Sebi Rule Change Allows Gold Futures in ETF Portfolios

A significant regulatory shift is underway in Indian gold ETFs, allowing funds to include gold futures contracts in their mandatory 95% allocation to the metal. The change, formalized by the Securities and Exchange Board of India (Sebi) in June 2024, permits gold-backed exchange-traded commodity derivatives (ETCDs) to count toward the required exposure. This means funds like the HDFC Gold ETF can now gain gold exposure through futures contracts rather than holding only physical bullion. While the move offers potential operational and cost benefits for fund managers, it has sparked debate within the investment community. Market observers note that while 'paper gold' instruments can enhance liquidity and reduce storage costs, they also introduce tracking error risks and may diverge from the performance of physical gold due to roll costs and contango in futures markets. The long-term impact on investor perception and the fundamental nature of gold ETFs—traditionally seen as a direct proxy for holding physical gold—remains a key point of discussion. Sebi's amendment aims to modernize the product structure, but it undeniably alters the traditional dynamic between these popular investment vehicles and the physical asset they track.