Introduction

Islamic exchange-traded fund based on gold and silver (Islamic ETF Gold and Silver) is an ETF which uses gold and silver (such as gold and silver bullions/bars) as the underlying asset. The Islamic ETF units represent the unitholders’ undivided ownership of the gold and silver on a pro-rata basis. The gold and silver will be held by the custodian during the tenure of the fund. Since this product involves ribawi item i.e. gold and silver as underlying asset, hence it was presented and discussed in the SAC meeting to seek their opinion on this matter.

Resolution

The SAC, in a series of its meetings, discussed the issues relating to the Islamic exchange-traded fund based on gold and silver (Islamic ETF Gold and Silver). In the 142nd meeting on 30 January 2013 and 161st meeting on 21 June 2014, the SAC resolved that gold and silver (such as gold and silver bullions/bars) may be used as underlying asset for Islamic ETF. The SAC also resolved that the concept of Islamic ETF based on gold and silver are acceptable by Syara’ and it is Shariah compliant subject to the following conditions:

Conditions for Establishment, Structuring and Trading of Islamic Etf Based on Gold and Silver as The Underlying Asset

1. The Islamic ETF units represent an equivalent amount of physical gold and silver held by the custodian on behalf of the Islamic ETF. Hence, the Islamic ETF units represent the unitholders’ ownership of the gold and silver on a pro-rata basis. The creation and redemption of the Islamic ETF units must be backed by physical gold and silver with specified quantity and quality. Therefore, at the inception and creation of the Islamic ETF units, the fund manager and Shariah adviser of the Islamic ETF must verify that:
   1. The gold and silver, with the correct quantity and quality as per the specification, are in existence;
   2. The gold and silver which forms the underlying assets for the creation of the Islamic ETF units are allocated and segregated; and
   3. The gold and silver can be delivered to the unitholders when they redeem the Islamic ETF units.
2. The trading of the Islamic ETF units between the buyer and the seller must be carried out in cash and on spot basis.
3. Since the trading of the Islamic ETF must be carried out on cash basis, the Islamic ETF units can only be traded if the buyers have cash accounts or margin facility (via third-party financing).
4. The Shariah adviser of the Islamic ETF must provide detailed reasoning on the Shariah compliance of the Islamic ETF in the Shariah pronouncement on the following:
   1. Structure, creation and redemption of the Islamic ETF units; and
   2. Trading of the Islamic ETF units in the secondary market. 
5. The Shariah adviser of the Islamic ETF must conduct an annual audit (including a site visit to the place where the gold and silver are kept) to confirm its existence, quantity and other details such as record of its movement. This is to ensure that the Islamic ETF units created are backed by the actual gold and silver kept in the vault in a segregated and allocated manner.
6. The Shariah adviser of the Islamic ETF must also prepare a report on the annual audit, to be included in the Shariah adviser’s compliance report to the unitholders.
7. The unitholders are entitled to redeem the Islamic ETF units in physical gold and silver or its equivalent in cash.

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