Silver ETF vs Gold ETF — Which Has Better 5-Year Returns?

Silver ETF vs Gold ETF: A 5-Year Performance Review

Imagine you have some money set aside. You want to invest in something solid, something real. Precious metals like gold and silver come to mind. But buying physical bars or coins seems like a hassle. Then you hear about ETFs. So, what is an ETF in India? Think of it as a basket of assets, like gold or silver, that trades on the stock market just like a share of a company. It is simple and low-cost.

Now the big question comes up: gold or silver? You want to know which one has performed better. Specifically, if you had invested five years ago, where would you have made more money? Let's cut to the chase and look at the numbers.

The 5-Year Returns Showdown: Which Metal Won?

Over the last five years, silver has outperformed gold. It’s not even a close race. Silver’s price grew more, meaning an investment in silver would have earned you higher returns than an identical investment in gold over the same period.

A quick note: Silver ETFs are relatively new in India, having launched only in 2022. So, a direct five-year comparison of the ETFs themselves is not possible. However, we can use the underlying commodity prices as a very reliable proxy to see how your investment would have grown. The returns of an ETF closely track the price of the metal it holds, minus a small fee.

Let’s see how an investment of 1,00,000 rupees in mid-2019 would look today in mid-2024.

As you can see, silver delivered significantly higher returns. An investment in silver would have netted you about 31,000 rupees more in profit compared to gold. This performance difference is driven by the unique factors that affect each metal’s price.

Key Differences Between Gold and Silver ETFs

While both are precious metals, gold and silver are very different beasts. Understanding these differences is key to deciding where your money should go. Here’s a simple breakdown of what sets them apart.

Volatility: Silver is the Wild Child

Silver is much more volatile than gold. Its price can swing up and down more dramatically. Why? Because the silver market is smaller than the gold market. Fewer buyers and sellers mean that large trades can move the price more easily. If you have a strong stomach for risk and are aiming for higher potential gains, silver's volatility might appeal to you. If you prefer a smoother ride, gold is your friend.

Demand Drivers: Investment vs. Industry

The reasons people buy gold and silver are different, and this is a crucial point.

• Gold: Gold's demand is primarily driven by investment and jewellery. Central banks buy it as a reserve asset, and investors buy it as a safe haven during economic turmoil. It’s seen as a store of value that protects against inflation.
• Silver: Silver has a dual personality. It is an investment asset, but over 50% of its demand comes from industrial applications. It is a critical component in smartphones, solar panels, and electric vehicles. This industrial link means silver's price is often tied to the health of the global economy. A booming economy can increase demand for silver and push its price up.

Liquidity and Market Size

The market for gold is vast and incredibly liquid. It is one of the most traded commodities globally. This means you can buy and sell large amounts of gold ETFs without significantly affecting the price. The silver market, while substantial, is smaller. This lower liquidity contributes to its higher volatility.

How to Choose the Right Metal ETF for Your Portfolio

So, which one should you pick? The answer depends entirely on your financial goals and your tolerance for risk.

Go for Gold if:

• You are a conservative investor. Gold is generally more stable and is a classic defensive asset.
• You want to hedge against inflation. Historically, gold has held its value well when the purchasing power of money falls.
• You seek a safe haven. During times of geopolitical tension or market crashes, investors flock to gold, pushing its price up.

Consider Silver if:

• You have a higher risk appetite. With higher volatility comes the potential for higher returns.
• You are optimistic about the global economy. As industries like green energy and electronics grow, the demand for silver is expected to rise.
• You want to diversify your commodity holdings. If you already own gold, adding silver can provide a different kind of exposure.

Your portfolio doesn't have to be an all-or-nothing game. A common strategy is to have a core holding in gold for stability and a smaller, satellite position in silver to capture potential upside from economic growth.

Understanding the Tax on Metal ETFs in India

Taxation is a big deal, and the rules in India have changed recently. For investments in Gold or Silver ETFs made on or after April 1, 2023, the rules are simple but less favorable than before.

Any capital gain you make, regardless of whether you hold the ETF for one month or ten years, is considered a Short-Term Capital Gain (STCG). This gain is added to your total income and taxed according to your income tax slab rate. There is no benefit for holding it long-term anymore.

For units purchased before April 1, 2023, the old rules still apply. If you hold for more than 36 months, it's a Long-Term Capital Gain (LTCG), taxed at 20% after indexation benefits, which adjusts your purchase price for inflation. If you hold for less than 36 months, it's an STCG taxed at your slab rate.

This change makes these ETFs slightly less tax-efficient for new investors in the higher tax brackets. Always consider the post-tax returns when making an investment decision.