SEBI-FMC merger could renew hopes for silver, precious metal ETFs

Will the seven-year wait finally be over for investors wanting to dabble in silver exchange-traded funds? With Finance Minister Arun Jaitley, in his Union Budget speech, proposing to merge the Forward Markets Commission (FMC) with the capital market watchdog SEBI, the regulatory environment may get a lot friendlier for security products not only in silver but also other precious metals and diamonds as well.

In 2008, Benchmark Mutual Fund (now owned by Goldman Sachs) filed a draft paper with SEBI for the launch of a silver ETF. But the FMC, which regulates the commodities and metals market, raised objections, saying investment products in metals and commodities fall under its domain and that SEBI has no jurisdiction over this market.

Now with the merger on the card, things could change.

Take gold ETFs for example, which were a big hit from 2008 when the equity markets went into a downturn. Launched by asset management companies (which run mutual funds), a gold ETF allows investors to track the price of the metal, buy or sell units in an exchange, and profit from a rise in prices, minus the fees charged by the AMC.

But analysts do not expect silver or other ETFs to happen anytime soon.

While it will definitely be convenient for an investor, AMCs might take a bit of convincing before they decide to launch such a product. Gold ETFs have been going out of favour, for one, as the equity markets recover and the international price of the metal falls.

Gold ETFs saw redemptions of ₹74 crore this February with absolutely no new money coming in, data by the Association of Mutual Funds of India show. According to a Crisil research report, February was the 21st straight month with net outflows in the segment.

Among the smaller gold funds is one by Motilal Oswal, with an ETF size of ₹46 crore. Aashish P Somaiyaa, MD and CEO, Motilal Oswal Asset Management Company, said that a silver ETF is still unlikely. “We haven’t had any consultations with the regulator regarding this and he was not sure they were likely to approve it.”

Even gold ETFs, he said, are not very good investment management products from an AMC’s point of view. “It might be convenient for investors but AMCs incur a lot in costs in managing physical gold, in storage and insurance. Plus, there is not enough liquidity available given the restrictions imposed on importing gold.”

He added, “We are already finding it difficulty to run the gold fund; so there is no plan to launch any new ETF products.” Naveen Mathur, Associate Director, Commodities and Currencies, Angel Broking, said the expenses AMCs bear for ETFs will magnify in the case of silver. If one unit of a gold ETF usually represents one gram of gold, the size of a silver ETF is likely to be in much bigger lots. “For each AMC to maintain such large quantities of a physical asset, and to keep adding to it as ETF demand rises, is difficult.”

However, Mathur believes a silver ETF is definitely a possibility. “For people who want to accumulate silver, an ETF is a very good option. And internationally, both gold and silver ETFs are popular products.”

In the market, timing is everything. And may be the time for a silver ETF has not arrived yet.