New ETF Focuses On Diamonds And Precious Stones
Last week FactorShares launched the first ever ETF focusing on diamonds and gemstones. The PureFunds ISE Diamond/Gemstone ETF (GEMS) hit the market on November 29, 2012.
It invests in a small number of companies engaged in the exploration, production, or sale of diamonds and precious stones.
Several firms were competing this year to be the first to launch a diamond and gemstone focused ETF. FactorShares has won the race. Now the question is whether investors should put their hard earned money into the fund?
GEMS is clearly designed to capitalize on the fervent demand for ETFs offering exposure to hard assets. As PureFunds CEO Paul Zimnisky recently said,
“The demand for diamonds and other gemstones has substantially increased over the past years as global investors look for hard assets as a potential safe haven from the degradation of fiat currency…”
In other words, Mr. Zimnisky expects investors to buy GEMS for the same reasons they’ve been buying gold and silver ETFs… as a hedge against inflation and a store of value.
It’s certainly a wise marketing strategy.
Investors have been pouring money into precious metal ETFs for several years now. For example, the SPDR Gold Shares (GLD) now has net assets in excess of $78 billion. And the iShares Silver Trust (SLV) boasts net assets of $10.3 billion.
But will GEMS have the same kind of success as these popular ETFs?
Of course, that remains to be seen.
One thing we do know for sure. GEMS is quite different from GLD and SLV. The gold and silver ETFs actually own the precious metals whose prices they’re designed to replicate.
GEMS, on the other hand, does not own the hard assets themselves. Instead, the fund invests in companies engaged in the mining and selling of diamonds and precious stones.
The fund’s top holdings include Signet Jewelers (SIG), Chow Tai Fook Jewellery Group (1929.HK), BHP Billiton (BHP), Harry Winston Diamond Corp. (HWD), Petra Diamonds (PDMDF), and Anglo American (AAUKY), just to name a few.
As such, GEMS might be more similar to precious metal mining ETFs like Market Vectors Gold Miners ETF (GDX) and Global X Silver Miners ETF (SIL). However, due to GEMS’ one of a kind structure and focus, there’s no exact comparison to an existing fund.
That makes it difficult to predict just how successful GEMS might ultimately become.
I can tell you that GEMS offers global exposure. The fund owns companies in Hong Kong, the United Kingdom, Canada, the US, Australia, and Japan.
However, the fund is heavily concentrated in just a small number of positions.
The index on which GEMS is based is made up of just 23 holdings. And the ETF’s top ten holdings account for more than 70% of the fund’s assets.
What’s more, GEMS is not cheap to own. The ETF carries an expense ratio of 0.69%. That’s higher than GLD, SLV, GDX, and SIL.
There’s no question that GEMS is attracting a lot of attention right now. The idea of owning diamonds and precious gems certainly captures the imagination.
However, I think it’s too early to risk your money on an unproven investment strategy. If you’re looking for exposure to hard assets, stick with the proven ETFs for now.
Profitably Yours,
Robert Morris
Category: ETFs
