Exchange-traded funds have been embraced by self-directed investors and professional money managers alike thanks to their transparency, ease-of-use and costefficiencybenefits.As the product lineup grows more diverse, investors have taken advantage of being able to easily tap into virtually any corner of the investable universe. The commodities asset class in particular has seen growing interest from ETF investors,althoughone particular resource continues to fly under the radar for most .

When it comes to lucrative upside potential and headline appearances, it's hard to compete with gold and oil. From a fundamentalperspective, however, one particular commodity offers an appealing thesis although often overlooked: water. Simply put, water plays an essential role in our everyday lives. The investment thesis is verystraightforward; everything from our bodies to our factories require water to operate. The appealing factor is that this commodity has no real substitutesand the fact that roughly 3% of all the water in the world is actually suitable for human consumption.

Factors To Consider

Besidesobviousfactors such as expenses andliquidity, there are several other factors that should beconsideredwhen shopping around for a water ETF:

Supply Conditions

There is a limited supply of fresh water, and while technologies andtreatmentmethods are being developed to tap into newreservoirs, we are still likely to face challenges as our ever-expanding world population grows thirstier.Growing rates of urbanization across emerging Asia and Latin America are also bolstering the demand for this essential good; this increase in population spurs an increase in demand for food and since water is a necessary component in farming, this puts extra strain on already tight supply conditions.

Regulations

The reason why most water equities receive little to no attention from growth-hungry investors is because the they find themselves in heavily-regulated markets. Water companies are always faced with thechallengeof delivering a crucial product to consumers while at the same time generating a profit forshareholdersas well as trying to avoid political backlash. As such, the water sector offers stability similar to electric utilities from a fundamental perspective, but it does warrant a closer look from those looking to tap into arapidlyexpanding corner of the economy.

Utilities vs. Treatment

As with any corner of the economy, it pays to take note of the various industries within the broader sector. Utilities, wastewater treatment companies, as well as businesses working to develop new ways to deliver potable water are all contenders for those looking to invest in this asset class. Companies involved with water infrastructure, such as themaintenanceandconductionof pipelines or waste water treatment, offer a risk/return profile that is perhaps best comparable to investments in the utilities sector; both have a history of low-volatility, limited upside potential in bull markets, as well as a consistent track record ofdividend distributions. On the other hand, firms involved indevelopingnew treatment technologies like desalination bear a higher level of risk given the inherently unpredictable nature of their business when compared to large, established utility companies with relatively fixed costs.

Water Equities

Total Holdings Expense Ratio
PHO 30 0.60%
PIO 33 0.75%
CGW 50 0.65%
FIW 37 0.60%
As of August 2012
  • PowerShares Water Resources Portfolio (PHO): This ETF is the biggest and most popular offering in the space; PHO holds a portfolio of primarily mid and small-cap size companies that created productsdesignedto conserve and purify water for homes, business and industries. Top individual holdings include industry giant American Water Works Co., Flowserve Corporation, as well as Toro Company.
  • PowerShares Global Water Resources Portfolio (PIO): This fund offers similar exposure as PHO with a global focus. From a country breakdown perspective, the United States receives the biggest allocation; the next biggest chunks go to the United Kingdom, France, Brazil and Japan.
  • S&P Global Water Index ETF (CGW): This ETF offer domestic as well as international exposure to this segment of the market. CGW's underlying portfolio is split 50/50 between water utilities, and waterequipmentand materials companies. Top allocations by country include the United States, United Kingdom, Switzerland and France.
  • First Trust ISE Water Index Fund (FIW):This ETF holds a global portfolio of companies that derive a substantial portion of their revenues from the potable and wastewater industry. Investors should note that U.S. companies account forroughly90% of total assets, giving this portfolio a geographic tilt that may be less-than-ideal for some. Top individual holdings include Mueller Water Products, Lindsay Corp. and Veolia Environment.

Follow me on Twitter@SBojinov

Disclosure: No positions at time of writing.

Related Articles
  1. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  2. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  5. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  6. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  7. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  8. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  9. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  10. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center