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Investing in Diamonds through a Diamond ETF

Gold investment, or any other commodity for that matter, is comparatively easy. Gold, although it comes in many forms, shapes and sizes, is basically a metal that is standard throughout. Diamond is a different matter. It has no fungibility such as gold or other precious metals. Due to the diversity of diamonds there is no standard by which one can measure one a one for one basis. The liquidity is limited and special expertise is required in order to establish the value of a diamond or selection of diamonds. In addition most of the transactions are private and there is minimal real time market pricing to rely on.

How can one invest, then, in diamonds other than actually buying some diamonds and hoping their value will increase in time?

One possibility is a Diamond Exchange Traded Fund such as has been developed by PureFunds, the PureFunds ISE Diamond/Gemstone ETF set up on November 2012.

Given the complexity of diamond investment the fund has found a way to provide investors a way to invest in the supply and demand cycles or rough and polished gemstones and attempts to engage in the complete cycle from the diamond dug up out of the ground through the entire process and into the retail market.

This is done by holding an investment in around 23 or so stock in various companies actively engaged in the diamond industry across 6 continents, the idea being that these companies are representative of the life cycle of a diamond from start to finish.

According to PureFunds,

“The ETF attempts to represent the full life cycle of the gemstone industry via some of the largest and most liquid public companies of the industry in the world. The fund represents some of the largest rough diamond producers in the world, such as, Petra Diamonds (6.31% of the Fund), as well as, exploration and early stage production companies such as Stornoway Diamond Corp (2.01% of the Fund).”

“The ETF also holds companies that primarily deal in the sale of polished stones and/or hold inventory such as Signet Jewels (9.03% of the Fund). Vertically integrated companies that produce or procure rough stones and also sell polished stones such as Chow Tai Fook Jewellery (8.69% of the Fund), Harry Winston Diamond Corp (8.06% of the Fund), and Anglo American (5.80% of the Fund), which owns 85% of DeBeers, are also included.”

Diamond ETF Holdings

The chart displayed shows the holdings in each of these companies held at 11/30/2012 and, of course, are subject to change.

Although it is a clever way to invest in diamonds and there are some advantages to this, there are disadvantages also. These include the fact that some companies may not be exclusively diamond although may hold an influence of the industry. A typical example is Anglo American which is concerned with the diamond industry in that it owns 85 percent of De Beers. The stock price and value of such companies can be dependent on the performance of other areas of interest to the company.

In addition the performance of the stocks can differ from the price performance of physical gemstones due to both systematic and non-systematic risks. Systemic risks are those relating to stock market performance and non-systemic related to company performance. Systemic risk is dependent on the stock market performance and is the inherent risk one takes by investing in that quarter. The way to reduce non-systematic risk is by diluting the potential risk through diversification into a number of companies.

Advantages of investment into diamonds include:

More value per weight than gold
Diamonds never go out of fashion
Ease of transport and storage
When a good balanced portfolio

The chart give the percentage of the fund for each stock held based upon these and other risks to provide a balanced portfolio that is representative of the diamond market as a whole.

It should be noted, as per the prospectus that:

“Individual shares may only be purchased and sold on a national securities exchange through a broker dealer. You can purchase and sell individual shares of the Fund throughout the trading day like any publicly traded security. The Fund’s shares are listed on the NYSE Arca. The price of the Fund’s shares is based on market price, and because use exchange traded fund shares trade at market prices rather than net asset value (“NAV”), shares may trade at a price greater than NAV (premium) or less than NAV (discount). The Fund issues and redeems shares on a continuous basis, at NAV, only in blocks of 50,000 shares (“Creation Units”), principally in kind for securities included in the Underlying Index Except when aggregated in Creation Units, the Fund’s shares are not redeemable securities”

Not long ago, Diamond Investing News spoke with Paul Zimnisky, CEO of PureFunds. One question asked was, “Since it’s not a physically backed fund and there are no futures contracts or other forms of trade, how does your ETF account for the qualitative nature of valuing gems? How is it priced?

Zimnisky Responded, “All of the companies in the fund are exposed to diamonds or other gemstones in one way or another, so fluctuations in the price of diamonds should directly affect these companies’ cash flows.

As far as how the fund is priced, the fund’s index is based on a market cap-weighted methodology across a basket of about 25 stocks. The fund is passively managed, attempting to mimic the stocks in the index as closely as possible, and the stocks are marked to net asset value every day, which is right around where the fund is usually priced.”

For someone who is interested in diversifying into other investment opportunities, diamonds could well hold the key and investing in Diamonds through a Diamond ETF such as PureFunds may well be the answer.

Exchange:NYSE Arca
Expense Ratio:0.69%
Index Provider:ISE
Index Ticker:ZIG
# of Holdings23

(As at 04/26/2013)
NAV (Net Asset Value) MARKET PRICE
Net Asset Value $18.89 Closing Price $17.76
Daily $ Change -$0.13 Daily $ Change -$0.31
Daily % Change -0.68% Daily % Change -1.72%



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