Are gold ETFs moving away from physical gold? What investors should know

Mon Apr 06 2026

Gold exchange-traded funds (ETFs), long considered one of the simplest and cleanest ways to invest in the yellow metal, may soon look slightly different under the hood—potentially changing how investors should view them in their portfolios.

A recent regulatory shift is allowing gold ETFs to allocate a portion of their portfolios to gold derivatives such as futures, instead of holding only physical gold. While the change appears technical, it marks an important evolution in how “paper gold” products are structured in India.

From physical gold to a blended structure

Traditionally, gold ETFs have been tightly regulated to ensure that the bulk of investor money is backed by physical gold held in vaults. This gave investors confidence that their holdings closely mirrored actual gold prices, without the hassle of storage or purity concerns.

Now, fund houses have the flexibility to use derivatives alongside physical gold to manage their portfolios more efficiently. In effect, a gold ETF may no longer be entirely backed by bullion—it could hold a mix of physical gold and gold-linked financial contracts. SEBI's Master Circular of June 2024 permits gold ETFs to invest in gold futures contracts and count them toward the mandatory 95 per cent gold allocation every such fund must maintain. HDFC Mutual Fund has become the first to act on this, with the changes taking effect from April 22, 2026.

What are gold futures, and why do they matter?

As explained by Value Research: Physical gold is exactly what it sounds like: the fund buys gold bars, stores them and your investment tracks the price of that metal.

Gold futures are different. A gold futures contract is an agreement to buy or sell gold at a fixed price on a future date. The fund does not hold gold in this case. It holds a financial contract that tracks gold's price. That is a meaningful distinction, even if the end result often looks the same on a returns chart.

Why regulators are allowing this

The move is aimed at improving how ETFs function operationally.

Using derivatives can help fund managers:

• Handle sudden inflows and outflows more efficiently
• Reduce transaction and storage costs
• Improve liquidity and price tracking in volatile markets

In a fast-moving market, buying or selling large quantities of physical gold instantly can be inefficient. Futures contracts offer a quicker, more flexible alternative.

What changes for investors

For most retail investors, gold ETFs will continue to track gold prices. However, the underlying shift introduces nuances that are worth understanding.

First, not all your investment may be in physical gold anymore. A small portion could be in futures contracts, which are financial instruments rather than actual metal.

Second, this could lead to minor tracking differences. While ETFs aim to replicate gold prices, the inclusion of derivatives means returns may not always perfectly match spot gold, especially during periods of market volatility.

Third, new risks—though limited—enter the picture. Unlike physical gold, derivatives carry elements such as counterparty risk, rollover costs and pricing mismatches. These risks are generally managed by fund houses but are still structurally different from holding bullion.

Consider an investor who puts ₹1 lakh into a gold ETF.

Earlier, over ₹95,000 would typically be invested in physical gold

Going forward, a portion—say ₹10,000–₹20,000—could be allocated to gold futures

The overall exposure remains linked to gold, but the composition becomes more financial than physical.

Why this matters in a volatile market

In stable markets, the difference between physical and derivative-backed exposure may be negligible. But in volatile phases—when gold prices swing sharply—derivative positions can behave differently, potentially leading to small deviations in returns.

This makes it important for investors to understand that gold ETFs are evolving from being purely commodity-backed products to hybrid financial instruments.

"Futures contracts expire periodically, and the fund must keep rolling them over. Each rollover has a cost. In certain market conditions, these costs can quietly widen the gap between what gold actually returned and what your ETF delivered. The gap is rarely large, but it is real, and it simply does not exist when a fund holds physical gold.

Settlement is the other consideration. At expiry, futures can be settled in cash or through physical delivery. Managing this requires active oversight that a fund holding only gold bars does not need," explained Value Research in a note. 

Should you be worried?

 Not really—here’s why

1. The “95% in gold” rule is still intact

Even after the change:

 Gold ETFs are still required to keep at least 95% of their money linked to gold

This means:

The core structure hasn’t changed

ETFs can’t suddenly become derivative-heavy products

2. Derivatives are only for temporary situations

Fund houses (like HDFC Mutual Fund) have clarified:

Futures will be used only in exceptional cases, such as:

When physical gold is hard to buy immediately

During sudden inflows of money

And importantly:

 Once things stabilise, they will shift back to physical gold

So in practice:

ETFs are still overwhelmingly backed by real gold

The change is more about flexibility, not a full shift

"There is also a number that has caused confusion: the rules cap combined exposure to futures and related instruments at 50 per cent of a fund's net assets. This has been misread as funds being allowed to move half their assets out of physical gold. That is not what it means. The 50 per cent is a ceiling within the 95 per cent gold allocation, not a substitute for it. Physical gold remains the default," said the Value Research note.

Hence, SEBI's change does not break the promise gold ETFs were built on. But it adds a condition: funds can now, under specific circumstances, hold a financial contract instead of gold bars and still count it as gold exposure.

SEBI's change does not break the promise gold ETFs were built on. But it adds a condition: funds can now, under specific circumstances, hold a financial contract instead of gold bars and still count it as gold exposure.

What should investors do now

For most investors, there is no immediate need to exit gold ETFs. However, expectations need to be adjusted.

• Gold ETFs will still broadly track gold prices
• But they may no longer represent 100% physical gold exposure
• Reading scheme documents and portfolio disclosures will become more important

Investors seeking absolute physical backing may need to consider alternatives like physical gold or sovereign gold bonds, depending on their goals.

Source: https://www.business-standard.com/