Will Water ETFs Be 'Blue Gold'?

Will water become the blue gold of the next generation? Water exchange traded funds (ETFs) have made taking advantage of the government’s stimulus plan to solve the water problem infinitely easier.

With $15 billion in stimulus money flowing into the $400 billion water market, many are wondering what the ultimate impact is going to be. Water market experts feel that it could make the industry attractive to investors.

Michael Szabo for Reuters reports that other factors supporting a water investment include:

• Growing water scarcity
• Soaring water demand, because of growing populations and higher living standards
• Climate change

Stimulus money in other countries has also been deployed to the water sector, as well. In the past, firms such as General Electric (GE), 3M (MMM) and Siemens (SI) have actively invested in companies that monitor, manage and improve water supplies. Now government stimulus cash is delivering the latest boost.

Meanwhile, cost-effective strategies are being developed through the latest technologies and metering water use, treating waste water for reuse and desalinating sea water are high on the list of possibilities.

ETFs that access these areas of water investment:

• PowerShares Water Resources (PHO): down 4.9% year-to-date

• PowerShares Global Water Portfolio (PIO): up 8.1% year-to-date

• Claymore S&P Global Water Index (CGW): up 4.3% year-to-date

• First Trust ISE Water Index Fund (FIW): down 3.6% year-to-date

Comments

[Mad Hedge F...:]

I think so. If you think that the upcoming energy shortage is going to be bad, it will pale in comparison to the next water crisis, so investment in fresh water infrastructure is going to be a recurring long term investment theme. (See my earlier efforts to get you into the water space at www.madhedgefundtrader...). One theory about the endless wars in the Middle East since 1918 is that they have really been over water rights. Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles. In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so. Some 18% of the world population lacks access to potable water, and demand is expected to rise by 40% in the next 20 years. Aquifers in the US, which took nature millennia to create, are approaching exhaustion. While membrane osmosis technologies exist to convert sea water into fresh, they use ten times more energy than current treatment processes, a real problem if you don’t have any, and will easily double the end cost to consumers. While it may take 16 pounds of grain to produce a pound of beef, it takes a staggering 2,416 gallons of water to do the same. The UN says that $11 billion a year is needed for water infrastructure investment, and $15 billion of the US stimulus package will be similarly spent. It says a lot that when I went to the UC Berkeley School of Engineering to research this piece, most of the experts in the field had already been retained by major hedge funds! At the top of the shopping list to participate here should be the Claymore S&P Global Water Index ETF (CGW), which has appreciated by 32% since I first brought it up. You can also visit the PowerShares Water Resource Portfolio (PHO), the First Trust ISE Water Index Fund (FIW), or the individual stocks Veolia Environment (VE), Tetra-Tech (TTEK), and Pentair (PNR). Who has the world’s greatest per capita water resources? Siberia, which could become a major exporter to China in the decades to come.

Jul 12 12:18 PM

[patriotaxe:]

I really think it would be a mistake for shareholders anywhere to get involved with what appears to be a privatization of what is widely believed to be a public commodity. There are several reasons for my belief:

"Although Earth is often referred to as the water planet, only 2.5% is fresh, and three quarters of that is locked up in ice at the North and South poles."

Yes, but remember that shareholders blindly supporting the fossil fuel and automotive industries are, for the most part, directly responsible for the fact that those ice caps are not only meting but also thinning, leaching into a saltwater sea where that fresh water cannot be affordable retrieved.

"In places like China, with a quarter of the world’s population, up to 90% of the fresh water is already polluted, some irretrievably so."

Agreed. But once again, that pollution is a direct result of shareholder apathy about the environment, pushing companies to profitability goals achievable only by cutting corners on pollutants and sustainability.

Does anyone truly believe that the citizens of a water rich region will stand by while shareholders of a water corporation suck off a community resource available to all?

Those days are gone. They disappeared during the financial crisis. The people are armed, angry and not likely to part with their water.

Jul 12 01:47 PM

[ladders11:]

Water could be a major issue, but that doesn't guarantee investor returns.

These ETFs feature many chemical companies as water treatment is a chemical process. Input costs cannot be ignored. Furthermore, water is, as the post above states, largely a public good. I don't see any guarantee that water companies will achieve pricing power or be able to control input costs. Meanwhile, several major companies involved in water are debt-laden and shedding assets (including VE & GE).

Also the ETFs have expense ratios pushing 1.0%, and they're filled with companies less than half-engaged with water treatment and filtration - most simply aren't doing business in China. And frankly, GE is the dominant player in the water industry yet they're too big to be included in the funds.

Jul 14 04:31 PM

[Mexx:]

I also favor ETFs, in particular CGW, as a way to play the water theme -CGW has a 7.68% yield, has a reasonable 0.70% expense ratio and provides exposure to some of the most important water players around the globe (and thankfully GE is not one of their top 25 holdings).

While I agree that water is a public good, the macro landscape will bode for long term investors who believe providers of water infrastructure services and equipment (i.e, treatment, transport, regulation, safety, environmental, etc) will benefit from this global trend. Municipalities, and governments around the globe will pay top dollar to these providers to develop or update their water infrastructure that will be financed through bonds, tax payer money, etc, how water prices are regulated to the end user is another matter.

Aug 18 07:42 AM