How To Buy The Best Water ETF

By ETFDatabase | August 14, 2012 AAA

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.

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