Invest in silver ETFs to generate alpha

Investing in silver exchange traded funds (ETFs) can enhance portfolio diversification, especially given the metal’s recent outperformance relative to gold. As silver is known for its price volatility, a staggered investment approach through systematic investment plans (SIPs) can be beneficial.
Silver’s unique position as both a precious and industrial metal, with its extensive use in electronics, solar energy, and medical devices, contributes to its distinct demand drivers. This can lead to price movements that differ from other assets, providing a hedge against inflation and currency fluctuations.

Silver outperforms
Returns from silver have surpassed that of gold in the past one year and also through the past five years as geopolitical tensions have prompted risk-averse investors to turn to safer assets such as silver. Experts say investing in silver is a tactical allocation, unlike gold, which is considered as a strategic investment.
Investing in silver ETFs provide better price and tax efficiency as compared with the physical options. Silver ETFs track the price of the metal and offer returns that closely correspond to the performance of the underlying asset. Investors can also buy and sell units easily. The Budget 2024 reduced the tax on silver ETFs from marginal rates to 12.5% for long-term capital gains with a holding period of 12 months. Nirav Karkera, head, Research, Fisdom, says silver ETFs offer a cost-effective way to gain exposure to silver’s price movements. “Incorporating silver ETFs into a diversified portfolio can reduce overall risk by adding an asset class that often moves independently of traditional equities and bonds,” he says.

Similarly, Satish Dondapati, vice president and fund manager, Kotak Mahindra AMC, says silver is cheaper than gold, making it more accessible to small retail investors. “Silver prices are more volatile than gold and during an economic downturn silver may not perform like gold due to less industrial demand,” he says.

Stagger investments
As silver prices may be affected in the short term after Donald Trump’s victory and the strengthening of the dollar, investors should stagger their silver purchases. By investing gradually in silver ETFs, they can purchase at both higher and lower price points over time, effectively averaging out the cost. This helps in managing the high price swings of silver more effectively than a lump-sum investment. “Staggered investments can smooth out the impact of market volatility, helping investors achieve a balanced entry price over the long term,” says Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor.

A staggered investment approach through Systematic Investment Plans (SIPs) can be a beneficial strategy. Silver is known for its price volatility, often driven by changes in industrial demand, macroeconomic factors, and investor sentiment. By adopting an SIP strategy, investors can mitigate the risks associated with these price fluctuations by averaging their purchase costs over time.

What to consider
Silver is more volatile than gold and prices can fluctuate significantly in short periods. Silver often performs well during times of global uncertainty and when the equity market valuations are high. However, its performance tends to run in cycles of a few years. After a period of strong returns, there may be a lull, so investors should be prepared for this cyclical nature.

While short-term gains may occur, silver is better for those with a medium- to long-term outlook. Investors should hold their investments through periods of low performance and consider redeeming their investments when they reach satisfactory returns. With a long-term approach, silver ETFs can add resilience to a portfolio. “If returns do not meet expectations in the short term, investors should be ready to hold their position for a longer period to fully capitalise on the white metal’s cyclical growth,” says Sarkar.