Not a Drop to Drink: Three ETFs for Future Global Water Shortages

I have written about the coming likely shortage of cool, clean water for many nations (including some of those touted as “owners” of the coming century) here and in follow-on articles. I also recommended specific companies in those articles that I believe will benefit from these shortages.

I’ll go further and speculate that the next horrific war, and the one the United States would be wise not to meddle in, may well be between two superpowers, China and Russia. Here is the amount of Internal Renewable Water Resources (IRWR) that China has per capita: just 2,173 cubic meters IRWR per person. Russia, on the other hand, with 1/5th the population (and declining), has 30,001 cubic meters IRWR per person, nearly 15 times that of China.

Nations may squabble over oil or gold or rare earth elements or some other commodity, but when it comes to water, there’s no squabbling, no protracted negotiation, no choice. It is: get the water or die. As I wrote once before:

All that fresh, clean water in Siberia has to look pretty good to China, a nation that, relative to its population, didn’t have much to begin with and has soiled, sullied, dirtied, and polluted what little remains.

If China is in bad shape for potable water – hence their land grab of Tibet from which most of their still-clean water now flows – imagine India’s possible plight, with just 1,211 cubic meters IRWR per person, barely enough to sustain new life after taking into account agriculture, industrial uses, and survival consumption.

Now contrast China at 2173 and India at 1211 with, say, those two allegedly “over the hill” has-beens, the USA and Canada. The U.S. has nearly 10,000 cubic meters IRWR per person, and Canada weighs in with an amazing 91,000. Water is needed for tertiary oil extraction, to squeeze gas from shale, to cool solar water towers, to keep agricultural products growing, and for scores of other, otherwise economically untenable projects.

In nations like ours where water is readily and cheaply available, we take it so much for granted that we barely notice it. Yet in terms of dollars devoted to providing that water, which industry is larger, the Internet or water treatment, transportation, delivery, and recycling? I believe the answer is water. How about education and water? Water. Health care or water? Water. Worldwide, this is big business.

In addition to the companies mentioned as I did my best to make the case for investing in water in those previous articles, I thought I’d offer up a few possibilities for those readers who prefer to gain diversification by investing in ETFs and mutual funds. For your further research and analysis, may I suggest the following as a starting point:

Two ETFs are the grand-daddies in this business, PowerShares Global Water (PIO) and PowerShares Water Resources (PHO) – if you can consider 2 years old a granddaddy! PIO is up about 50% this year and PHO about 20%. But their long-term moves may be just beginning. Yet another ETF in this space is First Trust ISE Water (FIW), up a hair less than PHO but a bit newer, as well.

Current water usage and future water demand doesn’t depend upon the actions of governments or the lining up of planetary bodies. The investment case is simple: if population increases, water usage increases. If more water is contaminated, more water has to be cleaned. If there are more mouths to feed, more stuff must be grown – demanding more water.

If I had to hazard a guess, I’d say we’ve already reached a tipping point in water, albeit one that may only be obvious in hindsight. Whatever the world’s GDP growth is going forward, whether 3% or 8%, I’ll hazard a guess that water companies in the aggregate will average a good 2 ½% to 4% higher.

Water investments are not for the tip of your investing pyramid where you place higher-risk holdings looking to hit it over the fence. They are for the foundation of your pyramid where you place Basic, Boring, Dull and Profitable companies and funds to provide stability in good markets and bad.

Among the more commonly-held companies owned by many of the funds above are Ameron International (AMN), Tetra Tech (TTEK), Flowserve (FLS), Kemira Oyj, Hyflux (HYFXF.PK), Arcadis NV (ARCVF.PK), Valmont Industries (VMI), Suez Environnement (SZEVF.PK), Lindsay Manufacturing Co (LNN), Veolia Environnement (VEOEF.PK), Nalco (NLC), Thermo Fisher Scientific (TMO), Watts Water Technologies (WTS), Pentair Inc (PNR), American Water Works (AWK), Itron Inc. (ITRI), Roper Industries (ROP), Danaher (DHR), ITT Corp (ITT), United Utilities Group (UUGWF.PK), and IDEX Corp (IEX).

Note: In addition to the three ETFs mentioned above, you may also want to consider some open-end (traditional) mutual funds. To view my recommendations, click here and scroll down.

Full Disclosure: Long PIO, TTEK, HYFXF, and LNN.

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of the staff of Stanford Wealth Management, and should not be construed as personalized investment advice.

Also, past performance is no guarantee of future results, rather an obvious statement if you review the records of many alleged gurus, but important nonetheless –our Investors Edge ® Growth and Value Portfolio has beaten the S&P 500 for 10 years running but there is no guarantee that we will continue to do so.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Comments

[Freya:]

Wow, I thought I was going to have to stick in my 2 bits on HYFXF but you already have it. Someone mentioned that CLNE has Water Rights to a big Aquifer in Texas, Houston, but not positive since I did not look into it. Pres. of AWK was on either CNBC or Bloomberg, He's in your camp.

How soon we have forgotten Georgia's little water plight of a few years ago.

Oct 23 07:01 AM

[Mono:]

remember looking at these guys for two years...opportunity cost is my only concern as it maybe a long term play. maybe not.

Oct 23 08:36 AM

[Joseph L. S...:]

Freya, Hyflux has a contract for the biggest water desalinization plant in the Middle East and a backlog of others that show their expertise around the world. Now if we could just trade the Arab states even-Steven oil-for-water, that's a trade I'd be willing to endorse!

Oct 23 08:39 AM

[bricki:]

I really don't thing the US spends more on water than health care. According to figures I've seen the US spends 1-2% of GDP on water processing and delivery, but 17% on health care. I mean it is not even close.

Education is closer, but still it is about 6% vs 1-2% for water.

As far as internet I was unable to find anything really reliable so I took telecommunications as a proxy - most all communications moves over the internet these days - and got a number of 3%. So one could claim water is comparable in size in the US to the telecom industry.

Yes water is a basic necessity and there are large populations where this is becoming a critical issue; as you say the size of the water problem correlates directly with population. But some of the claims you make about the size of the water industry aren't real. As far as growth goes, yes it has a long term growth picture. But if it is really linked to population it might not be that robust - after all world-wide population growth rates are declining.

Oct 23 10:49 AM

[cyclingscholar:]

<<The investment case is simple: if population increases, water usage increases.>>

INCORRECT. In most cases water is provided by government at fixed cost, with no marginal costs or peak load costs to encourage conservation. Even the SLIGHTEST marginal cost imposition drastically reduces water use and wasteage...coin operated showers at campgrounds being an example many may be familiar with. Drip irrigation is another example. I agree with your thesis about water being a good investment but 'water hysteria,' like 'famines,' 'global warming,' and the 'ozone hole,' will soon be discarded on the trash heap.

Oct 23 12:49 PM

[John A:]

Why do you say "Tibet land grab" when Tibet has been part of China for thousands of years. Read your history.

Oct 23 02:16 PM

[Chancer:]

What do you think of CGW?

It has a 7.36% dividend.

I think water may be a long term investment, and you might as well get paid while you wait.

Oct 23 08:05 PM

[john s. gordon:]

re tibet: well you could say that persia northern india russia have all been part of china, the mongol hordes overran these territories & ruled them for a long time.
i remember stories going around in 1974 about how the russians severely polluted their lake baikal resource with effluent from pulp mills.
i was on the yellow river near zhengzhou watching them pump river water up over the mountain for irrigation on the other side. those were big pumps & big pipelines at a 45 deg angle. the yellow was in flood @ the time (march-april 1997).
> jack

Oct 24 08:50 AM

[fran:]

T. BOONE PICKENS OWNS THESE WATER RIGHTS IN TEXAS. HE ALSO HAS A BIG STAKE IN CLNE. BUT THESE ARE SEPERATE ENTITIES.


On Oct 23 07:01 AM Freya wrote:

> Wow, I thought I was going to have to stick in my 2 bits on HYFXF
> but you already have it. Someone mentioned that CLNE has Water Rights
> to a big Aquifer in Texas, Houston, but not positive since I did
> not look into it. Pres. of AWK was on either CNBC or Bloomberg, He's
> in your camp.
>
> How soon we have forgotten Georgia's little water plight of a few
> years ago.

Oct 24 07:05 PM

[fran:]

WRONG!!! YOU KNOW THE TRUTH, ELSE CHINA WOULD NOT HAVE SUCH ISSUES WITH DALAI LAMA SUPPORT IN THE GLOBAL POLITIC. TIBET IS A POST WWll OCCUPATION..


On Oct 23 02:16 PM John A wrote:

> Why do you say "Tibet land grab" when Tibet has been part of China
> for thousands of years. Read your history.

Oct 24 07:18 PM

[sheeple123jump:]

....thank you,Joe, for the good article.

Oct 24 11:14 PM

[User 375405:]

I'd guess that China with their potential water shortage is smart enough to avoid ethanol production which in addition to being counter productive to its intended purpose of lowering oil needs uses about 50 gallons of water for each gallon of ethanol produced. Wouldst that those running the US gov't acknowledge this reality and let us use water and oil for their logical and natural purposes rather than to buy votes from the ignorant.

Oct 25 12:04 AM

[Joseph L. S...:]

Both Jack Gordon and Fran took John A. to task for his comment, “…Tibet has been part of China for thousands of years. Read your history.”

They were right to do so. I am a professor of military operations and history. I make certain my students cite their research and exercise academic rigor before they extend their analysis, and hold myself (as does my and every other university worthy of the title) to that same standard. Clearly Jack Gordon and Fran do the same.

I wouldn’t normally cite sources in a more practical forum like SA, but I would admonish anyone stating mere opinion in matters of factual history to “read your history.” Back atcha:

The Tibetan Empire came into being, as most did in those days, after much bloodshed between various factions and clans. After consolidating his power at home, the first ruler of that final entity, Namri Songtsen, sent emissaries to neighboring lands to let them know there was a new sheriff in town high up in those mountains. Emissaries were sent to China in 608 and 609. (Beckwith, Christopher I., The Tibetan Empire in Central Asia: A History Of The Struggle For Great Power Among Tibetans, Turks, Arabs, and Chinese during the early Middle Ages, 1987, Princeton University Press, Princeton, NJ.)

From this time forward, Tibet grew to be a major Central Asian empire, extending well into what is present-day India and Bangladesh, Mongolia, and Kazakhstan. It fought with China on an equal and peer status and then enjoyed treaties and inter-royal marriages with China on an equal and peer basis.

A treaty between the two per nations was signed in stone, and still visible, in 821, which reads in part, “The whole region to the East of that [boundary] being the country of Great China and the whole region to the West being assuredly the country of Great Tibet, from either side there shall be no hostile invasion, and no seizure of territory... and in order that this agreement establishing a great era when Tibetans shall be happy in Tibet and Chinese shall be happy in China shall never be changed, the Three Jewels, the body of Saints, the sun and the moon, planets and stars have been invoked as witness.” (Michael C. Van Walt Van Praag, The Status of Tibet : History, Rights, And Prospects In International Law, 1987, Westview Press (Boulder, CO.)

During the 13th and 14th centuries, of course, both China and Tibet came under the influence of the Mongol empire. Tibet came under Mongol influence before Kublai Khan's conquest of China and regained complete independence from the Mongols several decades before China regained its independence.

While China was militarily conquered by the Mongols, the Tibetans and the Mongols established the historically unique "priest patron" relationship, also known as CHO-YON. The Mongol aristocracy had converted to Buddhism and sought spiritual guidance and moral legitimacy for the rule of their vast empire from the Tibetan theocracy. As Tibet's patrons they pledged to protect it against foreign invasion. In return Tibetans promised loyalty to the Mongol empire. (Van Praag)

In 1639, the Dalai Lama established another CHO-YON relationship, this time with the Manchu Emperor, who in 1644 rose to power in China and established the Qing Dynasty. By the middle of the 19th century, the Munchu influence in Tibet had waned considerably as the Manchu empire began to disintegrate. In 1842 and 1856 the Manchus were incapable of responding to Tibetan calls for assistance against repeated Nepalese Gurkha invasion. The Tibetans drove back the Gurkhas with no assistance and concluded their own bilateral treaties. (Van Praag)

Tibet formally declared its nationhood in 1912 and continued to conduct itself as a fully sovereign nation until its invasion by Communist China an 1949. Tibet has been part of China for thousands of years? I think not, sir. I and every other historian more well-versed than I date it from 1949, when it was invaded and annexed by the People’s Republic of China. "Read your history."

Oct 25 09:43 AM

[Doc 224899:]

As growing populations collide with the absolute limits of the life support capacity of their environments, the rate at which advanced technology (like water-tech) is utilized will increase first, until the inevitable population overshoot occurs, then the technology will be used less and less as cultures and societies collapse under their own ponderous masses.

Since the world is heterogeneous in terms of culture and technology, there will be several generations during which water-tech investment opportunities will be attractive, though the investment sub-sector will follow a pattern of surges and declines.

Right now, look for the small Muslim Arab oil states to be buying water-tech big time: they have the cash, and they like flashy projects that carry a high prestige factor.

On Oct 23 10:49 AM bricki wrote:
But if it is really linked to population it might not be that robust - after
all world-wide population growth rates are declining.

Oct 25 09:34 PM

[chux08:]

Another good example of why I like the way you think....
Great article, Joseph!!!

Oct 26 01:12 PM

[Heyya:]

Ditto - great article, very forward thinking. Thank you Joseph.


On Oct 26 01:12 PM chux08 wrote:

> Another good example of why I like the way you think....
> Great article, Joseph!!!

Oct 26 03:36 PM