IndexIQ plans to release the industry's first physically backed diamond exchange-traded fund; pricing could be tricky
Alternatives exchange-traded fund provider IndexIQ plans to offer investors a brand new way to buy diamonds. IndexIQ has filed with the Securities and Exchange Commission to offer the first physically backed diamond ETF, pending regulatory approval.
The IQ Physical Diamond Shares ETF will work along the same line as other physically backed precious metal ETFs, such as the $69 billion SPDR Gold Shares ETF Ticker:(GLD). Rather than tracking an index, the ETF will be backed by a vault of actual diamonds in Antwerp, Belgium.
As the fund receives new money it will purchase more diamonds and as it loses money it will sell off the gems to pay for the redemptions.
“Diamonds are a great appreciable asset, so the ETF could certainly have merit,” said Jennifer Failla, principal at Failla Financial Management LLC.
IndexIQ notes in its filing that the retail value of the global diamond market was $72 billion in 2009 and is expected to grow to $90 billion total by 2015. That growth will be driven mostly by an improving global economy and a burgeoning demand from emerging markets for luxury goods.
The problem with investing in diamonds today is similar to that of investing in gold before the SPDR Gold Shares ETF came along — namely, an investor has to hold the physical asset. Having an ETF to maintain possession of the precious metal could give investors an easier way to access it without having to hold hundreds of thousands of dollars in diamonds at their homes, Ms. Failla said.
Unlike gold, which has a standardized price, there isn't a global standard for valuing diamonds, said Abraham Bailin, a commodity ETF analyst at Morningstar Inc. That could create a problem when it comes to pricing the ETF's underlying holdings, he said.
“If you deliver gold anywhere in the world, you're going to get the same price for a single gram," Mr. Bailin said. "That's not true for diamonds.”
Indeed, the price of diamonds is based not just on size. “That's only one of the factors that are going to move prices,” Mr. Bailin said. Color, shape, and clarity also factor into a stone's value, he explained.
IndexIQ intends to invest only in one-carat, industry-standard diamonds that are readily available and "in common use among diamond dealers,” according to its prospectus.
But according to Mr. Bailin, there's no way to know the value of the diamonds in the vault on a consistent basis — at least, not without having someone re-price the gems every time there's a new share created or redeemed.
Adam Patti, chief executive officer at IndexIQ, declined to comment while the fund is in registration. The filing did say that each diamond the fund holds will be certified by the Gemological Institute of America, which documents the individual diamond's characteristics and qualities. Certification is not an appraisal of price, however.
