State Street Corp.'s gold-tracking exchange-traded fund stands to draw more assets from recent agreements that allow its use in futures and options contracts, according to an executive at the Boston company.
The four-year-old SPDR Gold Trust began being used in such trades in early June on several exchanges, including the Chicago Board Options Exchange. Within a month the ETF had become the most actively traded call contract on the exchange. This means that investors were busily buying the right to purchase shares at a certain price before a pre-established deadline.
"One thing we know is that the more avenues there are for an institutional investor to express a view, the better," said Anthony Rochte, co-head of the ETF business at State Street Global Advisors, State Street's asset management arm. "So if they've got derivatives contracts with a fully collateralized ETF, they can do different types of trades, and that drives demand and interest in the ETF."
SPDR Gold Trust is considered to be fully collateralized because it actually holds gold bullion, and its shares reflect its changing market value. The ETF, which has assets of about $19 billion, was formed by State Street Global Advisors and the World Gold Council, an association of gold mining companies. It was the first U.S. commodity-based ETF.
Because the Securities and Exchange Commission considers the fund a security rather than a commodity, institutional investors barred from dealing in commodities can add gold to their portfolios without running afoul of their restrictions, according to George Simon, a partner in Foley & Lardner LLP, a Chicago law firm.
After a year, new stocks are eligible for option trading, but the SEC at first refused to allow the fund to be used in options trading, said Mr. Simon, whose firm represents the World Gold Council. But by June the SEC and the Commodity Futures Trading Commission had struck an agreement that permitted using the ETF in both futures and options trades.
The SEC approved trading in options on shares of the fund, and the Commodity Futures Trading Commission approved trading in futures on them. That cleared the way for option contracts on the fund's shares to be listed on the Chicago Board Options Exchange, the American Stock Exchange, the International Securities Exchange, the Philadelphia Stock Exchange, and the NYSE Arca Exchange.
Futures contracts, meanwhile, trade on OneChicago, a security futures exchange.
The joint approval was the first within a new cooperation agreement between the SEC and the Commodity Futures Trading Commission that included establishing a regulatory liaison between the agencies.
The two agencies' collaboration could clear the way for other commodity-based ETFs, Mr. Simon said, but gold and silver are the only ones that would fit within their current agreement.
Options and futures based on ETFs that track other commodities are tricky, in part because accurately reflecting changing commodity prices requires having a store of the physical assets. For example, the U.S. Oil Fund, which seeks to track the price of West Texas Intermediate Crude Oil, has often traded at prices far from those of the actual commodity. "People have been trying to figure out how to securitize oil, because you can't put it in a vault in London," Mr. Simon said.
Nonetheless, the State Street fund's new status is a milestone in the evolution of ETFs.
More than 600 of the funds have been launched since 1993, when State Street created the first. This spring Bear, Stearns & Co. Inc. introduced the first actively managed exchange-traded fund; State Street and other sponsors have said they plan to follow suit.
