Silver exchange-traded funds (ETFs) dropped up to 16 percent from their highs on February 5 amid a wider sell-off in metals.
At 10.50 am, Kotak Silver ETF was down 16 percent, Edelweiss Silver 15 percent and HDFC Silver was trading 14 percent lower from the previous session, as silver led the fall in metals.
The drop in silver ETF prices has been steeper than the decline in the underlying silver price on the MCX.
Varun Gupta, CEO of Groww Mutual Fund, said silver is inherently more volatile in the short term, with prices reacting quickly to global developments, currency fluctuations and shifts in risk sentiment.
Consequently, daily or one or two-day returns may not accurately reflect the performance of a silver ETF.
The traded price of a silver ETF can be affected by market liquidity, bid–ask spreads and temporary premiums or discounts to iNAV, especially during volatile periods. These short-term trading factors can cause returns to seem more negative or positive than the actual change in silver, he said.
Silver cracks, again
On MCX, silver experienced a notable correction. The March silver contract declined nearly 9 percent from its recent peak dropping to about Rs 2,45,000 a kilo. The slide reflects weaker momentum in the bullion market, along with a dip in silver ETFs.
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Silver ETFs can sometimes perform worse than the metal itself during sharp corrections due to temporary divergences between ETFs’ traded price and iNAV/NAV.
Amid a sharp sell-off and extreme volatility, market liquidity can decrease and bid-ask spreads widen, causing the ETF to trade at a higher discount (when there are more sellers than buyers) or a sudden collapse of premium.
This can result in the ETF declining more than the underlying silver price movement. On volatile days, exchanges NSE/BSE may impose circuit limits (for instance, ±20 percent based on the previous day’s NAV), which can make the ETF’s intraday price movements appear misaligned from the underlying silver prices.
Misreading the fall
When prices drop sharply, investors often feel compelled to act quickly — either by selling or by comparing short-term returns. For silver, such reactions can be misplaced.
“When prices fall, investors often misinterpret the situation by assuming a direct one-to-one correlation with global spot silver prices and attributing any discrepancies to ‘tracking error’, said Nehal Meshram, senior analyst, manager research, Morningstar Investment Research India.
In reality, these gaps can result from a combination of factors, including rupee or forex fluctuations, changes in premium/discount levels and execution costs such as spreads or market impact at the time of trade, he said.
Another frequent misstep is buying after a price surge when the ETF is trading at a premium to its iNAV. During a subsequent correction, this can lead to a double setback — the decline in silver prices coupled with the normalisation of the premium, Meshram said.
“From an investor perspective, it can be more useful to view silver ETFs as part of a longer-term portfolio allocation, rather than reacting to short-term price movements,” Gupta said.
Evaluating performance over a longer horizon and in the context of overall portfolio objectives helps put short-term volatility in perspective and allows the strategic role of silver to come through more clearly.
When looking at silver ETFs, a few simple factors can help investors make informed decisions
Tracking efficiency: How closely the ETF follows silver prices over time. Lower tracking error generally indicates better alignment.
Expense ratio: Lower costs help improve long-term returns.
Price vs iNAV: Checking whether the ETF trades close to its iNAV can be useful, especially at the time of investment.
Liquidity and fund size: Higher trading volumes and reasonable fund size support smoother buying and selling.
Together, these factors help investors understand how efficiently a silver ETF provides exposure to silver over time.