Q:  How did the natural resource sector ETF evolve? A : The idea was to create pure-play exchange traded funds in industries that make for interesting investment cases but are difficult to invest in because of a limited number of public pure-play companies traded in the US and Canada. The three funds that we launched last November are the PureFunds ISE Diamond/Gemstone ETF, the PureFunds ISE Mining Service ETF, and the PureFunds ISE Junior Silver/Explorer ETF. Q:  How are these three funds different? A : The PureFunds ISE Diamond/Gemstone ETF is the first-ever Exchange Traded Fund attempting to exclusively invest in the gemstone industry. This industry is interesting because global diamond demand is expected to grow at about 6% annually over the next 15 years but supply is only expected to grow at less than 3%. Most of the new demand for diamonds is coming out of the growing middle class in Asia, and the limited new supply is a result of very few new projects coming online near-term to offset the reduced production from maturing mines. Economic diamond bearing kimberlites are very difficult to find, and new project development is very expensive and takes a long time compared to other mining projects; a new diamond mine could take up to ten years and a billion dollars to develop, so this has resulted in limited new project development. As a result, the new supply expected in the next decade or so is not estimated to keep up with the growth in demand, which provides an interesting investment case for diamonds and the industry. The idea behind the gemstone fund is to represent as much of the full life cycle of the industry as possible, through publicly traded companies that produce rough diamonds and retailers that sell polished diamonds. The PureFunds ISE Mining Service ETF represents the global mining service industry as a whole via some of the largest and most liquid public companies in the industry. There are only a handful of pure-play mining service stocks traded in the US and Canada but as you go abroad, more options become available. In this ETF, we have approximately 30 stocks that trade in eight countries. The companies in the mining service industry have a completely different business model from the producers. They contract out drilling and engineering services, and manufacture and sell mining equipment to the producers. Since the service companies contract out their services, sometimes at pre-agreed upon rates, they can sometimes offer greater predictability of revenue than the producers, and sometimes can be less sensitive to short-term fluctuations of the underlying commodities than the producers. However, the service companies are still exposed to commodity prices in that when demand for commodities increases, the producers ramp up their exploration and production budget and that in turn increases the demand for the service companies, and the other way around when demand falls. PureFunds ISE Junior Silver/Explorer ETF focuses on smaller silver mining companies that have a higher risk profile but also offer a huge upside. The idea behind this fund is that the investor in silver wants a higher risk-reward profile than the typical gold investor. And an investor in small cap explorers wants an even higher risk-reward profile than an investor in a major mining company. So we put the two together and tried to create a fund that caters to the silver investor and the small cap investor that wants the highest risk-reward profile. Q:  Why are there no publicly-traded companies in the diamond polishing industry? A : The polishers are generally family run businesses and they have developed a successful niche, primarily in India. The polishing industry is labor intensive and is very fragmented and there are hundreds of small operators, but no pure-play publically traded diamond polishing companies that we know of. Q:  What kinds of companies are included in the fund? A : Harry Winston is an interesting stock. They have a diamond mine in Canada, and a high-end jewelry retail business, but they are in the process of selling the retail business, and acquiring another large scale diamond mine in Canada, and have even indicated further interest in acquiring more mining assets. The mining operations have been a better business for them than the retail business, so it makes sense that the company’s plan is to focus solely on the mining operations, particularly in Canada. If the deal closes, they will be one of the largest publically traded pure-play diamond producers in the world. On the retail side, a company like Signet that operates a retail jewelry chain is a good fit for the fund because a large percentage of the jewelry they sell contains a diamond. The retailers in the fund tend to do well when demand for diamonds is high, and they are turning over a lot of inventory. So as the demand for diamonds increases we expect these companies to benefit. Q:  Could you explain the indexing methodology for this ETF? A : This index uses a market capitalization weighted allocation process across pure-play and non-pure-play categories. Higher weights are generally applied to companies that are pure-plays, meaning companies with traceable revenues, earnings or assets that are specific to the industry for which the ETF is created to track. We wanted to make the fund as pure-play as possible, however there are some stocks in the fund that are not pure-play diamond companies in the gems ETF. For instance, Anglo American, the London, UK based multinational mining company that produces several commodities in addition to diamonds. It is not a diamond pure-play, but diversified miner own 85% of De Beers. So we thought it was necessary to include the stock because De Beers is the largest diamond player in the world, and we thought the fund should have that exposure. Since, Anglo American is not a pure-play but also one of the largest iron ore miners in the world, the company could be driven by the price of iron ore, and we didn’t want that to overshadow the index. But again, we wanted to include the company because of its ownership of De Beers, so we came up with a way to represent that company in the index, but discount the allocation weight because it is not a pure-play diamond company. Q What happens if there is a slowdown in the natural resource industry? Do you have to hedge or ride the cycle? Q:  What is the construct of the Mining Service ETF? A : Most of the companies in the mining service fund are pure play. It is a market cap weighted allocation and there are approximately 30 companies in this fund that are listed on the major stock exchanges all over the world. So it offers global diversification. Q:  How do you deal with the disparate currency situation, as companies are listed in global exchanges? A : The funds are not hedged for foreign exchange, so there is foreign exchange risk. Q:  Why have you chosen silver and not gold or any other metal? A : Silver is interesting in that it is typically perceived as a safe haven metal like gold, but silver is also driven by industrial demand, which could be beneficial in a stronger economy. Q:  In your selection process how do you go about picking these companies? A : For all of our funds, it was straight forward to select companies because there are such a few number of pure-play companies in these industries, and even fewer that meet the index criteria. So we included all of the companies that met the criteria. Q:  What is the role of Factor Advisors in your fund? A : PureFunds is a research firm and business manager to the three ETFs and our partner Factor Advisors is the advisor to these funds. Factor Advisors is a registered investment advisor that is registered to launch ETFs.