Water, Water Everywhere; An Overlooked Investment Opportunity

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Editor's Note: This post has been modified to better discuss Pall's business model.

As common as water is and all the everyday uses it has, the taken-for-granted posture of most people keeps this crucial resource out of mind for seeking profits.

According to a Congressional Budget Office report created in 2002, the average annual investment in water and wastewater infrastructure is estimated between $11.6 billion to $20.1 billion for drinking water and $13.0 billion to $20.9 billion for wastewater systems. This study was based on a period between 2000 and 2019.

The Department of Homeland Security has a strong interest in preserving this precious resource. Drinking water has to be protected from harmful toxic substances, and wastewater systems have to be preserved to reduce the spread of disease.

An investment strategy that is specifically designed to focus on this is the First Trust ISE Water (NYSEMKT: FIW )index fund. This is an exchange-traded fund that was created on May 11, 2007 and holds 37 stocks that are participants in water and wastewater industries. Below is a one-year price chart.

<img alt="" src="http://g.fool.com/editorial/images/46718/screen-shot-2013-06-02-fiw_large.png" />

Demand and infrastructure

According to Boonsri Dickinson, who commented on water demand and supply on Smart Planet, in 20 years water demand will exceed supply by 40%. In her commentary are statements that 90% of the water supply is used to produce food and energy. The amount of water it takes to make a computer is 1.5 tons, and it requires 6 tons to make a pair of jeans. Water used in the production of goods has been coined “virtual water.” Factors such as population growth and climate change are cited behind this demand increase.

Affecting the wastewater side of this concern are extreme weather events that are impacting systems and resources used to combat the spreading of disease. The increasingly unpredictable global weather patterns are straining these systems. The need for increased infrastructure investment to build new facilities and strengthen existing ones is prevalent.

Capitalizing on this trend

As you can see above, there are plenty of reasons to consider the First Trust ISE Water index fund as a packaged investment focused on this perceived dilemma. One of the stocks held in this ETF is Pentair (NYSE: PNR). Pentair is a Swiss industrial company that manufactures equipment and systems for water and other fluids on a global scale. One of the operating segments, water and fluid solutions, is dedicated to this long-term demand. Pentair recognizes this upcoming crisis and is committed to increasing access to water on a global scale by doing more that producing superior products and industry expertise.

Another company to look at is Pall (NYSE: PLL). Pall supplies filtration, separation and purification technology systems. This company is focused on the treatment of wastewater. With a global presence and more than 60 years of experience, Pall has developed a solid reputation as a leader. Customer success reporting shows a high degree of repeat business and enables Pall to continually find new technologies and methods to manage fluids with increasing sophistication that delivers better service results.

Flowserve (NYSE: FLS) is another holding in the First Trust ISE Water index fund. Flowserve is committed to being a single-source provider of low-cost water- filtration and water-desalination plants on a global scale. Meeting the demand of potable water in other parts of the world is accomplished by cleaning seawater, which accounts for 70% of the world. Management believes in the long-term investment into tapping this existing resource and converting it for use.

Bottom line

Water is more than just a utility. It is an essential resource that affects our daily lives in so many ways. In my opinion, seeking long-term profits in this category with the First Trust ISE Water index fund gives a well-balanced approach to meeting the various challenges discussed. In my opinion returns will be more in tune with the supply and demand of water than overall stock market conditions.

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Jeff Stouffer has no position in any stocks mentioned. The Motley Fool owns shares of Pentair. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

Jeffrey L. (Jeff) Stouffer is an Investment Advisor Representative and manages the Alexandria VA office of Kingsview Asset Management. As a practicing financial advisor serving the needs of individuals and small businesses, he believes in using a wide range of investment strategies, including alternative investments. All strategies are client centric and unique. He can be reached at jeff.stouffer@kingsviewassetmanagement.com and is available to answer any questions about this combined approach.

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