Despite the fact that water consumption has doubled the rate of population growth, investors still pay zero attention to the essential commodity. Over the past year, water-related equities have fallen right along with the rest of the market. Sector measures like the PowerShares Water Resources (ARCA:PHO) sit closer to their 52-week lows rather than their highs. (For related reading, see Water: The Ultimate Commodity.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

However, the long-term picture for water-related firms is still quite rosy. As incomes and populations in a variety of emerging nations continue to rise, the demand for water is also increasing. These incomes are moving water beyond the basic requirements needed for drinking, cooking and hygiene. Analysts estimate that over the next 20 years, India is expected to see its water demand more than double and China's will rise by 30%. The World Resources Institute projects that overall water demand will increase by more than 50% over the next 15 years in emerging market nations and by more than 15% in developed markets.

Given the long-term bullishness towards the water theme, investors may want to consider adding that type of stock to a 2012 portfolio. Here are some stocks and funds to watch for in the coming year.

Desalination Growth
Abundant natural gas and renewable energy has many nations now turning to desalination as a way to solve their water problems. Analysts at Pike Research estimate that cumulative investment in new plants will reach $87.8 billion worldwide from 2010 to 2016. This bodes well for engineering and construction firm, Tetra Tech (Nasdaq:TTEK). The company has been designing desalination facilities in Florida since the 1990s and developed California's first desalination plant. The firm continues to expand globally as well. In addition, Energy Recovery (Nasdaq:ERII) designs and manufactures products that allow plants to capture lost power, often with up to 98% efficiency. These two stocks offer an interesting pair to play the growth in worldwide desalination. (To learn more, read WaterSense: Saving Water And Money.)

Big Dividends in Water Utilities
Investors who are looking for income can find plenty of opportunities in the water sector. Middlesex Water (Nasdaq:MSEX) currently yields about 4% and has increased its dividend in each of the last 39 years. Similarly, The York Water Company (Nasdaq:YORW) just paid its 564th quarterly dividend and yields 3.2%. Both offer investors a wide range of infrastructure assets as well as water-reservoir exposure. These firms should continue to see outperformance as more portfolio focus is put on equity income.

The ETF Plays
Finally, for investors wanting to take advantage of the entire spectrum, there are plenty of exchange-traded funds (ETFs) that invest in the sector. The First Trust ISE Water Index Fund (ARCA:FIW) tracks the top 36 water stocks and has been the best performer in the category this year. The fund features a variety of water-equities including ITT (NYSE:ITT) and Watts Water (NYSE:WTS). Investors looking for more of a global focus can refer to the Guggenheim S&P Global Water Index (ARCA:CGW) and PowerShares Global Water (ARCA:PIO). (To learn about ETFs, read Exchange-Traded Funds.)

The Bottom Line
Despite the pressures facing our water systems, investors continue to ignore the precious commodity. Going into 2012, stocks within the sector offer a unique investment that should pay off in spades. Adding some of the previous funds or individual equities makes an ideal play in the New Year.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  4. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  5. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Benchmark Crude Oil

    Benchmark crude oil is crude oil that serves as a pricing reference, ...
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!