This article talks about Gold ETFs, Silver ETFs and how they both differ from each other.
In the Indian market, till now only one commodity Exchange Traded Fund (ETF) has been available. This commodity is gold. But with the introduction of Silver ETFs, investors in India will have a new asset class through which they can further diversify their investment portfolio. Silver is generally bought in the market in either physical form or through derivative contracts. Now with the launch of Silver ETF, like Gold ETFs, it will provide liquidity and ease in the transaction of silvers as it eliminates storage and purity issues relevant to physical form. SEBI announced the launch of Silver ETFs with certain safeguards that are already in line with Gold ETFs like backing up silver ETFs with physical silver and so on. Silver ETFs are aimed at making the investment in silver easy for investors. The biggest difference between Gold ETF and Silver ETF is that one has gold as the underlying asset while the other has silver. Let us understand these concepts in detail.
Gold Exchange Traded Fund (ETF) is considered a passive investment instrument based on gold prices. It aims to trace the price of domestic physical gold. Gold ETFs are sold in units in paper or dematerialized form representing physical gold. Gold ETFs are gaining popularity among investors as they combine the easiness of gold investments and the flexibility of the share market. 1 unit of gold ETF is equaled to 1 gram of gold. It is backed by very high purity gold. In India, gold ETFs trades on the cash segment of NSE and BSE, in the same way as any other company stock. Gold ETF is considered a convenient way to electronically invest in gold as it can take place through a Demat account and a broker. As gold ETFs derive their prices directly from gold prices, there is complete transparency on their holdings. Gold ETFs have much lower expenses or charges as compared to any other form of investment in gold due to their unique structure and mechanism. Though gold ETFs are considered a safe investment option, it is subject to market risks that impact the gold prices. Gold ETFs are advised to those investors who want to invest in gold but are not comfortable investing in physical gold due to storage and other expenses.
Silver Exchange Traded Fund (ETF), like the Gold ETFs, aims to track the spot price of silver in the open market. The functioning and mechanism of Silver ETF are similar to that of Gold ETF. Recently, SEBI allowed the launch of Silver ETFs by mutual funds in India, giving a huge boost to the silver market. Globally, Silver ETFs are widely used and are usually seen as a hedge against inflation. Investing in Silver ETFs provides greater liquidity and flexibility to the investors than directly investing in physical silver. Silver ETFs shall also provide investors an opportunity to diversify their portfolios further. After the introduction of Silver ETF, investors will be able to invest in silver metals easily through their Demat account. This move is highly anticipated by the investors and like gold ETFs, Silver ETFs are expected to have strong demand in the Indian market. Many investors in India are using overseas broking accounts to invest in Silver ETFs listed abroad. These investors might shift to domestic silver ETFs as and when they are introduced in the domestic market of India.
Gold ETF Vs. Silver ETF
Both Gold ETF and Silver ETF are similar in many aspects, although the biggest difference is their underlying assets. Gold ETFs track gold pricings whereas Silver ETFs track silver prices. Both bring more liquidity and ease of transactions for their respective metals. In fact, silver and gold are highly correlated and the Gold-Silver Ratio is one of the oldest tracked financial ratios. The ratio indicates the number of ounces of silver it takes to be equal to one ounce of gold. Investors closely monitor this ratio to decide the right time to invest in gold or silver. Silver prices are considered to be more volatile as compared to gold prices. Gold and Silver are both precious metals, but silver additionally is also a base metal for industrial uses. It has been globally noticed that at times of economic distress and uncertainties, silver acts as a hedge and thus is a more preferred metal in these situations. But at other times, silver just acts as a base metal for industrial use, which makes investment in a silver linked to global economic growth. Gold has been purely a precious metal is thus more stable than silver, whose price may be sensitive to economic cycles. Many investors view Silver ETFs as a cheap alternative to Gold ETFs.
It is evident from the article that there is not much difference between Gold ETF and Silver ETF, other than the nature of their underlying asset. Investment decisions in either of these ETFs should be based on the nature, liquidity, pricing, and volatility of the respective metals. As precious metals act as a hedge and have a low correlation with other assets, they are advised to be included in long-term portfolios of the investor for diversification benefits. The exact allocation of these precious metals in an investor’s portfolios should depend on their specific needs and goals and is advised to be between 5-15% of the total investment value of the investor.