Gold And Silver ETFs See Knee-Jerk Sell-Off On Trump’s U-Turn — Here’s Why ETFs Are Still Better Than Physical Assets

Gold and Silver ETFs: Gold and silver exchange traded funds (ETFs) crashed up to 24 per cent on January 22 as US President Donald Trump made a U-turn from his earlier tariff threats and walked back from proposals to annex Greenland by military force. This development eased concerns over a potential US-Europe trade war and triggered profit-booking in safe-haven assets.

Among silver ETFs, Nippon India Silver ETF, which is the largest silver ETF in India by assets under management (AUM), fell as much as 19.81 per cent during the session. ICICI Prudential Silver ETF slipped 18.94 per cent, while HDFC Silver ETF declined up to 19.70 per cent. Tata Silver Exchange Traded Fund emerged as the worst performer in the segment, plunging as much as 23.93 per cent.

Gold ETFs also came under heavy pressure. Nippon India ETF Gold BeES, the largest gold ETF by AUM, dropped up to 11.83 per cent. HDFC Gold Exchange Traded Fund slid as much as 12.94 per cent, ICICI Prudential Gold ETF fell up to 11.30 per cent, and SBI Gold Exchange Traded Scheme declined as much as 12.28 per cent.

The sharp correction in ETFs largely mirrored the sell-off in underlying gold and silver prices, which weakened after the easing of geopolitical tensions. According to data from the India Bullion and Jewellers Association (IBJA), silver of 999 purity crashed up to 5.15 per cent to Rs 3,03,584 per kilogram at the time of writing.

Gold prices also declined across purity levels. As of January 22, 24-karat gold fell 2.38 per cent, or Rs 3,704, to Rs 1,51,150 per 10 grams. Meanwhile, 22-karat gold slipped 2.39 per cent, or Rs 3,397, to Rs 1,38,770 per 10 grams, and 18-karat gold declined 2.39 per cent, or Rs 2,783, to Rs 1,13,620 per 10 grams.

Weakness was also visible in the derivatives market, where futures tracked the decline in the spot segment. On the Multi Commodity Exchange (MCX), March silver futures plunged up to 4 per cent to hit the day’s low of Rs 3,05,753 per kilogram. At the same time, February gold futures fell as much as 2.67 per cent to touch an intraday low of Rs 1,48,777 per 10 grams.

That said, the sharp fall triggered bargain buying at lower levels, following which gold and silver ETFs, MCX gold and silver futures, as well as physical gold and silver, recovered some ground from their intraday lows.

Why ETFs are Still a Better Option Than Physical Gold and Silver

ETFs Mirror Underlying Gold, Silver Returns: Although ETFs witnessed sharper intraday corrections than physical gold and silver, they continue to offer several structural advantages. High liquidity, ease of buying and selling, and the absence of acquisition costs such as making charges make ETFs a better investment instrument than holding physical assets.

Let us take a look at returns of ETFs and physical assets over the past four months. During this period, 24-karat physical gold has delivered returns of around 35 per cent, on the other hand, gold ETFs have generated returns up to 33-34 per cent, which closely track physical gold prices and indicate minimal tracking error.

Silver 999 has surged by about 128.50 per cent. Silver ETFs, meanwhile, have delivered returns of roughly 115-118 per cent, which, although marginally lower than physical silver, are broadly in line with the underlying commodity.

No Cost of Acquisition: The slight underperformance in ETFs is largely compensated by their lower costs and better tax efficiency, which help improve overall returns for investors. When investors buy physical jewellery or bars and coins, they incur making charges (20-30 per cent in case of jewellery, and 1-5 per cent in case of bars or coins), which directly eats up eventual returns, whereas ETFs avoid these costs altogether and offer exposure to gold and silver in a far more efficient manner.

Lower Holding Period For Tax Benefits: In India, taxation on gold and silver ETFs depends on how long an investor holds the units, which directly impacts post-tax returns. If ETFs are sold within 12 months, the gains are treated as short-term capital gains (STCG) and taxed as per the investor’s income slab. Gains made after a holding period of more than 12 months, however, qualify as long-term capital gains (LTCG) and are taxed at a flat rate of around 12.5 per cent, without indexation.

One of the biggest advantages of ETFs is the shorter holding period needed to qualify for LTCG. While ETFs become eligible for LTCG rates after just 12 months, physical gold and silver usually require a longer holding period, up to 24 months, to avail similar tax benefits. This makes ETFs more attractive for medium-term investors.

Lower Indirect Costs: ETFs also have a clear advantage over physical assets when it comes to indirect costs. Physical gold and silver attract goods and services tax (GST) of 3 per cent at the time of purchase, whereas ETFs do not carry any such upfront tax. In addition, with ETFs there are no concerns around purity, wastage, storage, and insurance, all of which add to the cost and complexity of holding physical metals.