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IndexIQ, the up-and-coming ETF issuer best known for its small cap and hedge fund ETFs, revealed plans for its latest fund in a recent SEC filing. The proposed product could be a little outside of the company’s wheelhouse, as it marks a foray into the physically-backed commodity space instead. However, unlike the current crop of physically-backed products on the market which target precious metals, this one looks to move in a new direction, holding diamonds in its basket. While some information was not yet released for this potentially innovative IQ Physical Diamond Trust—the expense ratio and ticker symbol was not available—we have highlighted some of the key details from the filing below:
The filing states that the product looks to be a cost-effective and convenient way to invest in physical diamonds with minimal credit risk. This looks to be done by holding one carat, gem quality stones, which the company believes to be the industry standard. By using this and the exchange-traded structure, investors look to have an easy and potentially liquid way to play a relatively illiquid market (See Is USCI The Best Commodity ETF?).
Diamonds are carbon crystals that develop over a great deal of time thanks to extreme pressure and high temperatures. They are created deep in the Earth and are brought close to the surface via volcanic eruptions in certain parts of the world. Generally, supplies have been heavily concentrated in Southern Africa, Russia, Canada, and to a lesser extent, Australia as well.
Thanks to this heavy concentration of supplies and the scarcity of the product, the diamond industry is incredibly oligopolistic. In fact, pretty much the entire diamond mining market is controlled by four companies; De Beers, Alrosa, BHP Billiton, and Rio Tinto, with De Beers and Alrosa making up the lion’s share of production. In total, about 130 million carats are mined each year, comprising a relatively small $9 billion in value, although global retail sales are close to $75 billion (read Three Commodity ETFs That Have Not Surged).
Will Investors Embrace A Diamond ETF?
Admittedly, the initial concept sounds kind of absurd at face value, but on closer inspection it could see inflows from commodity-focused investors. After all, according to the SEC filing, diamond price appreciation has outpaced that of gold bullion in recent years, easily the most popular physically-backed commodity investment in the world today. Additionally, investors should note that diamond prices have pretty much doubled in the past ten years, suggesting that diamonds have seen longer term strength as well, although obviously not on par with the precious metal in this longer time period (read Has The Junior Gold Mining ETF Lost Its Luster?).
Thanks to the solid performance of diamonds, as well as the popularity of the product, the proposed ETF could see some decent inflows if ever approved. The fund could be an interesting way to diversify commodity exposure beyond precious metals, energy, and agriculture into an entirely new segment that most currently have little access to from an investment perspective. Lastly, since diamonds take up very little space considering their value, the product could see relatively low expense ratios, possibly adding to the appeal of those seeking to make a play on the diamond market in Exchange-Traded form.
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