IndexIQ Plans Physically Backed Diamond ETF

March 06, 2012

What's more precious than a precious metals ETF?

IndexIQ, the Rye Brook, N.Y.-based exchange-traded fund firm known for its hedge fund replication strategies, filed paperwork with the Securities and Exchange Commission to market a physically backed commodities fund holding diamonds. The move suggests the company thinks an appetite remains for investments other than precious metals that will hold their value in times of great uncertainty.

The “S-1” registration statement, which didn’t specify on what exchange the IQ Physical Diamond Trust will be listed, said the fund will hold “one carat, gem quality, diamonds of readily available, industry-standard diamonds in common use among diamond dealers.”

The filing is the latest sign of the ETF industry’s willingness to expand the definition of what constitutes an ETF. The trust will be backed by vaulted diamonds, just as the world’s biggest commodity fund, the SPDR Gold Shares (NYSEArca: GLD) physical bullion ETF, is backed by vaulted gold. GLD has almost $70 billion in assets, and was for a few days last year the biggest ETF in the world.

The idea of a diamond ETF is also emblematic of the underlying nervousness that remains among investors as the global economy continues to heal following the mortgage-related market meltdown in 2008-2009.

Gold reached an all-time high last year near $1,910 a troy ounce, and is rising again amid continuing concern about economic instability in Europe and geopolitical tension in the Middle East.

Incomplete Puzzle

The filing left blank many crucial pieces of the fund’s operation, including the identity of the custodian, the trustee and the provider of diamond spot prices relevant to the fund.

But the filing did stress that the price provider wouldn’t be affiliated with the fund sponsor, the trustee or the custodian.

It also said that the custodian will hold the fund’s diamonds at vaults in Antwerp, Belgium.

The filing also didn’t disclose the fund’s proposed ticker or annual expense ratio.

Diamonds Are Forever

The prospectus specifically said synthetically produced diamonds won’t be part of the fund, as they aren’t investment grade.

"All diamonds held by the trust will be natural, mined stones certified to be other than a conflict diamond," the filing said.

The company said in the filing that diamonds for the fund's purposes will be those that are ejected from deep within the earth, along with large quantities of magma, by volcanic eruptions. It said that gem-quality diamonds are found in rock formations known as kimberlite or lamproite pipes.

It noted that diamonds coming from relatively shallow lamproite pipes are now only mined in western Australia.

But diamonds from kimberlite pipes, which can be as deeps as two kilometers in the ground, are mined from locations in Southern Africa, Russia and Canada, according to the prospectus.


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