Hot Enough for You? Cool Yourself Off With These 3 Water ETFs

by Aaron Levitt | July 3, 2013 11:01 am

No matter how you slice it, triple-digit degree temperatures are pretty gosh darn hot.

That’s what residents and visitors to California and America’s Southwest have had to suffer with over the last few weeks. The scorching heat has been caused by a dome of hot air trapped by a high pressure ridge — a meteorological phenomenon that has pushed the mercury above 100 degrees in parts of California, Arizona, Idaho, Colorado, Nevada and Utah and Texas.

Taken as a whole, the heat wave[1] that continues to blanket the region has rewritten record books and been the hottest June ever.

Heat waves and high temperatures like this aren’t too uncommon for this region of the U.S., but they are occurring each year with more frequency — and that’s masking something perhaps more sinister than melting ice cream cones or even forest fires: the enormous pressures on the region’s water supplies.

But where there’s pressure, there’s investment opportunity.

Water Scarcity Due to Climate Change

The water cycle — precipitation, evaporation, etc. — is a pretty delicate system[2]. So when anything alters it (even slightly), major changes can occur.

According to the EPA, America’s West has experienced less rain during the past 50 years[3] as well as surging increases in the severity and number of droughts. These droughts have been the most prevalent in places like Arizona, Nevada and New Mexico — states that already require much of their water supply to come from neighboring regions.

Future projections aren’t exactly painting a rosy picture either. Overall, the West will see less total annual rainfall[4], less mountain snowpack and earlier snowmelts. Recent studies of the impact of climbing temperatures on flow in the Colorado River — which supplies water for more than 30 million people in such cities as L.A., Phoenix and Las Vegas — have shown scenarios ranging from a “small” decrease of just 6% by 2050 to the worst case of a 45% drop in that timeframe. That all means less water will be available during the summer months when demand is at its highest.

More importantly, this same sort of situation is playing out all across the world.

Time to Invest

The global water industry[5] is currently a $360 billion market. As populations grow, pollution increases and supplies become even scarcer because of climate change, that market size should continue to expand. Given the severity of the water crunch, investors with a longer horizon might want to give the sector a go.

Yet, “water” as a theme covers a very wide net. Everything from pumps and pipelines to desalination and filtration are included. That makes broad exchange-traded funds the perfect way to play the space.

Here are three you should keep in mind:

The PowerShares Water Resources

The PowerShares Water Resources Portfolio (PHO[6]) is the biggest and most heavily traded water fund, spreading its $875 million in assets among 29 different U.S.-based water-related equities.

PHO is heavily concentrated in water-based industrials and utilities like filter maker Pentair (PNR[7]) and American Water Works (AWK[8]). These two sectors make up more than 83% of the fund’s assets.

However, that concentration in manufacturing might hasn’t hindered performance. The ETF has managed to produce a 6.24% annual return since its inception in 2005 — a better return than the S&P 500’s 5.2% annual return during that time.

Expenses run a relatively cheap 0.62%, or $62 for every $10,000 invested.

Guggenheim S&P Global Water

Given that water scarcity[9] is a global problem, investors in turn might want to be global in their approach — and that means the Guggenheim S&P Global Water Index ETF (CGW[10]) could be a better pick.

The Guggenheim fund is no slouch on the asset front, with $243 million AUM, and while volume isn’t as swift as PHO, investors should have no trouble buying and selling units.

CGW features a broader portfolio of water-related companies at 53. While some of those holdings should be familiar to U.S. investors — like utility Aqua America (WTR[11]) — many, such as Cia De Saneamento Basico Do Estado De Sao Paulo, are more exotic. Roughly 60% of the portfolio is domiciled in nations outside the U.S.

The ETF has managed to put up a pretty good performance as well. Last year, CGW saw an impressive 21% total return — better than the standard bearer S&P 500[12] by roughly 5 full percentage points.

CGW charges 0.65%.

First Trust ISE Water Index

The First Trust ISE Water Index (FIW[13]) can be seen as the middle-of-the-road play for investors. The fund has is U.S.-centric with its 36 different holdings, and that focus is squarely with industrial and water utilities.

Despite being the smallest of the main water-focused ETFs, FIW does have roughly $100 million in assets, so it’s in no danger of closing anytime soon[14]. Likewise, volume remains OK and investors shouldn’t have trouble getting shares near its net asset value.

On the performance side, FIW has managed to put up decent returns, returning about 7% since it went live in 2007. Perhaps more importantly, its benchmark index, the ISE Water Index, has outperformed PHO’s NASDAQ OMX US Water index by a few percentage points since the much larger ETF has launched, so investors might want to consider FIW instead.

Expenses run the cheapest of the three ETFs at 0.6%.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. heat wave:
  2. pretty delicate system:
  3. experienced less rain during the past 50 years:
  4. less total annual rainfall:
  5. global water industry:
  6. PHO:
  7. PNR:
  8. AWK:
  9. water scarcity:
  10. CGW:
  11. WTR:
  12. S&P 500:
  13. FIW:
  14. closing anytime soon:

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