Index Universe reported that IndexIQ has a physically backed diamond ETF in the works. Three years ago I had a light post asking why there was no diamond ETF. This idea intellectually appealing on some level. For men I think it might appeal the same way that we react when we see Jason Bourne’s safety deposit box with cash in various currencies, all the passports, a weapon or two and a few other things. Maybe Bourne has a velvet envelope in there with a dozen diamonds in it.
I don’t know if there is any connection for women or not other than I know my wife would not care.
A diamond ETF also appeals to fear of a total breakdown in society–maybe if the diamond ETF is successful there will be a cans of tuna fund too.
Seriously, the reason to explore something like this would be for what it can offer to a diversified portfolio. Something that offers a low correlation has a role all the more so if the low correlation is something that can be reasonably predicted (not to imply infallibility). I’ve written a lot posts over the years about the value I place on this for navigating market cycles.
The potential zigzag effect will be part of the argument for the diamond ETF if it actually lists. Then the ETF will either deliver a low correlation or it won’t. My initial hunch is that such a fund won’t get panic bids as reliably as gold appears to and that at times the correlation will indeed be low but maybe not when it would be most needed. It seems to me that like silver there is a cyclical aspect to diamonds, at least I think there is.
Diamonds are usually bought for jewelry. If that is correct then that means things like engagements, weddings and anniversaries. So there is one purchase for engagement and one for the wedding which could be more resilient in that those purchases “must” occur. The ones that don’t have to occur are various anniversary purchases. There are potentially a lot of anniversary purchases that could occur and depending on the current state of the economy it would be easier to forgo earrings for a 5th anniversary and to the extent diamonds rely on that type of demand the correlation to stocks could go up as stocks and the economy turn down.
If you want to learn more about the particulars of how the fund will buy diamonds and store them read this post from Kid Dynamite. The entire procedure is lengthy with many steps but it is amusing to think that in the first few days of the fund the entire AUM could fit in Jason Bourne’s safety deposit box.