Why should you consider silver ETFs over other options? 3 experts intervene

Silver exchange-traded funds (ETFs) have become one of the best performers so far in 2024, gaining an impressive 19.7% so far this year. They have gained almost 21% over the past three months, which is also one of the best among widely traded asset classes.

Silver ETF is the new kid on the block in the Mutual Fund (MF) investing landscape. The group’s oldest fund was launched just 28 months ago. But they managed to attract the attention of investors in a short time. Two silver ETFs alone have amassed assets under management (AUM) of approximately ₹5,400 million.

Prices of precious metals like silver have risen this year due to geopolitical uncertainties and continued high inflation. Silver, often referred to as poor man’s gold, has eclipsed the yellow metal this year by gaining around 19% on a year-to-date basis in the Mumbai market. In contrast, 22-karat gold prices have only increased 12.8% since the start of the year.

Silver prices hit an all-time high of nearly ₹1 lakh per kg last week in the Mumbai market. “The positive momentum (of silver) is relatively stronger than that of gold, mainly due to the latest data indicating an improvement in the industrial outlook in the United States,” say analysts at Brokerage Religare said.

“The white precious metal continues to benefit from its use in solar panels, which is expected to hit a new high this year, pushing the silver market into its fourth consecutive (year) deficit. “At present, silver appears relatively stronger than gold,” analysts explain. Unlike gold, the white metal is widely used in industrial applications, and this phenomenon is steadily increasing over the years. last years.

Investors have had to watch from the sidelines whenever silver prices have climbed in the past, because the only way they could profit from a rally was to buy silver bars or ornaments. But with the foray of digital silver in the form of ETFs about two and a half years ago, investors can now instantly benefit from any rally in the white metal.

The category may be fairly new, but it experiences periodic price surges followed by declines. So, what should investors consider before deploying funds into silver ETFs?

Be willing to take risks because money is a commodity

Silver, despite its close relationship to gold as a precious metal, is treated as a commodity and is subject to all the risks associated with that category. “Although it is a precious metal, it is more of a commodity and does not have the benefits associated with gold which is used as a risk against uncertainties,” says Anil Rego, founder and CEO of Fair horizons.

Watch out for glitter

Silver has had a rollercoaster ride over the past few years. The white metal hit a new high in 2011, followed by a 12% return in 2012. But it lost its luster over the next three years. Silver prices collapsed 24.3% in 2013, their biggest fall in a decade, 15.6% in 2014 and almost 8% in 2015.

The precious metal generated negative returns five out of ten years in the decade that began in 2010. With the exception of 2016, silver was actually a loss-making asset for investors between 2013 and 2018. The losses were in the range of 2.1% to 24.3%. .

“When commodities recover, silver will do well. Investors need to be glued to commodity cycles to get good returns. There could be extended periods where it would be down,” says Rego. “If you miss a down cycle, you’ll miss out on all your gains. Money is a high-risk investment. You have to know when to get in and when to get out,” he says.

Examine industrial growth for signals

Money is closely linked to industrial consumption. If there is an uptick in industrial production, silver will do well. Thus, investors in silver ETFs should follow developments in the manufacturing sector, as it is closely correlated with the growth of the white metal.

“The medium-term outlook is positive for manufacturing industries. But investors should keep an eye on the metrics used to assess industrial production,” financial planners say. “If the economy does not recover, cash withdrawals will decline, impacting prices,” says Suresh Parthasarathy, financial planner, partner, Fouress Finserv LLP.

Allirajan M is a journalist with over two decades of experience. He has worked with several major media outlets in the country and has written about mutual funds for almost 16 years.