Emergence of Silver ETFs: All You Need to Know

Exchange-traded funds (ETFs) are investment avenues that invest the pooled fund in various asset categories like commodities, stocks, bonds, etc. Silver ETFs invest their funds in physical silver or silver-related instruments. The NAV of silver ETFs is directly dependent on the price of silver.

How Does a Silver ETF Work?

Silver ETFs track the spot price of silver in the open markets. Fluctuations in the price of silver will change the NAV of these ETFs. Fund managers of a silver ETF purchase silver and store them in secure vaults. SEBI safeguards the rights of the investors by regulating these ETFs.

The fund managers must obtain auditor reports on physical verification of the silver stored in vaults at regular intervals.

Features of Silver ETFs

Here are some features of Silver ETFs:

• Purity

Investors who allocate their funds to silver exchange-traded funds need not worry about the purity of the metal. The physical silver bought by fund managers is at least 99.99% pure and is stored in secure vaults.

• Acts as a Hedge against Inflation 

Investing in commodities like gold and silver can hedge against inflation. Accordingly, during a crisis, silver can be a prudent investment option.

• No Storage Costs

Silver-based ETFs allow investors to avoid paying storage costs. Fund managers purchase silver by utilising the investment corpus. The storage and security are also a fund house’s responsibility.

• Reduced Portfolio Risk

Individuals can diversify their portfolios by investing in low-risk assets like silver, gold, etc. This will reduce the overall risk exposure in their investment portfolio. 

Taxation of Silver ETFs

Silver is a capital asset and is treated as debt securities. An individual’s investment in bullion attracts long-term capital gains tax if held for more than 36 months. In such a case, gains from silver are considered taxed at a flat rate of 20%.

However, if the investor’s holding is for less than 3 years or 36 months, profits are treated as short-term capital gains and are added to the regular income, which is taxed as per the respective tax slab.

Things to Consider Before Investing in Silver ETFs

Here are certain aspects that individuals should consider before purchasing units of a silver ETF: 

• Risk Appetite 

An investor must analyse his/her risk appetite before investing. Bullions are always risky as the prices depend on demand and supply. When it comes to silver, it is more volatile than gold.

• Expense Ratio

Individuals must compare the expense ratio of various ETFs before making a decision. The higher the expense ratio, the lower the returns and vice versa.

• Tracking Error

Investors must consider the tracking error of various silver ETFs before making a decision. One must choose a silver ETF that has minimal tracking error. 

SEBI Rules for Silver ETF 

Here are some important guidelines and regulations of SEBI regarding silver ETFs:

• Investment Ceiling 

Fund houses must invest at least 95% of the total corpus in silver and silver-related instruments. Exchange-traded commodity derivative is also considered silver-related instruments. So, managers can invest in ETDC as well to meet the requirements.

• Tracking Error

Tracking error is the difference between the returns of a scheme and that of an underlying benchmark. Fund houses must keep their tracking error within a range of 2%. If it exceeds 2%, the fund houses must mention tracking error percentage on their portal.

• Expense Ratio

SEBI has mandated that fund houses cannot charge more than 1% of the Silver ETF scheme’s assets under management as the expense ratio. This ratio is levied by fund houses on investors to cover the fund’s operating expenses.

• Purity

According to London Bullion Market Association (LBMA) standards, fund houses must buy physical silver of 99.99% purity. It ensures purity and reduces the chance of fraud.