Diamond Miners ETF Outperforms S&P 500

 |  Includes: GEMS
by: Tom Lydon

The market for precious gems has weakened over 2012 but they are beginning to stabilize in recent weeks, reflecting the improvements in the global economy. While exchange traded fund investors can't directly invest in precious gems through ETFs, there is a relatively new diamonds and gemstone miners ETF to watch.

The PureFunds ISE Diamond/Gemstone ETF (NYSEARCA:GEMS) has gained 6.2% over the past month, compared to the 3.3% rise in the S&P 500.

Diamond prices have been declining over 2012 as slower growth forced consumer to cut back on discretionary spending.

"The story behind these declines will be familiar to those who watch the global economy: slow growth in the U.S. was more than offset by declines in Europe and the emerging markets (especially China)," Nicholas Colas, ConvergEx Group chief market strategist, said in a recent research note. "The good news is that pricing has in fact stabilized in recent weeks, and overall price levels are - like equities - above their 2008 level."

While the U.S. and Europe remain the dominate markets for diamonds, Colas noted that emerging markets, like China and India, are adopting western traditions, like gifting diamond engagement rings.

However, demand for diamonds remains shaky, especially with Europe and Chinese demand weaker than expected at the start of the year. Meanwhile, U.S. demand, which accounts for half of the global market, did hold up.

"Since diamonds and gold share many basic characteristics, it is tempting to lump them together into a 'precious metals/materials' bucket along with silver," Colas added.

Basic price fundamentals and its "hard" asset status both contribute to the argument. However, diamonds experience a wider bid/ask spread due to its categorization into the "four Cs" - color, carat, cut and clarity.

Due to their wide variations, the ETF industry has also struggled to provide a uniform physically-backed diamond ETF. Although, there are some providers, like GemShares and IndexIQ, that have shown interest in a physical diamond ETF offering.

Max Chen contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.