ETFs for World Water Day
Christian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The United Nations holds World Water Day on March 22nd each year in an attempt to "focus attention on the importance of freshwater and sustainable management of freshwater resources." The critical resource is the only commodity of which there is no replacement. Each year freshwater becomes more scarce as more demands are placed on the supply through growing populations and rising standards of living. Some often refer to water as the next oil or blue gold as demand is catching up to supply very quickly.
In response to this challenge, a variety of industries and technologies have emerged to deal with managing the freshwater supply, including companies focused on equipment, infrastructure, chemicals, services and treatment. These water-related companies have been the focus of a few ETFs launched over the past few years allowing investors to buy a basket of companies focused on this under-the-radar space. So in honor of World Water Day, let's examine the ETF options available to investors and find out if there are any attractive investment opportunities.
There are four water ETFs currently in the marketplace. They are:
- Guggenheim S&P Global Water ETF (NYSEMKT: CGW)
- PowerShares Water Resources (NYSEMKT: PHO)
- PowerShares Global Water (NYSEMKT: PIO)
- First Trust ISE Water Index Fund (NYSEMKT: FIW)
Initially these ETFs can be separated into Global and U.S. focused options. CGW and PIO are focused on water-related companies around the globe; FIW and PIO focus on U.S. listed water companies, which could include the ADRs of foreign companies. This distinction is important because there are two separate water stories playing out in the world today.
The global story is one of a race to create new infrastrucure around the globe that allows for the clean delivery and treatment of water in developing nations that are experiencing massive migrations to cities. China and India come to mind here. In addition these countries are seeing increased standards of living, which leads to the consumption of more meat, a resource that takes a lot more water to produce than wheat or rice. This move to diets that are more water-inefficient puts greater strain on the water supply in developing countries and is forcing new investment in technologies to recycle, conserve and treat water. Here's an insightful quote from the World Water Day website that puts this consumption issue into focus:
"Statistics say that each of us drinks from 2 to 4 litres of water every day, however most of the water we ‘drink’ is embedded in the food we eat: producing 1 kilo of beef for example consumes 15,000 litres of water while 1 kilo of wheat ’drinks up’ 1,500 litres."
The second story is focused in the U.S. and the aging water delivery and treatment infrastrucure it has in place. Estimates are that much of this infrastrucure is approaching 100 years old. Along with the aging of the infrastrucure comes considerable waste in the form of leaky pipes and less efficient delivery and treatment technology. Estimates are that over the next 25 years the repair and updating of American water infrastructure will top $1 trillion.
The ETFs that invest in both of the above mentioned opportunities are CGW and PIO. The ETFs that are more concentrated in the U.S. opportunities are FIW and PHO.
Water ETFs are probably best compared to Utility and Industrial companies. In this case, let's compare the SPDR Utility ETF (NYSEMKT: XLU) and the SPDR Industrial ETF with the four water ETFs using the longest time period available from stockcharts.com, a few months shy of four years.
As you can see, the big winner here is FIW, from First Trust. It has dramatically outperformed the other water ETFs and the Utilities and Industrial SPDR ETFs. Let's examine a shorter time period, the last year for example. Here's the chart from stockcharts.com.
Again FIW is the leading water ETF, although it has been outperformed by the Utilites and Industrial SPDR. Why is FIW leading in the water ETF space? The answer is found in its country weighting.
FIW is only comprised of companies listed on U.S. exchanges. This produces more concentration in U.S. companies as only some foreign companies have ADRs that trade in the United States. PHO has a similar methodology but its selection criteria within that universe has obviously been inferior to FIW thus far. Over the tumultuous last few years in the markets, the U.S. has held up better than many international markets and that has benefited the aforementioned ETFs.
In contrast, CGW and PIO are global in nature with both ETFs containing less than 40% of their porfolios in U.S. listed companies. That international allocation has hindered both funds over the most recent global market cycle but seems to make sense when looking at the macro opportunity in water going forward.
Finally, an interesting comparison is to review the expense ratio, AUM and performance of each water ETF. In the case of water, it pays to do some research before your turn on the faucet within your portfolio. Here's the chart I compiled from Sponsor website data.
Investing in a water ETF is a unique opportunity. One one hand there is the potential for portfolio gains as evidenced in FIW. Perhaps just as important however is the chance to support and benefit from the technology and industries which are working to help all of humanity create a sustainable freshwater supply. This type of social impact is a great compliment to potential investment gains and is one of the few explicit areas where profit and social progress can be combined.
Motley Fool blogger Christian Magoon does not own any shares in any of the ETFs mentioned in this entry.