What is the Palisades Water Index
The Palisades Water Index was a modified equal-dollar weighted stock market index originally comprised of 54 stocks, diversified across 19 economies and 12 currencies. Created by Palisades Water Index Associates LLC to capitalize on the growing public awareness of water provision and treatment, the index tracked the performances of companies engaged in the global water industry. Pump and filter manufacturers, water utilities, and irrigation equipment manufacturers were among the types of companies that it followed. Initially, the index was set at 1000 on December 31, 2003.
BREAKING DOWN Palisades Water Index
The Palisades Water Index was one of the first widely published indicators of the potential of the global water industry. It was a benchmark measure of the economic value of water. It looked to capture the growth potential of the water industry as institutional changes and technological advancements combined to address the global demand for clean water and the growing investor awareness of water entering investors' social consciousness.
The Palisades Water Index rebalanced every three months, in March, June, September and December, while other water indexes adjust semi-annually or annually. An increase in M&A activity in the water industry, private equity participation and a water industry in transition made more frequent rebalancing the favored strategy because it increased the number of opportunities the index had to add new water stocks in a more timely fashion.
Screening methodology was also a distinguishing characteristic of the index. Most water indexes generally resemble one another in the criteria pertaining to inclusion, size and liquidity inclusion in particular. Many use mechanical screening methods. However, the Palisades used industry-specific knowledge and water business experience to optimize performance.
The Palisades Water Index and Risks
The Palisades Water Index and investments that provide exposure to water are straightforward. Investors can invest in water by purchasing individual company stocks or by baskets of stocks organized by mutual funds, indexes and exchange-traded funds (ETFs). Increasingly, indexes and ETFs include water but also include infrastructure or utility stocks. Another trend that continues to gain traction is investing in products that target water as pure play.
However, there are risks to any investment, especially when the investable industry is relatively nascent and growing. As more investment opportunities come to the market amid greater index investing and related exchange-traded funds, it is important that investors do the necessary due diligence to determine which products align with an individual investor’s profile, objective and risk tolerance.