The Mutual Fund Show: Should Investors Consider Silver ETFs?
Mutual fund investors can substitute physical gold by investing in exchange-traded funds with the yellow metal as the underlying asset. They now have a similar option for silver.
Three asset managers, including ICICI Prudential Mutual Fund and Aditya Birla Sun Life Asset Management Co., are launching silver exchange-traded funds in January. In September last year, the market regulator had allowed silver ETFs.
“Silver ETF, much like gold ETF, is a very simple way of investing in silver as a commodity through the financial route,” Chintan Haria, head of product and strategy at ICICI Prudential Mutual Fund, told BloombergQuint’s Niraj Shah on a weekly special series The Mutual Fund Show. “This is a simple way for investors to participate into a financial product which will ultimately get listed on the exchange and investors can buy and sell. They basically will get exposure to silver and the price of silver in international markets is converted into Indian rupees.”
According to Gaurav Rastogi, founder and chief executive officer of Kuvera.in, having an easier way to invest in silver or hold silver is a good idea. Silver is a “bit more procyclical” to growth than gold because of its industrial uses, he said on the same show.
Rastogi urged investors to look at the gold-silver ratio, which is trading at one of its lowest points. The biggest risk factor for gains in any silver ETF, according to him, is that both the metals are losing the “cachet of safe assets”.
“People are happy with currencies. They’ve not had a very bad tail risk event in a very long time where you would hear stories that nothing but gold would work, or nothing but silver would work. That kind of framing is one of the risk factors…but otherwise a great opportunity for precious metal investors who now have a very easy way of buying silver,” Rastogi said.
Besides, the returns from silver can move higher in the times to come, they said.
According to Haria, “for almost 10 years, silver has had virtually no return, except for one big jump that we saw between March 2020 and August 2020 where silver and gold jumped, but a 10-year CAGR is only about 2% in silver”.
Over the next two years, he said, there’s a potential for a step-up jump in silver given its industrial usage across electric vehicles to 5G mobile technology and the medical industry. “Silver is a good addition for diversification of portfolio, especially when other asset classes like equities and debt are not looking that attractive on a relative valuation basis.”
Watch the full show here:
Here are the edited excerpts from the interview:
Chintan, since ICICI Prudential is launching a silver ETF, can you tell us what is a silver ETF and what is its use case?
Chintan Haria: Silver ETF, much like gold ETF, is a very simple way of investing in silver as a commodity through the financial route. Most Indians are aware of how exchange traded funds work. You can go on the exchange and, much like you buy a share or equity, you can buy and sell ETFs as well.
Silver ETF, which we are launching right now and the NFO (new fund offer) closes on Jan. 19, is a simple way for investors to participate in a financial product which will ultimately get listed on the exchange and investors can buy and sell. They will get exposure to silver, and the price of silver in international markets as converted into Indian rupees. So it is similar to the gold ETF. Silver ETF is a unique financial way to invest in silver, which otherwise was not available for Indian investors.
Is there a particular reason why the industry is seeing the advent of these (silver ETF funds)? Why did you decide to launch it now?
Chintan Haria: From a timing perspective, we would have loved to launch silver (ETF) much earlier. But the advantage which we have right now is that the regulations are in place. Our regulator has been benevolent in terms of doing it quickly once we raised the request.
The reason for the launch is that the regulatory approvals have come right now as well asthe circulars etc relating to the silver ETF. Prior to this, there were no regulations around silver and hence, we weren't able to launch the silver ETF.
Also from a timing perspective, for almost 10 years, silver has given virtually no return except for that one big jump that we saw between March 2020 and August 2020 where silver and gold would jump.
So, if you see a 10-year CAGR, silver is only about 2% while our markets are in excess of 10%. Silver typically moves in step-up jumps and we probably believe that over the next two years, there is a potential of a step-up jump which can happen again, given that the industrial uses of silver – across solar, electric vehicles, 5G mobile technology, and industrial and medical uses – is increasing.
So from that perspective, silver is a good addition for diversification of portfolio, especially when other asset classes like equities and debt are not looking that attractive on a relative valuation basis.
Gaurav, what have you made of this troika of silver ETFs coming from three prominent houses, the timing, and the applicability of the product?
Gaurav Rastogi: Timing and applicability is as Chintan explained from a regulatory perspective. There are reasons why regulatory ETFs are being launched today.
If you look at precious metals, the two names that will come up are gold and silver, and not just as an ETF or a mutual fund, but in the physical market (as well). Indians have been purchasing gold and silver for a very long time. Globally, those are the two precious metals that have been accepted everywhere in the past as well.
Having an easier way to invest in silver, or hold silver is a good idea. Silver also has industrial uses, not a lot of industrial usage, but more than what gold does. That's why it's a bit more procyclical than gold.
You think about gold as a hedge to your stock portfolio. But silver is a bit more procyclical to growth because (of) the industrial uses and that demand kicks in according to the business cycle, and not uncorrelated to the business side.
What's interesting about silver, if you look at what precious metal investors consider, is the gold/silver ratio. It is one of the lowest that has been there. I don't think you've seen this gold/silver ratio in the past, I would say probably, 1,000-2,000 years.
There is a big chunk of investors, especially in precious metal, who would believe that at some point their reversion to mean is imminent. Now, it is predicated on a lot of risk factors as well. So, the biggest risk factor (and this holds true for both silver and gold) is that both are losing that cachet of safe assets.
People are happy with the currencies. They've not had a very bad tail risk event in a very long time where you would hear stories that nothing but gold would work, nothing but silver would work.
That kind of framing is one of the risk factors on where the world is going, but otherwise a great opportunity for precious metal investors who now have a very easy way of buying silver.
What would your advice be for investors wondering if they should or should not use this route, and whether they should choose a precious metal like silver for investing at the current point of time?
Gaurav Rastogi: The channel is definitely good. We firmly believe in more and more digitised and frictionless ways of owning assets.
Buying silver has all the same drawbacks of buying gold – you have to store it, keep it safe, think about purity and insurance. It's not easy. You need infrastructure and that infrastructure will be as simple as having a locker, but then you have to maintain that locker and you pay for those lockers.
ETF gives you similar returns – there is an expense ratio involved of course – but without requiring you to build all of this. So it's more liquid, it's a more frictionless way of owning the same asset. We do like that path for sure.
Timing wise, I've always said this, it's very hard to time anything. Gold to silver ratio was 12 in the early 2000s. From there, it moved to somewhere around 17 and 18. And 12 itself is historically a very high number. So, some of these trends, whether they'll revert or whether they will continue, is a very hard call to make.
But if this is an area of your expertise, this is something you do anyways, for example, if you are a family that buys silver periodically then you might want to think about owning ETFs rather than buying physical silver.
Chintan, when you are telling investors to subscribe to this ETF or Fund of Funds, whichever route they take, what are the kind of investors that you would tell to choose a silver ETF?
Chintan Haria: If we look at the target market audience, most Indians want to invest in silver and gold in general. Because of the lockdown, people did realise that it is extremely difficult to reach out physically, and also the gap between buying and selling prices which is there in the physical market. For gold, it may be narrow, but for silver it can be slightly wider.
Also, silver oxidizes or has a natural tendency to probably get impacted with the atmosphere and hence, it is difficult to store it. So, we did get requests over the last five-six years to launch a silver ETF.
Many investors do not want the headache of actually storing physical silver. There are many Indian investors who have serious amounts of money in silver in physical form as well.
If you see gold ETFs, for example, which we are also promoting because gold should be looked at as a hedge to inflation and as a diversifier.
In fact, in many of our funds in which we invest gold, we have increased the gold allocation as well. We do believe that silver is also something which investors want to invest in and most of the people who have large amounts of physical silver may look to invest.
There was a very large section of Indian investors who wanted to invest in silver but because it is difficult to have physical silver, did not invest.
Now this route is so easy. You can basically go online and just invest, and in smaller amounts which is also important. The flexibility of having one unit, which is equal to one gram and which is equal to Rs 62 roughly today, is very useful. It democratises the ability for every Indian to hold silver in their portfolio, however big the portfolio may be.
Gaurav, would you believe that 2022 could be a year wherein Balanced Advantage Funds are the right recipe for an investor who's not completely sure about what kind of exposure they should have to equities?
Gaurav Rastogi: I would frame it by taking returns out of the equation completely. I don't think that Balanced Advantage Funds are a recipe to solve volatility because volatility is as hard to predict as returns. It's hard for me to sit here and say that 2022 will be a very volatile year and have a reasonable degree of accuracy associated with it.
If someone is not sure about what asset allocation they should have, or how their asset allocation should move basis relative valuation, and maybe they don't want to be hands-on about rebalancing and equity allocation, for them, this is the perfect vehicle.
It literally is a one-fund solution. I hear people say, ‘Oh, I have five equity funds and three debt funds, and I'm now going to add a BAF’. Basically, you have your own equity debt allocation, and now you have the equity debt allocation that fund houses are putting all of their collective brains into figuring out the right fund allocation. Effectively, you end up with a hotchpotch fund allocation at a portfolio level.
So, if someone is fairly confident that they want 70% equity and 30% debt, there are fantastic equity funds and debt funds. You want to go passive, go passive; you want to go active, go active. And manage that asset allocation phase.
If you find that hard or that it is not for you, then BAF is literally the one-fund solution that answers all of these questions. Just keep on investing in it periodically.
Chintan, for the uninitiated investor, is BAF the right option in 2022 and beyond?
Chintan Haria: Back in 2005-2006, we were thinking about BAF as a solution for those investors who mostly end up investing when markets are expensive, and then take out money when markets become cheap – the reverse of what they should do.
That's how the Balanced Advantage Fund, as a solution for buying-low-selling-high and (as) a very simple product, came into the picture.
For 12 years, we are very happy to note that investors have stuck around in terms of their investment for long terms. So, it is not a solution for 2022 or 2023, it is a solution forever for anyone who wants to invest in markets but does not have the time necessarily to follow the valuations or do the asset allocation on their own. Probably 99.99% of Indians fit in (this category) and because none of us are actually taught about finance when we are young, and then, we end up making mistakes. So, to stop us from learning the hard way, a Balanced Advantage Fund is the first port of call and for most people, that will end up being the final port of call.
So, you can invest any time you want, and any amount of money, because ultimately, we as an asset management company, are deciding how much is the right equity based on valuations. So go for it.
BAF should be a core allocation for the long term, and more so right now when market volatility is a little bit higher.
Every month, I see some announcement about a new product coming in from your organisation. What's a very interesting product that you guys have launched?
Chintan Haria: The silver ETF and the auto ETF, which was India's first auto ETF and just closed on Jan. 10.
Apart from that, we also closed a very interesting fund called the ICICI Prudential Passive Multi-Asset Fund of Funds. We felt that investors really do not have the time to figure out how much should be in equity, debt, gold and International equities. So, we brought all these four components – equity, debt, gold and international equities – into one fund investing in ETFs and index funds.
Being a passive investing fund, where the active call of where, how much, and when (to allocate money) is taken by our fund managers. We've done a good job of actually doing that for many of our other schemes.
On the passive side, a true-to-label asset allocation solution is what the ICICI Prudential Passive Multi-Asset Fund of Funds is all about. It's something which we believe has a true potential to be part of every investor's portfolio for the long term.
Gaurav, tell us about the insights you and your team picked up in the last 30-60 days about where people are parking the maximum money and why they are doing that?
Gaurav Rastogi: Look at the most bought and most sold funds – we actually publish (the details) on a weekly basis. We are impartial, and so we do both sets.
If I look at the last one-and-a-half months, (though) this actually goes back probably from August of last year, we're definitely seeing people getting more bullish on equity. You will see that in SIP numbers and in equity inflows. We see it on our platforms as well. People are getting more and more bullish on equity mutual funds, and this is what we would have predicted based on past returns as well.
When past returns are good, people get bulled up, they invest. Chintan also referred to that. Instead of buying low and selling high, a lot of people tend to buy high.
In terms of which sectors people are looking at, two stand out in our data. One is passive funds. We're seeing a lot of interest in passive in the last two to three months – the Nifty Index and the Nifty Smallcap Index, in particular.
We're also seeing a lot of focus on digital and IT funds. Those are the two sectors where we are seeing disproportionate flows. If you look at our top five most-bought lists, that we publish on a weekly basis, for the last one month you will see these names come up again and again.
With a lot of fund houses now launching a lot of passive funds, it is creating awareness about passive (funds) – what it means, its benefits versus an active fund, and what you lose out on. People are making their own choices.
When it comes to digital and IT, it’s purely performance-driven. Last five years, if you look at what the Nifty IT Index has done, it's up about 250% in the last five years. it is probably better than what the index has done on its own and people are seeing that performance. I do believe that there is a little bit of performance chasing happening in the IT and digital space.
IT and digital space is also where the companies are coming out with great numbers. So, it's being backed by their financials so far and that's what people are seeing globally as well. You're looking at the Nasdaq outperforming the S&P 500 index; you're looking at technology firms doing better in public and private markets.
So, if people were bullish on this earlier, now they're even more bullish that this is the way of the future.