Edelweiss Gold and Silver ETF Fund of Fund is an open-ended scheme investing in Gold ETF and Silver ETF units. The fund is currently in its NFO period (Aug 24th to 7th Sep 2022). In this review, we discuss if it makes sense for investors to consider such a fund.
The scheme presentation says the fund “aims to maintain equal allocation between Gold and Silver ETFs and rebalance it periodically.” However, the scheme document says, “based on various macro/technical/fundamental factors, the Fund Manager shall decide allocation towards units of Gold ETFs and/or Silver ETFs”.
This alone is enough for us to avoid the scheme. It is high time SEBI puts an end to mutual fund houses making statements about the investment strategy in the sales material that is absent in the scheme document.
We do not know which ETFs will be used or the exact strategy. The scheme can vary gold and silver allocation from 35% to 65%. The total allocation to both metals will be 95% to 100%.
Readers may be aware that investors now have access to Silver ETF from Jan 2022. See: ICICI Prudential Silver ETF: What you need to know before investing. We shall use the same dataset for this review.
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We have previously established on several occasions that gold is not a hedge against inflation, and gold has a reward incommensurate with its risk (in the above link, we show that silver is much worse in this regard!)
In fact, in another detailed study – Gold vs Silver Returns: Which is a better investment? – we had concluded the following.
Silver is consistently twice as volatile than gold but is only occasionally rewarding. Therefore investment in silver should be tactical (including trading) with appropriate indicators. Buying and holding silver for returns/diversification can be twice as frustrating than gold.
Silver prices have been underwater (below a maximum) for decades. Again means that it is unsuitable for long-term investing. So is gold, for that matter. When both gold and silver are unnecessary in a long-term portfolio, a mixture of the two cannot be any different.
We will use the monthly returns of silver and gold prices to construct a 50:50 Gold-Silver index in USD. The data from Jan 1915 to Dec 2021 is sourced from macrotrends.net (a paid resource).
The 10-year and 15-year rolling returns data of Gold (USD), Silver (USD) and 50% Gold + 50% Silver (USD) is shown below. Of course, Edelweiss Gold and Silver ETF Fund of Fund returns will be INR, but our main aim is to find out if there is any benefit in investing in this new fund of fund instead of using existing gold ETFs or gold funds. So the exchange rate does not matter.
The red line (silver returns) swings up and down a lot more than the yellow line (gold returns). So an equal mix of the two (green line) will be in between.
So one can expect Edelweiss Gold and Silver ETF Fund of Fund to be significantly more volatile than a gold ETF or gold fund (and this is before accounting for price-NAV deviations!). Sometimes Edelweiss Gold and Silver ETF Fund of Fund may be more rewarding than gold ETFs or gold funds, and sometimes not. Often the returns are similar!
Over 15 years, the 50% gold + 50% silver index has outperformed the gold index only 633 out of 1104 times. The margin of outperformance has been greater than 1% only on 432 occasions.
Over 10 years, the 50% gold + 50% silver index has outperformed the gold index only 618 out of 1164 times. The margin of outperformance has been greater than 1% only on 457 occasions. So the metal combo has just about a coin-toss (50%) probability of beating a gold index. That is not enough reward for the guaranteed higher risk. It makes no sense for investors to buy into this idea.
Therefore we recommend not investing in Edelweiss Gold and Silver ETF Fund of Fund. Our recommendation has always been to avoid gold ETFs, gold funds, or Sovereign gold bonds as an investment (tracking gold price for returns). The same goes for silver ETFs or silver-based products as well. See: When to invest in gold and when to buy it.
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