Gold ETFs have been in the Indian Financial markets for long enough and they have a great track record of helping investors meet their financial goals and targets. They have not only acted as a great hedge against equity volatilities during economic slowdowns, but they also have provided stable returns to portfolios which consist of high beta stocks. To add to the investor’s delight, ICICI Mutual Fund launched the country’s first silver ETF on Jan 5, 2022. In fact, Nippon India MF and Aditya Birla Sun Life MF are also set to roll out their own silver ETFs on January 13 called as SilverBees and BirlaSLAMC respectively.
However, one might be curious- why this sudden urge to go for silver ETFs? Also, how advantageous is it compared to traditional gold ETFs? Should you invest in both or just go with any one of the ETFs? In this article, we aim to deconstruct both these ETFs and help you make an informed decision related to investing in them.
But before we go through Gold and Silver ETFs let us understand how these ETFs work?
Both the Gold and Silver ETFs represent their corresponding underlying asset which is Gold in the case of Gold ETF and Silver in the case of Silver ETF. Both of these ETFs have the physical spot gold rate as a base for their derivation. This means that if the spot rate of Gold increases in India then the Gold ETF will be expected to rise, similarily if spot Silver prices increase so will the prices of Silver ETF.
They are the investor’s first choice when it comes to diversifying their investment portfolios. Investing in physical gold is inconvenient due to two main reasons firstly the making charges that the jeweler charges and secondly the risk it carries to hold them without the security of vault, therefore most investors and other market participants focus in investing in gold through ETF or Digital gold.
Gold ETFs are considered as a safe asset because gold prices are not as volatile as compared to the stocks and index. Why? Simply because gold doesn’t have a lot of industrial use. So the factors affecting it are limited in nature.
Here are some features of Gold ETFs that make them an attractive investment option:
- Secured Holding:- Gold ETFs are held in the demat accounts of the investors. In India, CDSL and NSDL are the largest depositories. While the money is invested in the fund by the investors, all of the actual trading and order placements are done by the Asset Management company. Each fund is managed by a fund manager, who has the adequate experience in the respective investment field. So for example if you buy GoldBeES then in that case Nippon India’s fund manager will manage the fund. Just like shares, you can buy gold ETFs and they will be stored in the demat account. The AMC with respect to their policies will trade the gold stocks and other gold related assets on different stock exchanges for you. Some of the ETFs trade only in spot gold market while some international gold ETFs trade in both the spot and the futures markets to ensure good correlation. In India, the fund houses try to correlate the movements of spot gold prices and the price of the ETF itself.
- Liquid:- Both Gold ETF and Silver ETF are highly liquid in the stock markets, therefore they provide the investors and traders with easy and timely entry and exits. Also, transactional expenses are lesser compared to physical gold. In physical gold often the jeweler will compel you to run certain purity checks which might cost you.
- Gold ETFs are a secure way to gain exposure to the gold market without much risk.
- No time boundation and tax benefits:- Investors can hold Gold ETFs for a long time without any worries because no additional wealth tax is levied on demat accounts. At the same time if Gold is held physically, the Gold asset might depreciate if not taken proper care of.
- Transparency:- All the transactions are transparent and can be easily tracked with minimal effort.
On the other hand, Silver ETF is a relatively newer concept in the Indian financial market. Unlike gold, silver has historically enjoyed wide industrial use. Based on a world silver survey report, this metal is used in heavy industry and technology related products like smartphones, tablets, automobile electrical systems, solar powered panels and many others. Naturally, with so much dependence on industrial demand, the price of silver largely depends on the country’s economic condition and is highly volatile.
Silver ETFs are benchmarked to spot silver price and they derive their rates from the india spot market rates which are derived as per the fixed daily price calculated and published by the London Bullion Market Association or also known the LBMA. Since, mutual fund houses purchase 99.9% pure silver bars therefore you need not worry about adulteration or impurity.
Fun Fact- 99.9% Silver is the purest form of Silver in physical form. Such pure silver is soft in nature and can be molded with minimum efforts. Therefore you should always take good care of Silver bars and coins.
However, as we have mentioned before, silver is a highly volatile commodity. On that note, here are some factors that affect the silver price:
- Economic condition of the major countries- As silver is a highly industry driven commodity, it’s price rises when the economy is doing good. In fact, during periods of inflation, often times the prices of silver also shoot up making it a better hedge against inflation.
- Demand and Supply– Unlike gold, Silver is a very sensitive metal which is responsive to industrial demands. A recent event during this pandemic was when a lot of silver mines closed down. There was an inadequate supply of silver coupled because of the increasing refining costs in China which led to a 52% inflation rate for silver compared to gold’s 28%. Like this the concepts of demand and supply work very aptly in the silver markets.
Fun Facts Related to Demand/Supply:-
Increase in Demand+ Supply unchanged = Prices increase
Increase in Demand+ Supply increase with same quantum= No Significant change
Decrease in Demand+ Supply unchanged= Prices decrease
Decrease in Demand+ Supply decrease with same quantum= No Significant change
Decrease in Demand+ Supply increases= Prices decrease
Increase in Demand+ Supply decreases= Prices increase
Gold ETF vs Silver ETF- Which is better?
Before coming to any conclusion, let’s go through the advantages and disadvantages of each so that we can form a clear picture of what suits your requirements.
If you wish to trade in gold ETFs, you must buy a minimum of 1 unit of gold ETF that is equivalent to 1 gm of gold in most ETFs, every single fund has different criteria for the quantity of gold it represents in gram. Just like equities, you can purchase or sell them in units(grams).
Also, your ETF investments are managed and handled by a fund manager or stock broker. So you need not be an expert to trade and invest in gold ETFs!
- Standardised rates:- Gold ETFs have a standardised rate per unit. You can buy gold ETFs from any part of the country during trading hours without worrying about the difference in gold prices due to GST.
- Liquid:- Easy entry/exit without paying any additional fees. You only have to pay 0.5-1% of the brokerage fee.
Sounds too good to be true? Here are some challenges that investors might face with traditional gold ETFs:
- Tax:- A lot of times traditional capital gains tax breaks/reliefs are not applicable for gold ETFs. In that case, the investor has to pay a hefty amount of tax from his/her gains when the position is sold or liquidated.
- There are always some additional costs associated with Gold ETFs like the cost of your demat account as well as the annual maintenance charges that are payable to your brokers. Some brokers have reduced these costs but still over a course so time they impact your portfolio especially if it’s small, because since you do not receive any dividend from Gold ETFs like GoldBeES, therefore technically such charges leads to interim cash outflow unless you liquidate your holdings.
Now, onto the relatively newer Silver ETF. Let’s look into some of the advantages of silver ETFs.
- Lesser trading costs allow silver investors to come in and out of the market in a flash.
- Volatility:- View silver prices in real time on the exchange and trade easily. For short term investors, this is a real deal maker. You can even hold the silver for a few hours or minutes before selling them off as you wish. The volatility together with the liquidity provides a great benefit to the traders.
Silver being an industry driven metal does not show sharp aggression towards inflation( like gold) just because there is a lot of demand.
Instead, new shares are created and correspondingly, new silver is also bought to cover these shares. This helps to keep the silver pricing in line with the overall market price.
However, there are a few things to keep in mind before investing in Silver ETFs
- New:- Firstly, silver ETFs are relatively new in the market. Therefore one might face the issue of lower liquidity based on the demand and supply curve in certain funds. Some funds are pretty liquid while some tend to have certain slippages.
- Brokerage and Fees:- there are costs associated while purchasing any ETF. Brokerage fees, AMC expenses, as well as any error in tracking, can largely impact the overall returns.
- Management Errors:- counterparty risks and poor ETF management can largely lead to huge losses in ETFs and impact investors. That is why understating and conducting research on the fund house is always recommended.
- Holding- Usually investors hold a large amount of gold ETFs for a long period of time because of their stability, and for their history to provide good returns. Although silver prices get influenced by gold prices because both of these assets share a good correlation, but they are not usually held for long periods.
So, what should you choose Gold or Silver ETF?
Now it is of no doubt that both gold and silver ETF are important instruments for investors. Both are very secure modes of investment and are easy to trade. Both act as an important hedge against inflation but in different ways.
While gold ETFs help minimizes the loss of investment returns during market turmoil, silver ETFs help you earn during inflation. Deciding on which one to go for is purely based on what you are looking for. As far as diversifying your investment portfolio is considered, both gold and silver ETFs are good options.
However, if you are looking for a secure investment during your retirement then gold ETFs are a much better option. They are stable and aren’t sensitive to sudden changes in the market. But for an investor looking for quick profits in a safe and secure way, then silver ETFs are the way to go for!
Smart Switch – Gold to Silver
If you find yourself stuck in a dilemma in respect with which ETF to invest in either gold or silver then we have a feature called- ‘Smart Switch‘ for just you in the GoldLane mobile app. With this amazing feature you can convert your gold holdings to silver & vice-versa with just one click. Thus when gold prices are going down and if at the same time silver is doing good then you can easily convert gold to silver & save your investment from losses. After some time when the gold market stabilizes you can switch back to gold from silver or book your profits in silver.
Learn more about smart switch here:- https://www.goldlane.in/digital_gold_faq/switch.html
Wrapping up the discussion
While prices of silver might be volatile, traders might use this feature to gain some quick money off Silver ETFs. On the other hand, gold ETFs are a secure investment that helps to minimize losses during inflation this, to long term investors is a great dealmaker. That is why, industry experts generally recommend having a 5-10% investment in both gold and silver ETFs in your investment portfolio. That way, you get the best of both worlds.