Silver ETFs trade at steep premiums amid physical supply shortage

Kotak MF halts lump sum, switch-in subscriptions in Kotak Silver ETF Fund of Fund

A sharp surge in demand has overwhelmed silver exchange-traded funds (ETFs). On Thursday, these ETFs were trading at noticeable premiums over their indicative net asset values (iNAVs), as mutual fund (MF) houses struggled to meet demand with fresh supplies while the underlying metal hit all-time highs.

 

Nippon India’s silver ETF, the largest in the category, closed at Rs 156 on Thursday, up 5.5 per cent over its iNAV of Rs 148.3. ETFs offered by HDFC MF, Tata MF, and UTI MF saw premiums of 10 per cent or higher.

 

Considering the scarcity of physical silver and the premium ETF pricing, Kotak MF on Thursday announced that it will not be accepting lumpsum and switch-in transactions in its silver ETF Fund of Fund (FoF). FoF inflows ultimately gets invested in the underlying ETFs.

 

According to MF executives, creating fresh units has been challenging because each unit must be backed by physical silver, which is facing supply issues amid a sharp rise in global demand. They added that silver’s bulk and weight — far greater than gold for the same value — makes rapid sourcing difficult.

 

“We need physical silver in our custody to create new units. Given the short supply internationally, we are facing challenges. Options are being explored, and this issue should soon get resolved,” said D P Singh, deputy managing director and joint chief executive officer of SBI MF.

 

According to Kotak MF, the supply shortage "may persist through the end of October 2025".

 

Silver, along with gold, has seen a sharp run-up in prices over the past six months. The metal’s price is up 60 per cent in the domestic market during this period, driven by both investment and industrial demand.

 

“Global silver markets are in the midst of a genuine demand–supply deficit — now persisting for the fifth consecutive year. In India, the situation is amplified by strong festival season buying and restocking, creating further tightness in the physical market,” said Vikram Dhawan, head of commodities and fund manager at Nippon India MF.

 

“This premium is also being reflected in domestic silver ETFs, which are entirely backed by physical silver and thus act as a transparent proxy for the underlying spot market,” he added.

 

The premium pricing on exchanges has also prompted caution.

 

“Investors need to tread carefully. Buying an ETF at a heavy premium means you’re paying extra purely for the hype. If sentiment cools and that premium shrinks, losses could follow — even if silver prices remain steady,” said Akshat Garg, assistant vice-president at Choice Wealth.