Definitive Guide To Water ETFs

by on November 27, 2009 | Updated January 5, 2010 | ETFs Mentioned:

The rise of the ETF industry has democratized commodity investing, making this asset class accessible to more investors than ever before. ETFs offer exposure, both direct and indirect, to almost every commodity imaginable, ranging from popular resources such as metals and grains to obscure commodities like azuki beans and greasy wool. With all the attention paid to gold bullion and crude oil, investors often overlook one of the most important commodities: water.

Unlike most commodities, water has no real substitute, a fact that is raising concern as the world’s population expands more quickly than supplies of fresh, clean water. It is estimated that only 3% of all the water in the world is fresh and of that only 0.3% is above ground in lakes and rivers. With billions depending on the ability to make the most of this limited supply, the few unclaimed water supplies left are becoming increasingly valuable. As concerns about its scarcity in coming decades intensifies, water has the potential to become big business.

Population Growth

Median population estimates for 2050 are at 9.2 billion, up significantly from today’s 6.8 billion. If each one of those new people drink a half gallon of water per day (as is often recommended) this would put an additional strain of 1.2 billion gallons of water per day on the worldwide water infrastructure just for drinking alone.

It is predicted that in just 20 years time half of the world’s population will experience water shortages. This figure suggests that significant gains must be made in the water industry in order to meet the forecasted demand. As such, many investors are extremely bullish on the future of companies operating in the water industry for the long term. Companies that are engaged in desalination activities, which are becoming increasingly popular in the Middle East and South East Asia, as well as companies that have pipe system and construction expertise, may see demand for their services surge. These industries may be particularly active in rapidly developing countries.

Building Block of Life…And Industry

Crater Lake, ORFrom one perspective, it is astounding that we haven’t run out of water already: it takes 2,000 gallons of water to make one gallon of milk and nearly 20,000 gallons of water needed to make one ton of steel.

U.S. power plants alone go through 136 billion gallons a day, meaning that this industry uses more water than on a daily basis than do humans for drinking. As countries further industrialize, levels of water consumption will grow, further straining water supply. These trends could potentially force companies to find water in new places and develop more efficient recycling systems.

Profiting From Necessities?

Some investors strongly dislike the idea of profiting from increasing demand for a commodity that is as vital to people’s lives and well being as water. Should this attitude become commonplace in government circles, it could lead to nationalization of some water companies, especially in emerging markets where there are very few choices for clean water supplies. Water facilities have been nationalized in many emerging markets over the years and the threat of further nationalization is always present. Also, while many politicians, even in this county, were calling for windfall profit taxes on oil companies when the price was well over $100/barrel, it is only a matter of time until they come after water companies for price gouging, which would obviously be a huge drag on water equities and it is something that investors should keep in mind when investing in water ETFs.

Water ETF Options

While there aren’t water futures or ways to directly invest in water, there are several companies that could see demand for their products and services increase as water becomes increasingly scarce. Moreover, there are a number of ETFs that offer exposure to the “water industry.”

First Trust ISE Water Fund (FIW)

This fund, which tracks the ISE Water Index, is comprised of companies that derive a substantial portion of their revenues from the potable and wastewater industry. Of the fund’s 36 holdings, most are in smaller-sized firms, with large caps account for only about 10% of fund assets. The top individual holdings include Veolia Environment and Nalco Holding Company, both of which engage in water and waste water treatment operations.

FIW

Claymore S&P Global Water Index ETF (CGW)

CGW is designed to have a balanced representation from different segments of the water industry, consisting of two clusters. CGW’s holdings include 25 water utilities and infrastructure companies (water supply, water utilities, waste water treatment, water, sewer and pipeline construction, water purification, water well drilling, and water testing) and 25 water equipment and materials companies (water treatment chemicals, water treatment appliances, pumps and pumping equipment, fluid power pumps and motors, plumbing equipment, totalizing fluid meters and counting devices). This ETF is also diversified among developed markets: nearly 40% of the fund is in U.S. stocks, with 15% in the UK, 14% in France, and 9% in Japan.

CGW

PowerShares Global Water ETF (PIO)

The ETF tracks an index that seeks to identify a group of global companies that focus on the provision of potable water, the treatment of water, and the technology and services that are directly related to global water consumption.The fund also has decent geographical diversification, with the U.S. making up only about 30, followed by Japan at 12% and France at 10%. Nearly a quarter of PIO’s holdings are in utilities companies.

PIO

PowerShares Water Resources ETF (PHO)

PHO seeks to identify a group of companies that focus on the provision of potable water, the treatment of water, and the technology and services that are directly related to water consumption. This ETF is very similar to PIO, but is limited to American firms and it has a lower expense ratio (0.60% compared to the expense ratio of PIO at 0.75%). Its largest holdings include AECOM Technology group, which provides technical and managerial support to infrastructure projects including water facilities, and Tetra Tech, which in addition to oil and gas services, specializes in inland water drilling projects.

PHO

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Disclosure: No positions at time of writing.