Silver ETFs and FoFs: A Temporary Anomaly

Investors in Silver Exchange-Traded Funds (ETFs) and Fund of Funds (FoFs) have found themselves caught in a precarious situation due to the surge in metal prices. The recent scarcity of physical silver in the domestic market has led to an abnormal premium in domestic prices, making it unviable for fund houses to accept fresh lumpsum investments in Silver ETF FoFs. This anomaly has forced mutual fund houses such as Kotak, SBI, and UTI MF to temporarily suspend accepting fresh lumpsum investments in Silver ETF FoFs.

Key Takeaways:

• Silver ETFs are traded on stock exchanges, allowing investors to gain exposure to price movements of the precious metal without the hassle of physically buying, storing, and insuring silver.
• A Silver ETF FoF is a scheme that invests in the Silver ETF, typically of the same fund house, and is preferred by investors who do not want to deal with the nuances of a demat account or who want to invest in a staggered manner through systematic investment plans.
• Fund houses such as Kotak, SBI, and UTI have stopped accepting lumpsum investments in Silver ETF FoFs to prevent retail investors from buying silver at inflated domestic prices.
• The domestic price of silver is trading at an abnormally high premium compared with international import parity prices, with some cases reportedly showing a premium of 10-12% or more, while the normal premium is around 0.5%.
• Silver ETFs and their FoFs buy silver at this inflated domestic spot price due to the inflows of retail money they receive, posing the risk of an immediate and sharp loss when the premium eventually normalizes.
• The limited availability of physical silver also makes it difficult for fund houses to create new ETF units at their indicative Net Asset Value (iNAV), which tracks the physical price
• Investors should ideally allocate 10-15% of their overall portfolio to gold and silver, building this allocation slowly and in a staggered manner over time to avoid making lumpsum buys.

Statistics:

• The domestic price of silver is trading at an abnormally high premium of 10-12% or more compared with international import parity prices.
• The normal premium for silver is around 0.5%.
• Silver ETFs and FoFs have received inflows of retail money due to the surge in metal prices.
• The limited availability of physical silver makes it difficult for fund houses to create new ETF units at their indicative Net Asset Value (iNAV).
• The recent surge in silver prices has shown a 49% increase in the last three months and a 79% increase in the last year.

Sources:

• Kotak MF
• SBI MF
• UTI MF