After a rough patch in the first half of 2013, natural resources
finally took off with the Fed deciding to postpone cuts to its
stimulus program. Although the Fed may still taper soon, it is not
yet final, so commodities may still have some room to run in this
weak dollar environment.
This bodes well for commodity mining ETFs that depend on the price
changes of their underlying assets. A good example of this is the
precious metal and gemstone market, where asset demand has surged
amid geopolitical concerns and worries over a government shutdown
back in the U.S. (read:
3 Mining ETFs Finally on the Upswing
The improving China data is also playing a major role in driving
commodity mining ETFs. Investors were naturally encouraged to pick
precious commodities on hopes of higher returns. Leveraging the
SPDR S&P Metals & Mining ETF
), which was down about significantly to start the year, has really
turned it around in the past few trading days, beating out the
In such a situation, investors seeking to tap a new form of hard
assets can consider the overlooked option of diamonds. Along with
gold and silver, diamonds are also compelling opportunities, and
can benefit from the broader metal strength.
The return from
The Diamond/Gemstone ETF
) from upstart PureFunds in the last one month breezed past
commodity ETFs like
, while it also beat out larger mining products like XME as well.
Given this solid performance, some might be wondering what lies
beneath this uptrend and whether it will continue.
Demand Outshines Supply
The demand-supply scenario is favorable for diamonds with global
demand expected to increase
annually through 2020, but production likely to expand only about
2.7% annually over the same time period, as per market research
firm Bain & Company.
Demand is trending higher especially in Asia, both in terms of
jewelry and investment with India and China accounting for major
chunks of global demand. Both markets are still in their nascent
stages, indicating a wide runway for future growth (also read
A Complete Guide to Mining ETFs
Specifically, demand from India has recently seen a surge on
increased import taxes on gold to cut dollar expenditure, which has
hurt the yellow metal's appeal in comparison to other metals.
Moreover, imports of rough diamonds, which comprise almost 90% of
all diamonds brought into India,
do not attract any levy
. Polished diamonds, however, charge a 2% import tax.
According to Bain & Company, the diamond industry was largely
unscathed during global downturn, probably as this precious stone
is purchased by high-end customers who were somewhat immune to
recession. Moreover, the firm expects several new mines to come
online by 2020.
Geopolitical concerns and their influence on other regions have
also infused some fresh blood into diamond investing. All this has
set a bullish tone for investing in the Diamond Mining ETF which
should see a pickup on the higher demand for precious stones.
Diamond ETF in Focus
PureFunds ISE Diamond/Gemstone ETF
tracks the gemstone industry including exploration, production or
sales of precious stones. This is done by following the ISE
Diamond/Gemstone Index, a benchmark that holds about 24 holdings in
In terms of a national breakdown, the U.K. takes the top spot at
34%, followed by the Hong Kong (27%), Canada (20%) and the U.S.
(10%). Japan and Israel account for single-digit allocation.
The product is also somewhat concentrated in its top holdings with
Chow Tai Fook Jewelry taking the top spot with 8.9% of assets,
followed by Anglo American and Petra Diamonds both of which account
for more than 7.5% of assets.
However, the fund has an inclination towards small-caps with more
than 60% of the allocation. While this might lead to a certain
amount of volatility, greater exposure to blend style (more than
80%) provides some cushion to the volatility.
Most of the companies in this fund focus on the jewelry industry as
well as broad miners that deal within the gemstone space (also read
IndexIQ Files for Industry First Diamond ETF
). However, the product is a bit pricey in the commodity producers
equity space charging 69 bps in year.
Despite the solid performance for GEMS and its unique exposure
profile, the fund remains unloved by investors. Volume and assets
under management are both very light, so make sure to use limit
orders if you are thinking about this product.
Still, if you are able to get by the low volume, GEMS could offer
up an interesting choice in the mining/hard asset space. Diamonds
and gemstones are overlooked by many other ETF products, and given
the solid performance of the space lately, this could be one
segment that may be worth a closer look heading into the end of the
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PF ISE-DIAMOND (GEMS): ETF Research Reports
SPDR-GOLD TRUST (GLD): ETF Research Reports
SPDR-SP MET&MIN (XME): ETF Research Reports
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