Investor interest in silver exchange-traded funds (ETFs) has increased due to rising metal prices and increased geopolitical concerns.
However, many investors might be overlooking an important metric—the Indicative Net Asset Value (iNAV)—in their haste to become involved. Investors may wind up paying far more than the actual value of silver warrants when ETFs trade at a substantial premium to their iNAV.
For instance, on March 2, the Groww Silver ETF was trading at about 28.50 on the exchange, but its iNAV was 43.05. Similar to this, the HDFC Silver ETF was trading close to 273 while having an iNAV of 252.62, illustrating the discrepancy that can occur between indicative value and market price during a trading day.
“Commodity ETFs in India, particularly silver ETFs, might encounter transitory price distortions when investor demand jumps quickly, unlike huge, very liquid equities ETFs,” said Jayant Manglik, Partner, Fortuna Asset Managers.
Short-term demand-supply imbalances rather than changes in the actual silver prices alone are the main cause of the discrepancy between the iNAV and the trading price of certain of the Silver ETFs.
ETFs often trade at a premium to iNAV during periods of greater global concern or momentum-driven buying because secondary market demand outpaces authorized participants’ ability to swiftly produce additional units and arbitrage the difference.
“Investors in an ETF trade at the market price on the exchange, not at the end-of-day NAV,” clarified Manish Jain, Deputy CEO of Choice AMC. Checking iNAV, a regularly updated intraday estimate of the ETF’s underlying value, is crucial because of this. It assists investors in figuring out whether they are selling at a discount to fair value or purchasing at a premium.
The premium may also momentarily increase due to variables like retail involvement, creation and redemption cycle lags, market timing discrepancies, and liquidity limitations.
The trading price of some silver ETFs may rise significantly above the indicative net asset value due to strong investor demand. Time zone variations can generate distortions in international funds since the underlying market, like the US, might close while the ETF is still trading in India, rendering the iNAV out of date. Authorized players may also find it challenging to swiftly produce new units during turbulent periods, which would increase the price difference.
Manglik stated, “It indicates aggressive purchasing activity rather than inherent value expansion if the underlying asset is up about 3 percent while the ETF is staying around 7–9 percent.”
According to Manglik, arbitrage processes usually correct such mispricing over time, bringing the price of the ETF closer to its iNAV. “However, in the short term, premiums can remain in a high momentum or risk-hedging environment, as is the case currently due to the geopolitical scenario,” he continued.
A point to remember
Always compare the iNAV with the current market price on the website of the stock exchange or asset management firm. Avoid trading or put a limit order if the difference is significant.
This step can often have a greater impact on your returns than the expense ratio of the ETF.
By regularly monitoring iNAV and spreads, particularly during unpredictable times, a straightforward discipline lowers surprises.
