The trouble with silver ETFs in a rapidly crashing market

Summary: The ongoing silver crash has exposed a problem most ETF investors never think about. ETFs are designed to track prices smoothly but only in normal markets. Read on to understand how ETF pricing, liquidity and exchange rules behave when markets move too fast. A metal that rallies like a rocket can also slam into a circuit breaker, especially when ETFs meet a fast-moving global sell-off. That's what many silver ETF investors discovered on Sunday morning, when markets opened for the Union Budget's special trading session. As prices plunged, they found themselves locked in, watching losses mount, unable to sell. "Bought a Silver ETF yesterday. It became Silver WTF today," quipped a user on X (formerly Twitter) after silver prices on MCX crashed 27 per cent on Friday, wiping out over Rs 1 lakh per kg. The joke captures Silver's personality rather well. It can behave like a sensible inflation hedge in the morning, a momentum trade by lunch, and a plumbing problem by closing time. Why couldn't you exit your ETF An ETF has two prices. One is its fair value (NAV or iNAV, where i stands for indicative), based on the underlying silver it holds, recalculated every few seconds during trading hours. The other is the last price it actually traded at on the exchange. In calm markets, market-makers keep the two close through arbitrage. Buy the ETF cheap, sell the silver dear; or vice versa. The gap stays small. In volatile markets, the rulebook matters more than arbitrage. Indian regulators set price bands to protect investors from wild swings. Sensible idea. But those bands are anchored to a base price using the NAV from two trading days ago (