Silver ETFs Offer Good Investment Opportunity Amid Market Volatility

As investors look diversification and a hedge against economic uncertainty, there has been a notable increase in investment in basic products as Gold and Silver which have always been considered safe haven assets. Commodities are often seen as a hedge against inflation, as their prices are closely linked to overall price levels in the economy. They also offer investors the opportunity to diversify their portfolios, due to their relatively low correlation with stock markets. This trend was evident during the early stages of the COVID-19 pandemic, when stock markets fell, but capital inflows into the prices of precious metals and related instruments increased as investors sought a safe haven. However, lately silver, often overshadowed by its more glamorous counterpart, gold, has attracted significant attention for its dual role as a precious and industrial metal.

What makes silver attractive?

Silver is a popular choice for precious metals investments around the world. In September 2024, the US Federal Reserve (Fed) cut the reference rate by 50 basis points (bp) amid concerns about the labor market in the US and on the eve of the US presidential elections. More rate cuts are likely in the coming months. This scenario increases the attractiveness of silver, as lower interest rates reduce its opportunity cost. Additionally, geopolitical tensions could also prompt risk-averse investors to turn to safer assets like silver.A significant portion of silver demand is driven by industrial applications due to its unique properties, including high conductivity, malleability, and corrosion resistance. The rise of environmentally friendly manufacturing has increased industrial demand for silver, particularly in electronics and green technologies. Demand for silver in industrial applications is expected to grow, driven by growing emphasis on sustainable practices. This growing demand, along with supply constraints (due to challenges in mining and refining), is expected to drive silver prices higher.

Why choose silver ETFs?

Investing in silver is often considered a tactical allocation, unlike gold, which is considered a strategic investment. The volume of silver can make physical storage difficult. Previously, Indian investors invested in silver in the form of bars, coins or jewelry and some participated in silver futures trading. However, purchasing physical silver incurs GST costs, which can be a disadvantage for unregistered dealers who have to pay out of pocket. With the introduction of silver exchange-traded funds (ETF) regulations, investing in silver has become more liquid than traditional methods. Additionally, pricing efficiency is generally better with ETFs compared to traditional physical options. The ETF aims to track the price of silver and provide returns that closely correspond to the performance of the underlying asset. By listing on the stock exchange, Silver ETF offers liquidity, allowing investors to easily buy and sell units.

By choosing silver ETFs, investors can avoid issues related to purity, theft, storage, and liquidity. This innovative and efficient investment approach has made Silver investing more accessible and transparent for retail investors, allowing them to benefit from professional fund management. Investors with a demat account can access silver ETFs, while those without one can invest through a Fund of Fund (FoF). Recent tax changes in Budget 2024 have reduced taxation on silver ETFs from marginal tax rates to 12.5% ​​for long-term capital gains, bringing them in line with the treatment of stocks. In addition, the holding period necessary for capital gains to be classified as Long Term has been set at 12 months. This makes silver ETFs an attractive option for investing in silver, diversifying your portfolio and providing a cushion for an equity debt portfolio.

Conclusion

Silver has become a compelling addition to investment portfolios. Factors such as the potential for lower interest rates in the United States, ongoing geopolitical tensions, and silver’s dual role as an industrial and precious metal increase its appeal. Silver ETFs offer a convenient and tax-efficient investment option. As part of a balanced asset allocation strategy, investors should consider allocating at least 5% to 10% of their portfolios to silver ETFs to take advantage of this promising opportunity.

(Chintan Haria is Principal-Investment Strategist, ICICI Prudential AMC)

(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)