Coming Soon: A Physically Backed Diamond ETF?

- October 10th, 2013

GemShares and the NASDAQ OMX Group are developing the GemShares Global Investment Grade Standard Diamond Basket Index in the hope of providing “a standardized pricing mechanism for valuing a diamond basket.” In the long run, they hope it can be used to develop financial products like a diamond-backed ETF.

Coming Soon: A Physically Backed Diamond ETF?

Diamonds are a polarizing investment choice. Those who love them are quick to extol their virtues, while those who don’t are just as quick to point out their problems. 

For detractors, part of the issue is that diamonds are valued subjectively using cut, color, carat and clarity, the “four Cs” — unlike gold or silver, they have no simple cost-per-ounce valuation system. That means potential investors can be left wondering whether different appraisers will assign their diamond the same value; according to Fox Business’ Judy Martel, it also means exchange-traded funds (ETFs) and mutual funds based on diamond value “have remained elusive.”

It’s against that background that GemShares, along with its partner, the NASDAQ OMX Group (NASDAQ:NDAQ), is developing the GemShares Global Investment Grade Standard (GIGS(TM)) Diamond Basket Index, which it says will “provide a standardized pricing mechanism for valuing a diamond basket that could be used for the development of financial products.”

Diffusing doubts

That may sound complicated, but Andrew Feldman, a partner at GemShares, recently explained to Kitco that the company’s plan is fairly simple: for now, its main goal is to convince investors that diamonds can be assigned a fixed value.

He told the news outlet, “[i]f you look at barrels of oil, one barrel of oil is different from the other — there’s viscosity, there’s all sorts of different metrics that people don’t really know. One hundred ounces of 24-carat gold is very similar, I hesitate to say exactly, but extraordinarily similar to 24 ounces of 24-carat gold.”

However, “[t]here can be different purities that are minor, and the world has basically said that a certain amount of 24-carat gold is equal to (another amount of) 24-carat gold. We’re trying to create that same idea.”

To do so, the company will use a variety of characteristics — including, but not limited to, the 4Cs — to create diamond “baskets” that are similar to each other; each basket will contain diamonds from three different weight classes, as per ETF Trends,

As mentioned, in the long run, GemShares sees those baskets being used to develop “financial products.” Wealth Daily reported that one such financial product could be GemShares’ proposed diamond trust ETF, which, according to the company’s Securities and Exchange Commission (SEC) filing, would be designed “to reflect the performance of the wholesale price of diamonds included in a [GIGS(TM) diamond basket]” and aimed at “investors who seek a cost effective, transparent and convenient way of making an investment similar to an outright investment in physical diamonds.”

Similar options

Unsurprisingly, other companies are thinking along the same lines as GemShares. One of those is IndexIQ, which last year filed with the SEC to launch a physically backed, diamond-holding commodities fund, ETF Trends states. As yet, that company’s plans have not yet come to fruition.

And, for those unwilling to wait for GemShares and IndexIQ to move forward, there is the PureFunds ISE Diamond/Gemstone ETF (NYSE:GEMS). Launched in November 2012 by New Jersey-based PureFunds, the fund is not backed by physical diamonds, but provides exposure to the gems via a basket of about 25 companies involved in the diamond and gemstone industry.

For diamond fans, all three are certainly worth keeping an eye on.

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.

Related reading: 

Are Diamonds Really “Bullshit”?

PureFunds’ Paul Zimnisky Talks Diamond ETF Investing

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