETFs volumes will overtake those of gold because silver gives better returns in shorter spurts," said Chirag Kabani, a professional trader and technical analyst. “When China also introduced silver ETFs in the previous decade, there was big demand there.”

These asset classes have been in demand since March 2020 when developed-world central banks, led by the US Federal Reserve, cut interest rates to near-zero levels and flooded the system with liquidity to cushion their economies from the effects of Covid-19.

With real interest rates turning negative, money flowed into gold and silver last year, driving their prices to record highs in August 2020 as holding precious metals was considered preferable to fixed income. An ultra-accommodative monetary policy and rising inflationary pressures had made the economic cost of holding them low. But their prices have weakened of late after the US Fed recently hinted at raising interest rates earlier than what the market expected to combat inflation.

Silver ETFs will give mutual funds and asset managers one more option to enhance their asset allocation products.

To be sure, some industry officials are more circumspect.

“Silver ETFs will be a good option for investors but for mutual funds, it could be a nightmare,” a senior official at an asset management company said, on the condition of anonymity. “The cost of storage of the underlying silver will be very high and low levels of purity are big problems.”