Dive Into Water ETFs And Mutual Funds

by Chuck Epstein | November 3, 2010 2:43 pm

While water is the world’s most precious resource, it’s also an industry dripping with investing opportunities via water exchange traded funds (or ETFs) or mutual fund investments. 

Today, investors can buy ETF funds, mutual funds, hedge funds of international companies and even individual water-related stocks engaged in all aspects of the water business worldwide.

But astute investors interested in navigating investment opportunities in the water business should undertake two separate steps: First, they should research all aspects of the water business to determine which investment vehicle gives them the exposure they are looking for. Second, they should choose the right ETF, mutual fund or individual stocks to isolate the opportunity or industry sectors they want to pursue.

To do this, investors need to research the regulations, technology and treatment processes affecting water purification and waste water treatment. Many investors do not realize that investing in water is even possible. That’s because the U.S. water industry has undergone significant structural changes in its management and regulation since the Paris-based company Vivendi acquired U.S. Filter in 1999.

Today, the water business is the third-largest industry in the world, behind oil and gas production and electricity generation.    Due to climate changes and increased demand worldwide, the need for pure water, as well as every technology and infrastructure related to the purification, drainage, treatment, and the search for water is now a priority among many of the world’s developed and developing nations.

This includes new ways to re-claim contaminated water in remote areas.  For instance, decentralized treatment plants are becoming more popular in emerging and developed nations. New efforts are also needed to build storm water infrastructure, especially to treat runoff in the form of fertilizers, pesticides, and organic compounds, which are major contributors to impaired water quality.

Water is also essential to modern technology manufacturing.  For example, it takes 2,300 gallons of water to fabricate one six-inch semi-conductor wafer, according to Steve Hoffmann, author of the book, Planet Water: Investing in the World’s Most Valuable Resource. 

Obtaining clean water is a worldwide problem.  The World Health Organization estimates that 1.1 billion people cannot easily find clean drinking water, while 40% of the world’s population lives in areas without adequate sanitation.  This helps explain why 50% of the world’s hospital beds are being used to treat patients suffering from water-borne and water-related diseases. An estimated 4,500 children per day die from the lack of water and sanitation services. 

Since water is essential and becoming more scarce, governments worldwide will be required to spend more on building water infrastructures and related water treatment services.  One estimate by the Organization of Economic Co-operation and Development (OECD) estimates that $15 trillion will be needed for just 20 OECD member nations, plus Brazil, Russia, India and China.

In the U.S., water is regulated by many different agencies, including the Environmental Protection Agency (EPA), as well as state agencies. These regulations cover everything from water quality to water runoff and setting standards for sewage treatment and water runoff.

ETF Investment Opportunities and Risks

For investors, the water industry can be broken down between companies which provide drinking (potable) water and wastewater treatment.  Each industry segment has different treatment, plant design and regional requirements.

A more refined breakdown for investors was made by the Palisades Water Indexes, which further breaks the industry down according to its functionality.  These categories are: water utilities, treatment, analytical, infrastructure, resource management and multi-business. Each of these main categories is then broken down into subsectors.

Investors can buy exchange traded funds (ETFs) based on water indexes, as well as stocks of companies engaged in all aspects of the water industry.   The popular ETFs are based on the Palisades Water Indexes, the S&P Global Water Index, and the ISE Water Index.  Each index has different weighting methods, underlying stocks, re-balancing and company re-placement schedules. In addition, there are about 16 mutual, private equity and hedge funds focusing on companies in the global water industry. 

Like other ETFs, investors should understand the composition and weighting methodology of companies in each major index since that drives performance. Many large water companies are non-U.S. and operate worldwide in many sub-sectors of the water industry.  

When an index is constructed, these weightings can be made according to market capitalization, fundamental, equal dollar or hybrid.  Investors should also know how often the index is re-balanced and re-constituted with new companies added or subtracted from the index. 

Partial List of Water ETFs and Mutual Funds

While some investment experts consider water to be “the new oil,” individual investors should carefully consider the risks and rewards of this very liquid and new investable asset category.

Here is a partial list of ETFs specifically related to the water industry worldwide:

PowerShares Water Resources Portfolio ETF (NYSE: PHO[1])

PowerShares Global Water Portfolio ETF    (NYSE: PIO[2])

Guggenheim S&P Global Water Index (NYSE: CGW[3])

First Trust ISE Water Index Fund (NYSE: FIW[4])

SPDR FTSE Macquerie Global Infrastructure 100 (NYSE: GII[5])

Here is a partial list of the mutual funds specifically related to the water industry worldwide:

Calvert Global Water Fund (CFWAX[6])

Allianz RCM Global Water Fund (AWTAX[7])

PFW Water Fund (PFWAX[8])

Kinetics Water Infrastructure Advantaged Fund (KWIAX[9])

Source URL: https://investorplace.com/2010/11/dive-into-water-etfs-and-mutual-funds/

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