Commodities have exploded in popularity over the last few years as investors have noticed the asset class's attributes. As a way to play rising inflation expectations and the growth of the emerging world, investor interest has resulted in record fund flows into natural resources. Add in the asset class's low correlations to traditional stocks and bonds, and it's no wonder why funds like the iShares S&P GSCI Commodity-Indexed Trust (ARCA:GSG), have now become portfolio standards. However, in all this excitement, investors often ignore one commodity. For those with longer timelines, blue gold could be one the best plays around.

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Liquid Assets
While investor focus has tilted towards corn and copper, water remains absent from many portfolios. However, that could be the wrong move over the long haul. Despite the fact that the substance covers much of the earth's surface, currently only about 3% of it is considered fresh and suitable for consumption. That small figured doesn't even take into the account that much of that fresh water is still locked in the polar ice caps.

At the same time, rising global populations are draining these supplies at exponentially increasing rates. According to the International Water Management Institute, water demand is expected to increase by 18% in developed countries by 2025. In the booming emerging world that number will jump by 50%. The U.N. Food and Agricultural Organization (FAO) estimates that, by 2025, over 1.8 billion people will live in regions with absolute water scarcity, and two-thirds of the global population will be under what the agency calls "water stress conditions." New sources of industrialization, consumerism and agriculture demand will continue to put pressures on the planet's already dwindling water supplies. Add these supply shortages to the insufficient distribution networks, rising pollution and the lack of treatment systems and you have a recipe for rising prices.

Just how expensive? The American Water Works Association (AWWA) predicts the cost of repairing and expanding water infrastructure in the U.S. will top $1 trillion over the next 25 years. The group estimates that those infrastructure costs will nearly triple the size of a typical family's water bill, adding on between $300 and $500 per year above current costs. Likewise, China will spend nearly $50 billion on water treatment systems and flood control projects, and India has plans for large irrigation projects that will divert rivers and soak dry farmland. Analysts at Citigroup (NYSE:C) predict a globally integrated market for fresh water within 25 to 30 years, that will include spot pricing and futures exchanges. All of these things will ultimately boost prices for end-users.

SEE: Water: The Ultimate Commodity

Playing the Ignored Resource
For those investors with long-termed portfolios, water could be one of the better commodity values. Until there is a spot market for potable water, investors will have to settle for those firms that provide infrastructure, filtration, consumption and desalinization products like Pentair (NYSE:PNR). The PowerShares Water Resources ETF (ARCA:PHO) holds the bulk of the assets in the sector, at net assets around $895 million and remains one of the best broad choices for water investment. The fund tracks 29 different water-related firms, including Watts Water Technologies (NYSE:WTS) and pump-maker Flowserve (NYSE:FLS). So far, the ETF is up about 11% year-to-date. The Guggenheim S&P Global Water Index (ARCA:CGW) offers investors a broad global approach.

There may be another way for investors to gain from exposure to water. Insurer PICO Holdings (Nasdaq:PICO) and avocado grower Limoneira (Nasdaq:LMNR) may not seem like water plays, but both hold vast amounts of water rights underneath their properties. With operations in drought-stricken Arizona and California, both firms are sitting on a virtual ocean of future profits.

SEE: Introduction To Exchange-Traded Funds

The Bottom Line
As commodities have gain prominence in portfolios, water has continued to be widely ignored. However, that could be a major mistake long term. Increasing demand and dwindling supplies will make for some nasty conditions going forward. Ultimately, that will drive up prices. Betting on the sector now could lead to big profits. The proceeding picks, along with Xylem (NYSE:XYL), make ideal choices.

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

Tickers in this Article: GSG, C, PNR, PHO, WTS, FLS, CGW, PICO, LMNR, XYL

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