This article explains the working of gold ETF funds. The following are the major participants in gold ETFs.
ETF sponsorAuthorized ParticipantCustodianExchangeRetain InvestorsInstitutional/large investors
Let’s understand the working of gold ETFs.
A mutual fund sponsor (like HDFC, Quantum), when senses a market for gold ETFs, approaches authorized participants to arrange for required physical gold. If these two comes to an understanding, the fund sponsor (ETF sponsor) files a prospectus with the SEC (in the U.S.) or SEBI (in India).
Once the regulator gives approval, the ETF sponsor collects money from retail investors and gets physical gold through authorized participants and keeps it in the custody of custodians. The ETF sponsor provides ETF units back to the retail investors.
Once the New Fund Offer Period is over, the ETF sponsor doesn’t deal with the retail investors directly. The gold ETF is listed on the exchange and the units are traded just like any other stock.
Authorized participants, who are market makers, act as intermediaries between retail investors and the gold ETF sponsor through the exchange.
Authorized participants get creation units from the gold ETF sponsor in exchange of physical gold. Creation unit usually comprises of 1000 grams of physical gold and in return the authorized participants get gold ETF units worth the physical gold.
Authorized participants then take care of creating the market by supplying gold ETF units as per the demand. A gold ETF unit usually represents either 1 gram of gold or half gram of gold so that small investors can buy.
The gold ETF sponsor arranges for safe custody of the physical gold. Usually, specialists called custodians do this job for sponsors for a fee. The gold ETF sponsor is responsible for quality of gold, safety of gold. The gold ETF sponsor takes adequate insurance for physical gold. The gold ETF sponsor can also invest in money market instruments upto the percentage mentioned in the offer document.ADVERTISEMENTS