Diamond ETFs In The Works -- Will Investors Bite?

by: Tom Lydon

As exchange traded fund providers ramp up efforts to market the first physically backed diamond fund, some advisors believe the commodity's unique characteristics will create pricing inefficiencies.

Portfolio managers contend that diamonds will be more difficult to package and price into the ETF structure, compared to other types of successful products based on precious metals, reports Murray Coleman for MarketWatch.

"Unlike gold, diamonds trade in a very fractured private marketplace that is highly opaque and ripe with opportunities for pricing markups," Greg Peterson, investment research director at Ballentine Partners, said in the article.

Andrew Ahrens, an adviser who's firm manages $900 million in assets, noted that his clients were also concerned with the pricing aspect of diamonds and a diamond ETF.

"Their experiences were so negative, I just don't know how many people will trust an outside manager at this point to create a fairly priced and representative basket of diamonds," Ahrens said.

Moreover, Peterson even argues that fund providers are pushing out a physically backed diamond ETF in hopes that it will generate the kind of attention gold ETFs have garnered.

"This is typical of the ETF industry - someone takes an interesting financially engineered product like GLD and then tries to copy it," Peterson added. "But not everything fits so neatly into an ETF wrapper."

Fund providers, like GemShares and IndexIQ, are already planning physically backed diamond ETFs of their own.

"The natural users are industry players, just like airlines are for oil and miners are with gold," Andrew Feldman, a financial adviser, said in the article.

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.