Gold ETFs Can Now Hold Futures, But Physical Gold Remains the Core, Regulators and Fund Houses Say

Gold exchange-traded funds in India, long treated as the plain way to own the metal without storing it, are about to look different on the inside. Under SEBI's Master Circular of June 2024, a gold ETF may now put part of its money into gold futures contracts and count them toward the 95 per cent gold allocation every such fund must maintain. HDFC Mutual Fund has become the first fund house to act on the permission, with its changes taking effect on April 22, 2026.

The distinction is a real one. A physical gold ETF buys bars, stores them in vaults, and tracks the price of that metal. A gold futures contract is an agreement to buy or sell gold at a fixed price on a future date. A fund holding one does not hold gold; it holds a financial contract that follows gold's price. On a returns chart the two often look alike, but they are not the same thing, as Value Research has explained.

The stated purpose is operational. Futures can help managers handle sudden inflows and outflows, reduce transaction and storage costs, and improve liquidity and price tracking when markets are volatile. Buying or selling large quantities of physical gold quickly can be inefficient, and futures offer a faster, more flexible route.

For investors, the article points to three practical differences. Part of the money may now sit in futures rather than metal. Returns may drift slightly from spot gold, especially when prices swing sharply. And derivatives bring risks that bullion does not: counterparty risk, rollover costs and pricing mismatches. Fund houses generally manage these, but they are structurally different from holding bars. As an illustration, on ₹1 lakh put into a gold ETF, over ₹95,000 would typically have gone into physical gold before; going forward, perhaps ₹10,000 to ₹20,000 could be in futures.

Value Research spelled out the cost mechanics. Futures expire periodically, so a fund has to keep rolling them over, and each rollover has a cost. In some market conditions those costs can quietly widen the gap between what gold returned and what the ETF delivered. The gap is rarely large, it noted, but it is real, and it does not exist for a fund holding only physical gold. Settlement at expiry, in cash or by physical delivery, also demands active oversight that a bars-only fund does not need.

The article argues there is no cause for alarm. The 95 per cent gold rule remains, so ETFs cannot suddenly become derivative-heavy products. Fund houses such as HDFC Mutual Fund have said futures will be used only in exceptional cases, such as when physical gold is hard to buy immediately or when money pours in suddenly, and positions will shift back to physical gold once conditions stabilise.

One figure has caused confusion: the rules cap combined exposure to futures and related instruments at 50 per cent of a fund's net assets. Some have read that as permission to move half of a fund's assets out of physical gold. Value Research says that is wrong. The 50 per cent is a ceiling inside the 95 per cent gold allocation, not a replacement for it, and physical gold remains the default.

The upshot is that the promise gold ETFs were built on is not broken, but it carries a new condition: under specific circumstances, a fund can hold a financial contract instead of gold bars and still count it as gold exposure. Most investors need not exit, but they should adjust expectations, since ETFs may no longer be 100 per cent physical gold. Reading scheme documents and portfolio disclosures becomes more important, and those wanting absolute physical backing may look at physical gold or sovereign gold bonds. What to watch as HDFC's changes begin on April 22 is how much futures are actually used, and what rollover costs and tracking differences follow.