Water ETFs: The Next Commodity?

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 |  Includes: CGW, FIW, PHO
by: Tom Lydon

The long-term outlook for potable water remains uncertain, but the prospects for water becoming a valued commodity is not a matter of if, just a matter of when as the global population rises.

"The increasing need for fresh water has emerged in recent years as a potentially lucrative long-term investment theme. The investment thesis is based on the fact that demand for clean water increases along with the global population. PowerShares Water Resources (NYSEARCA:PHO) aims to provide exposure to this theme by tracking an index of firms that have business lines focused on water treatment services and infrastructure," John Gabriel wrote for Morningstar.

Every company involved with water stands to benefit if water ever becomes a "blue gold," reports Brian Shaw for The Motley Fool. According to a study by the World Water Assessment Programmer Study, 70% of fresh water is used for irrigation, while 22% is used in industry and 8% is used in domestic households.

Companies that are represented in PHO include industrial firms that have operations in water treatment equipment and/or pipe and pump manufacturing. Another big chunk of the fund is composed of water utilities, which make up about 24% of assets, reports Gabriel. However, many of the water-focused firms that are currently operating earn regulated returns and many of the diversified industrial firms generate significant business from industries outside the investable water complex.

Interestingly, water has been 90% correlated to the industrial sector. Since water is a niche investment, there are risks represented not only by the water industry, but by other industry- and firm-specific factors.

The water investment theme is supported by the population growth in emerging markets, as well as the global population. The need for more potable water for irrigation in emerging economies is also present, as more people need to eat, drink and use this element.

PHO is a mix of small- and mid-cap companies that focus on the industrial and utilitarian aspect of water. PHO costs 0.6% and has $924 million in assets.

Other water-focused ETFs:

  • First Trust ISE Water (FIW): 0.60% expense ratio; $106 million in assets
  • Guggenheim S&P Global Water (NYSEARCA:CGW): 0.70% expense ratio; $227 million in assets

PowerShares Water Resources

Click to enlarge

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.