The new
Diamond/Gemstone ETF (
GEMS
)
from upstart PureFunds is off to a solid start since its recent
debut. The product has easily beaten out broad markets and mining
focused funds as well in its short time on the market.
In fact, the new ETF has beaten out
XLB
by about 1,000 basis points in a little over a month, while its
performance against
SPY
has been even similar, leading that floundering index as well. If
that wasn't enough, GEMS has also seen even greater levels of
outperformance against
ETFs
that mine for precious metals like gold or silver, suggesting
that trends could be lining up for GEMS and the diamond industry
as we get further into 2013.
This is because of some bullishness in the overall diamond
space and a growing imbalance in the supply demand picture. This
has been further compounded by rising demand in enormous emerging
markets, specifically China and India, which are just now
starting to develop an appetite for participation in the diamond
market both from a jewelry and an investment perspective.
After all, some estimates suggest that China and India account
for just over 12% of global diamond demand now, but that they
could account for nearly 50% of demand by 2025. Clearly this
could be a huge new source of fresh demand even if we see flat
growth in the rest of the world (read
Access the $30 Trillion Consumer Market with
These ETFs
).
Supply & Demand
Global demand is increasing 5.9% annually through 2020, but
supply is only moving higher by about 2.7% a year over the same
time period. Add in the extreme difficulty in finding new
supplies-some believe that 'peak diamond' has been reached
already-- and the lack of new mines coming online, and investors
could see a continued bullish trend in the space this year.
Further good news just hit the market in the space thanks to
Swatch buying Harry Winston's retail unit. This will leave
Harry Winston (
HWD
)
-which will soon be called Dominion Diamonds-focused in on the
diamond mining business which has seen higher margins in the
recent past (see
Top Three Precious Metal Mining ETFs
).
The firm has already stated that it is considering diamond
mining acquisitions, so this move could give them some added
capital to explore this avenue. This could be another positive
move for the industry as well, as it could signal a new M&A
trend that may put a modest premium on some of the smaller
players in the space, especially if it appears as though some
acquisitions are imminent.
Diamond ETF in Focus
Despite some of these promising trends and the incredible
start for the Diamond and Gemstone ETF, GEMS is still a relative
unknown to many investors. For this reason, we look at some of
the key aspects of this ETF below, for those who are looking to
take advantage of the interesting situation developing in the
diamond and gemstone market in 2013:
GEMS tracks the ISE Diamond Gemstone Index and holds about 23
stocks in its portfolio, with an overwhelming focus on diamond
production and finishing. Some gemstone producers also make their
way into the ETF, but their exposure pales in comparison to the
diamond-focused components (also see
Palladium ETFs to Rally in 2013?
).
Individual holds are well spread across nations and across
continents, although there is a focus on Canadian and British
securities, and stocks based in Hong Kong. Exposure is also
tilted towards small and mid caps, but some large caps like Anglo
American and
BHP Billiton (
BHP
)
make their way into GEMS as well, largely thanks to their massive
levels of production of gemstones (BHP Billiton) or their
outright ownership of key diamond players (Anglo owns 85% of
DeBeers).
Investors should also note that volume in the product isn't
exactly great right now, so you could see some relatively wide
bid ask spreads. However, in recent looks, the spread was only a
few basis points wide so it shouldn't add too much to the stated
expense ratio of 69 basis points a year (see
PureFunds Debuts Innovative Mining ETFs
).
Still despite this drawback, the ETF has been a very solid
performer in its limited time on the market and it remains the
only way to gain targeted exposure to the diamond industry in ETF
form. For this reason, GEMS could be an interesting pick in 2013
for those looking for a new hard asset play that goes beyond the
traditional markets and into something potentially even rarer
than precious metals that also has strong fundamentals at its
back.
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BHP BILLITN LTD (BHP): Free Stock Analysis
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PF ISE-DIAMOND (GEMS): ETF Research Reports
HARRY WINSTON (HWD): Free Stock Analysis
Report
SPDR-SP 500 TR (SPY): ETF Research Reports
SPDR-MATLS SELS (XLB): ETF Research Reports
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