Silver ETFs: Silver funds’ pomp and show fails to glow | Value Research We assess the investment case of silver ETFs, as Kotak launches a version of its own

Silver funds' pomp and show fails to glow

We assess the investment case of silver ETFs, as Kotak launches a version of its own

Silver ETFs: Silver funds’ pomp and show fails to glow

Hype springs eternal, but in silver exchange traded fund's (ETF) case, it has proven to be destructible, pretty quickly.

Ever since mutual fund houses got the green light from markets regulator SEBI to launch silver ETFs in November 2021, a glut of such funds flooded the markets last year on expectations that the metal prices will rise due to their applications in the electric vehicle (EV) space.

In fact, they are still trickling in. Kotak Silver ETF Fund of Funds is the latest on the block which will invest in units of Kotak Silver ETF. The new fund offer is available for subscription from March 13 to March 27, 2023. (ETFs are a type of mutual fund that tracks a particular index).

Yet, despite the pomp and show, silver ETFs are down in the dumps, reducing our investment value by 5.5 per cent on average over the last year.

Why? A slowdown in China, which consumes the most silver among major economies, caused silver prices to tumble in 2022.

None of the silver ETFs in India was spared as a result. ICICI Prudential Silver ETF, Aditya Birla Silver ETF and Nippon India Silver ETF fell by 5-5.7 per cent last year.

Unhappy 2023?
Silver's script seems to be doomed in 2023 too. "We don't anticipate any major improvement in China's economy this year. If the Fed continues to increase the rates, gold and silver are likely to see more pain this year too," said a fund manager on condition of anonymity.

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Actually, the returns of silver ETFs would have been much worse, but for their recent weeks' resurgence of around 3 per cent.

Reasons for the silver resurgence in recent weeks include:

  • A sharp drop in yields on US Treasury bonds over the last three to four days has resulted in a rally in silver prices.
  • The failures of Silicon Valley Bank and Signature Bank will prompt the US Federal Reserve to be less aggressive in raising interest rates. That's good news for both silver and gold.

Our take
It doesn't matter which direction silver prices go this year or the next.

We, at Value Research, have never been big advocates of silver (or gold, for that matter). Unlike equity, bonds, or deposits, silver is an unproductive asset, and its price depends on the whims of demand and supply.

And the number backs our conviction too: silver delivered - look away if you are a silver believer - a modest 1 per cent in the last ten years, as of January 31, 2023. It's clear everyone should maintain a healthy distance from all silver-based investments.

Suggested read: Fund houses line up silver NFOs

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