A little less than three months ago I named the Powershares Water Resource Portfolio (NASDAQ:PHO) as my top ETF pick for 2018. It was, calling a spade a spade, a less-than-thrilling prospect.
Water will clearly never go out of style, but as far as growth opportunities go, it pales in comparison to names like the Robo Global Robotics & Automation ETF (NASDAQ:ROBO) or the Global X Social Media ETF (NASDAQ:SOCL).
Gotta be honest though … for a name I’m hypothetically going to remain married to for a full year, I’m still happy with my choice. Though all three of these ETFs — like the market — are more or less at break-even levels for the year, the future of the water market hasn’t changed while robots and social networking names like Facebook, Inc. (NASDAQ:FB) aren’t exactly on firm footing.
An Ugly Reality
It may be one of the market’s most overlooked opportunities, rooted more in necessity than in greed. But, that’s why it’s a trade that’s built to last.
As was noted in my introductory look at the Powershares Water Resource Portfolio, the world is running out of potable water. That’s not to say the world is running out of water altogether. There’s plenty of water in the world’s oceans and rivers, and most of the water we pipe into our homes and businesses is sent right back to treatment plants as wastewater, ready to be scrubbed and re-used.
It’s getting increasingly tough to keep up with the demand for drinking water though, and increasingly expensive.
For perspective, The American Water Works Association believes the United States needs to spend $1 trillion over the course of the next 25 years to update and refurbish our water infrastructure. Leaks from individual homes’ pipes and plumbing fixtures bleeds about 900 billion gallons every year in the United States, and about 850 water mains break every day in North America.
It is, in a word, ridiculous. It’s also expensive.
Companies like Xylem Inc (NYSE:XYL) and Ecolab Inc. (NYSE:ECL) are looking for ways to do something about the problem though. Xylem offers a wide array of water-management solutions for industries ranging from agriculture to the oil and gas industries. Ecolab also offers solutions that reduce water usage, including dishwashers built from the ground up to use as little water as possible.
It’s working too. Ecolab is looking for a 16% improvement in this year’s per-share profits. Xylem turned 7% year-over-year revenue growth during the fourth quarter of last year into 15% growth in per-share earnings.
Both companies are among the top holdings in the Powershares Water Resource Portfolio ETF, and while these two stocks are arguably the most water-focused names in the fund, all them are indeed changing the landscape of how we use, conserve and recycle water.
Bottom Line for PHO ETF
The basis for owning PHO is solid enough, but that doesn’t inherently make it a top performer.
Unlike more riveting, storied ideas like the aforementioned social networking and robotics ETFs, the Powershares Water Resource Portfolio is never the beneficiary of traders’ euphoria. These stocks are generally treated like the boring names they are, and tend to ebb and flow with the broad market from one day to the next. For perspective, the S&P 500 is down about 1% year-to-date, while PHO is just a hair above breakeven. We’ll call it a tie thus far.
This is a trade, however, that — to put it in baseball parlance — pays off not with the occasional grand slam, but a steady string of singles and the occasional double. It holds up a little better on down days for the right reasons, and moves a little higher than the overall market on the market’s good days.
That’s the way things used to be, before “strategically-timed investments” legitimized (erroneously) short-term trading with too many ETFs. I’m still committed to the idea that this old-school strategy will, in the long run, pay off with PHO.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.