Gold ETF vs Silver ETF: Where to Invest?

Precious metals like gold and silver may give inflation-beating returns, prompting individuals to invest in them. With the emergence of Gold and Silver ETFs, you can now get the benefit from the price movements of bullion without having to purchase physical gold or silver. Here is a comprehensive overview of what gold and silver ETFs are, their advantages, disadvantages, similarities and differences. 

What Is a Gold ETF?

An ETF or Exchange-Traded Fund is a mutual fund that pools money from investors and uses the funds to invest in certain assets. However, unlike a traditional mutual fund, an ETF is listed on an exchange and can be bought and sold freely like stocks. 

A gold ETF is an exchange-traded fund that invests in physical gold. One unit of a gold ETF represents 1 gram of physical gold of the highest purity, i.e. 24 Karat (24K). The Asset Management Company (AMC) responsible for the ETF stores 24K gold bullion equivalent to the number of ETF units in circulation in a secure vault. 

With gold ETFs, you don’t get the option to take delivery of physical gold bullion when you sell the units. Instead, you only get the cash equivalent of the number of units you sold. 

Pros and Cons of Gold ETFs

Now that you know what a gold ETF is, let’s take a look at some of the advantages you get to enjoy by investing in it. 

• Due to the exceptionally high demand for the metal, Gold ETFs are often very liquid and can be bought and sold easily on the exchanges.
• Gold ETFs are considered to be a safe-haven investment and may provide a hedge against inflation and adverse stock and currency market movements. 
• The Net Asset Value (NAV) of gold ETFs is usually stable and not as volatile as other market-linked investment options. 
• Gold has historically performed well during periods of economic downturns by retaining its value. 
• Investing in gold ETFs is a good way to diversify your portfolio since the metal has very little correlation with other assets. 

As with any investment option in India, gold ETFs also have their fair share of disadvantages. Here’s a quick overview of some cons. 

• Compared to other mutual funds, gold ETFs don’t offer any dividends or regular interest payments. 
• Although gold is considered to be a safe-haven asset, its prices may still be volatile, at least in the short term. 

What Is a Silver ETF?

A silver ETF is an exchange-traded fund that invests in silver bullion of the highest purity and fineness (0.999). Each unit of a silver ETF represents 1 gram of physical silver and is stored in a secure vault by the Asset Management Company. 

When you redeem the ETF units on an exchange, you only receive the cash equivalent of the number of units sold. You don’t get the option to take physical delivery of the precious metal. 

Pros and Cons of Silver ETFs

With the introduction to silver ETFs out of the way, here’s a quick glimpse of some key advantages of this investment option. 

• Since silver is extensively used in various industries, the price of the metal can be very responsive to changes in demand and economic conditions. 
• The per-gram price of silver is very affordable, which makes it very accessible to a wide range of investors. 
• Similar to gold, silver also has a low correlation with other traditional market-linked assets, making it a good addition to an investment portfolio. 
• The higher volatility in silver may lead to higher returns, especially during periods of economic uptrend. 

As an investor, understanding the disadvantages of silver ETFs is equally crucial. Let’s look at some of the key cons. 

• The high volatility in the price of silver can become a major disadvantage during adverse market conditions.  
• The liquidity in silver ETFs is comparatively lower than many other market-linked investment options, making it slightly challenging to enter and exit positions.

Similarities Between Gold and Silver ETF Funds

Gold and silver ETFs have a lot of similarities between them. As an investor, you need to know what they are to make an informed investment decision. Some of the crucial points of similarity are as follows. 

• Traded on the Exchanges 

Both gold and silver ETFs are actively traded on exchanges like individual stocks. Any investor can purchase and sell units of their desired ETF freely without any restrictions.

• Purity and Fineness of the Metal 

Although the underlying assets of gold and silver ETFs are different, both instruments track the price of the metals in their highest purity and fineness – 0.999.   

• Low Expense Ratios 

Gold and silver ETFs are both passively managed mutual funds with little to no intervention from the fund manager. This ensures that the expense ratio, the fee levied by an Asset Management Company (AMC) for managing the fund, is kept low and affordable.   

• Transparency 

With gold and silver ETFs, you get maximum transparency in terms of the holdings and the Net Asset Value (NAV). Information regarding the NAV and the quantity of metal that the AMC holds can be easily accessed at any time. 

Differences Between Gold ETFs vs. Silver ETFs 

Now that you’ve seen the similarities, let’s look at the differences between gold ETF vs. silver ETF. 

• Underlying Asset 

The most obvious difference between the two ETFs is the underlying asset. While 0.999 purity gold bullion is the underlying asset of gold ETFs, the underlying of silver ETFs is 0.999 purity silver bullion. 

• Industrial Demand

Silver is widely used in many industries for manufacturing solar panels and electronics, among others. Industrial demand is one of the major factors that influence the price of silver ETFs in the market. Gold, on the other hand, is not used in industrial processes. 

• Volatility

Silver ETFs are more prone to volatile price movements since due to the industrial demand for the metal. Meanwhile, the price of gold ETFs is relatively more stable. 

• Accessibility 

Since the per-gram price of silver is more affordable than the per-gram rate of gold, silver ETFs are far more accessible for investors across all spectrums. 

• Returns 

Gold has traditionally offered much higher returns. Although silver has also produced good returns, it hasn’t been able to beat inflation as consistently as the yellow metal.

Gold ETF vs. Silver ETF: Where Should You Invest?

So, now that the similarities and differences between gold and silver ETFs are out of the way, you can start considering which one to invest in.

The choice between the two ultimately depends on a multitude of different factors, such as your investment goals and objectives and risk profile, among others. For instance, if you’re a slightly more conservative investor with a low appetite for risk, you may consider investing in gold ETFs due to their relatively stable nature. However, if you are a more risk-aggressive investor with a high tolerance for volatility, you may invest in silver ETFs.  

That said, not all ETFs are equal. Therefore, you should spend enough time doing adequate research to find out the best gold and silver ETFs to invest in. When evaluating funds, make sure to consider factors like the expense ratio, storage costs, historical performance, and fund manager’s experience, among others. This will ensure that you make a well-informed investment decision that’s in line with your goals. 

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