Silver ETF: The polish your portfolio could use

One investment avenue that receives relatively lower attention compared to its other precious metal cousin is silver. Over the medium to long term, adding silver to your portfolio can give adequate diversification.

Now, silver can be a good inflation hedge. It has multiple industrial and commercial uses, is used in jewellery and has very low correlation to the movement in the prices of other asset classes such as equities and bonds. Silver’s fortunes are linked to economic growth and consumer demand; it tends to do well during periods when a country’s economic cycle is in an expanding mode.

As interest rates near their peak across advanced and developing economies, it may be a good time to consider silver investments. Taking the ETF (exchange traded fund) route to taking silver exposure may be the ideal way of doing so. 

Here’s more on why silver must be a part of your portfolio and why silver ETFs provide the best mode of investing in the precious metal.

Silver lining to your portfolio

Inflation hedge: Silver prices rally much faster during times when metal/commodity prices increase sharply during expansionary cycles in the economy. Thus, silver tends to beat inflation rates convincingly and serves as a good hedge.

Strong industrial usage: Silver has critical usage in fast-growing new-age technologies, including in smart phones, solar panels and electric vehicles. In addition, the precious metal is used in automobiles, electronics, TV screens, 5G networks, manufacturing, bio pharma and medical technologies among other areas. As many advanced economies seek an alternative to China and look to India for reducing technology supply chain dependence, demand for silver is likely to be high. 

India is among the fastest growing large economies in the world, and silver prices are likely to be on a bullish trend given the demand environment for the precious metal.

Supply constraints: Given that silver has multiple usages across industry, jewellery and investment needs, it has considerable demand. But silver mining and supply generally do not keep up with demand. According to the Silver Institute, the global shortfall in silver supply will be 140 million ounces in 2023, which is however down from 253 million ounces in 2022. This supply constraint is likely to keep prices at healthy levels for silver.

Peaking interest rates: After sizeable rate hikes in the last 18 months, the US Federal Reserve may be done with its rate tightening cycle according to experts. Indeed, treasury security yields had peaked in October. As other large economies follow suit in pausing in rates and as economic activity remains robust, silver prices are likely to be elevated. 

Diversification with uncorrelated assets: Silver’s movements have very low or almost no correlation with equities and bonds. As the dynamics of these asset classes are different, silver would serve as a good diversifier to an investor’s portfolio. This would reduce the overall portfolio risk.

Taking the ETF route

For retail investors buying silver via the ETF route is the ideal approach for taking exposure as silver units are traded on the BSE and NSE. With a demat and trading account, investors can buy ETFs tracking the precious metal even in small denominations of a few hundred rupees.  Given that there is adequate liquidity of such ETFs in the exchanges, buying and selling can be quite smooth for investors. 

Investors also need not worry about the quality or purity of silver as the fund house would buy the metal on your behalf. Each unit of Silver ETF is backed by physical silver of 99.90 per cent purity. Since these units are held in demat form, concerns related to storage, theft are non-existent. For those investors without a demat account, may consider investing in a Silver ETF Fund of Fund, which is akin to any other mutual fund. One can invest through SIP or lump sum in a Fund of Fund.

In short, the fund house takes care of the purchase, quality, storage and transport of the silver you buy via the ETF mode, making it an ideal low-cost mode of taking exposure to silver. 

Finally, there is no credit risk or the fear of downgrades, as silver is a precious metal and will remain a store of value for investors.

(The writer is Principal - Investment Strategy, ICICI Prudential AMC)