Why Water ETFs Are Worth a Look

When individuals think about commodities and related ETFs, they generally think of gold or oil, but don’t consider one of the most valuable commodities to mankind: water.

Water is so valuable because it is absolutely essential for survival and it’s becoming scarce. What’s even more amazing is the fact that while more than 70% of the Earth’s surface is covered by water, only 3% is fit for human consumption. Of this 3%, only 1% is readily available for consumption.

As a result of global population increases, rapid industrialization and increasing agricultural use water is rapidly being depleted. Nations such as India, China, Egypt, Mexico and parts of the United States are witnessing water shortages and are part of the reason that the demand for water is on the rise, states James E. MccWhinney of Investopedia.

From an investor’s perspective, a common index that is looked at is the Palisades Water Index, which is designed to track the performance of companies involved in the global water industry. This index can be accessed through the PowerShares Water Resources Fund (PHO), up 8.4% year-to-date. PowerShares also provides the PowerShares Global Water (PIO), up 20.8% year-to-date.

A second way to watch the water markets is through the ISE-B&S Water Index which focuses on water distribution and companies that specialize on water technology. One could take a look at the First Trust ISE Water Index Fund (FIW) which is up 9.8% year-to-date.

A third way to access water is through the S&P Global Water Index, which holds a universe of companies listed on global developed market exchanges. The index is represented by the Claymore S&P Global Water Index (CGW), which is up 15.3% year-to-date.

Kevin Grewal contributed to this article.

Comments

[dick black:]

is it 1% of the 3% or is it 1/3 of the available supply is readily available.... big difference.

Aug 23 01:31 PM

[Marc S.:]

While I agree, the macro view sounds compelling, I am afraid when you look a little deeper at the economics of water and the industry, you will see little to get excited about from an investment perspective.

Water companies that make up these etfs are either in distribution, treatment or water technology.

The big problem is all of these products are commodity businesses. While, pipe, pump and treatment equipment sales should rise as our aging infrustructure is rebuilt, new suppliers will enter the markets to supply them keeping margins low, thus limiting any massive profit upside for any group of players.

Some point to treatment technology companies, however, there has been very little innovation in this area and no new silver bullet companies that will revolutionize the cost. (Check out the BWTR story a nice example) RO is a commodity business and still way to expensive for mass adoption. It is also important to note that mass treatment of water for agriculture is prohibitively expensive and will be for a long time.

I hear a lot of people say, Water is the next oil. I think this is silly. Maybe in a 100 years, but even then, there is no Exxon or private ownership of water supplies. Water in Southern California is going up and is selling in the $600 per acre foot range. It may surpass $1,000 soon. At $70/barrel, oil is 538 times more expensive than the most expensive water in America.

Also, the cheapest way to solve the problem is conservation, which will happen before any more costly option gains steam. I can't see any great investment returns from conservation.

Aug 24 12:07 AM