Zakat on Gold ETFs & Commodity Holdings | Musaffa Academy

For thousands of years gold and silver have played a huge role in the wealth and zakat of the Muslim Ummah. But the manner in which Muslims hold these two precious metals has dramatically changed. Hardly anyone physically holds bullion in the attic or under the bed anymore. More people are opting for gold through brokerages such as in gold ETFs or gold mutual funds, and wider commodity ETFs which can contain precious metals, alongside commodities like oil, agricultural products and industrial metals.

Last week we covered a change in the night guard shift, and this week we faced a more interesting question relating to this shift. So the question is: if the gold and silver assets were in the form of gold and silver ETFs, as opposed to physical bullion – or a commodity fund that holds diversified mix of natural resources – would they still be subject to zakat? It really depends on what exactly the fund is invested in. Here as well, the rule stands as in the majority of zakat-related cases: understanding the underlying nature of the asset is crucial to making the right zakat decision.

Why Gold and Silver ETFs Require Special Attention

Gold and silver hold a special place in Islamic Law. Unlike shares, properties or even cash, where the debate is about the circulating assets and their assessment, gold and silver are considered mawḍūʿ (subject) per se for zakat. The Prophet صلى الله عليه وسلم himself fixed the niṣāb for both these metals and Zakat on gold and silver has been an undisputed obligation since the earliest days of Islam.

You don’t hold gold when you hold a gold ETF. You hold units of a fund managed by someone else and that fund holds gold. So does that mean you have to pay zakat as you effectively indirectly own gold? And if yes, how will it be calculated? This will depend on the nature of the fund.

Physically-Backed Gold ETFs: The Clearest Case

A small number of gold ETFs are constructed so that every share is guaranteed to have one ounce of gold stored in a vault. Most are managed by a custodian who holds allocated gold bullion and each share represents a fixed amount of gold – for example one-tenth of an ounce. In these cases the fund can be seen as a storage container and a method of trading the physical gold it holds.

For physically-backed gold ETFs the matter of scholarship is, in my opinion, relatively straightforward. Your shares represent a legitimate claim of direct ownership to gold. And the gold exists and is yours in proportion to the number of shares you own and the zakat, therefore, is to be calculated in the same way as it would if the gold was physically stored in your safe. In this case you need to calculate the amount of gold behind your investment (which, usually, is expressed as the gold content per share of the ETF – often the terminology used is then “gold per share” or “gold per unit”) and determine if this exceeds the niṣāb of 85 grams. And if so then the zakat should be paid to the level of 2.5% of the value of the gold at that time.

The wrapper — the fund structure, the brokerage account, the ticker symbol — does not change the underlying reality. You own gold. Gold is zakatable. The same rules apply.

Worked Example: Physically-Backed Gold ETF

I hold 50 units of a physically-backed gold ETF. The gold per unit is 0.95 grams. 50 x 0.95 = 47.5 grams The gold niṣāb is 85 grams. My gold ETF holding is below the gold niṣāb, so I don’t need to pay zakat on the ETF alone. If I have other zakatable assets such as cash, savings, shares etc, the total value that I need to consider against the niṣāb will be subject to zakat in accordance with my madhhab, which is the Hanafi school. Therefore if the total of my assets was over the silver niṣāb value, I would need to pay zakat on the entire amount, including the value of my gold ETF.

Synthetic and Futures-Based Gold ETFs: A More Complex Picture

Not all gold ETFs are physically backed. Some use derivatives, futures contracts or swaps to replicate the performance of gold without actually holding the physical bullion. Such synthetic models raise important Shariah compliance and zakat issues.

Shariah perspective, futures and derivative-based gold products are contentious. Many are of the opinion that they are also prohibited. The rationale here is based on principles of classical fiqh where the sale of gold and silver that is not in possession at the time of the contract is prohibited. This prohibition is based on general principles of fiqh with respect to riba and bayʼ al-dayn specifically for gold and silver. If one was to accept that derivative-based gold products are not permissible, the issue of zakat becomes secondary.

If you are not sure whether the financial instruments you hold are Halal, you can treat the whole value of your holdings as subject to Zakat and deduct 2.5% (as with cash and other liquid investments) on your zakat anniversary date. This does not help in determining the permissibility of holding such financial instruments. It merely protects you from missing the Zakat obligation.

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Zakat on Silver ETFs

The same principle is applicable for silver ETFs. If your silver ETF is physically backed (meaning that the fund actually purchases physical silver bullion in the form of bars and holds it in segregated form for each unit that you own) then for zakat purposes, your ownership is considered as direct silver ownership. You have to work out the equivalent amount of silver held in grams, compare it to the silver niṣāb (595 grams) and then if it exceeds the niṣāb, you pay 2.5% of the value of the silver at the prevailing market price.

Where does that leave silver? At current prices the price of gold is about 17 times that of silver (note the price per gram). Therefore the value of the silver niṣāb will be approximately $535–$655, 1/17th of the value of the gold niṣāb, which is $7,200–$8,000. So, depending on exactly when one triggers zakat, an investor in a silver ETF could have a portfolio that is liable for zakat for relatively modest amounts. Although this may seem counter-intuitive given the small value of what one is required to pay, an ETF holding of silver equivalent to 595 grams or more will unambiguously be subject to zakat.

And by the way, Hanafi investors: just a small item to bear in mind. The niṣāb for silver is the niṣāb for your mixed wealth. So if your silver ETF is the portion of your combined zakatable wealth that would then take the entire amount of your mixed wealth over the niṣāb, that would be Zakatable (note just the silver position would not be, the whole lot would be).

Zakat on Broader Commodity ETFs

Gold and Silver ETFs are one thing, but commodity ETFs that hold physical commodities (energy products, agricultural commodities, industrial metals and precious metals) are quite another. In these cases, the underlying is not gold or silver, but rather a commodity index portfolio.

If the Fund Holds Physical Commodities

The Zakatable Commodities Except for agricultural products, oil and metals, it is generally agreed that none of them are considered Zakatable in an Islamic Shariah sense. Gold and silver as monetary metals have specific niṣāb thresholds and are zakatable. Wheat, barley, dates and raisins have a different system of zakat imposition, (zakat al-ḥurūb wa’l-thimār) in which zakat is levied based on their weight at the time of harvest and not on their capital value or investment value. None of the oil, copper and other commodities fall under any of the three categories mentioned above.

The majority of modern scholars agree that a commodity ETF comprised of various types of physical goods would require the market value method. Therefore, Zakat on such commodity ETFs would be imposed at the rate of 2.5% on the market value of the fund units on the respective zakat anniversary date. The fund should be treated like a financial instrument - part of the trade inventory, rather than as an ownership of the commodity itself.

If the Fund Holds a Mix Including Gold or Silver

Commodity ETFs that provide a small allocation to gold or silver as part of a broader mix of commodities pose a couple of alternative problems for which scholars provide a couple of different solutions. The quick and dirty solution is to apply the 2.5% charge to the full value of the investment in ETF units. The more rigorous approach is to work out the gold and silver components of the fund separately. This can be done with some reference to the fund’s fact sheet, which will provide information on the gold and silver holdings that underpin the ETF. We then work out the value of the gold and silver component using the weights for physical metals we derived above. For the remaining portion of the fund we apply the charge as we would to any other financial asset. But for most retail investors, the full value of the units charge will be sufficient.

Zakat Treatment by Fund Type: Quick Reference

A Note on Islamic Gold Funds

A growing number of Shariah compliant gold funds have been launched in recent years to allow Muslims to invest in gold without the potential repudiation of futures contracts. These gold funds hold physical gold in segregated form, have a interest free structure and are Shariah compliant as they are audited and approved by a Shariah supervisory board.

These are like physically backed gold ETFs for zakat purposes – the units are the gold and the obligation is the same. Some of the Islamic gold funds will provide a zakatable asset ratio or a zakat guidance note for investors – if you have this then you can use the actual percentage for a more accurate calculation. If it is not provided then 2.5% of the market value of the units on your zakat date is also a correct and very simple calculation.

Combining Gold ETF Holdings With Other Wealth

A small item, but one that is frequently overlooked. In this context, an ETF stands for an “exchange-traded fund”, which is a fund that allows you to buy and sell an amount of gold or silver (say, one tenth of a gram) in the same way that you buy and sell shares or mutual fund units. So, if your gold ETF holding is less than the gold niṣab, this does not mean that there is no zakat to pay. When your zakat is due, you have to add together all your cash and liquid assets, including “ready money”, savings in the bank, shares, mutual fund units, gold ETFs, silver ETFs, accounts receivable. If the total amount of your assets equals or exceeds the niṣab for each type, and a full ḥawl has elapsed, you have to pay zakat on the total value at a rate of 2.5%.

This is particularly relevant to Hanafi investors who choose to utilise the silver niṣab as the threshold value for cash and financial assets. A relatively small holding of gold ETFs together with cash and other investments can result in the overall portfolio value exceeding the niṣab value of silver.

The Bottom Line

Zakat on gold ETFs and commodity funds is not a fundamentally different obligation from zakat on physical gold, but it involves an extra consideration that is easily overlooked: understanding the nature of the assets the fund holds. If you are dealing with a physically-backed gold and silver fund, then the units represent physical gold and silver, and the preceding notes on zakat apply in full. If you are dealing with a synthetic gold, silver or broader commodity product, then applying the market value method is the safer option, with a Shariah-permissibility check on the product itself a necessary first step. In the case of wider commodity ETFs — where the fund holds other types of commodities — the rules recommend that the product be treated as a standard financial asset, with an obligation to pay zakat at 2.5% of market value.

So what is common to all of these properties is that everyone agrees that owning the property indirectly through a fund does not exclude the property from Zakat. If you own it, you calculate Zakat on it. Take a look at the ownership structure of the properties you hold, determine the appropriate method of calculation, and make sure to include the properties in your annual Zakat calculation.

And Allah knows best.

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