Water: How to Quench Your Investor Thirst

Back in November, I had a post on why water should find a place in your portfolio. The main point of the article was that as we face a global shortage of drinking water, investing in water makes a sound choice for long term investment. If you are also interested in investing in water, the most convenient choice so far is the Powershares Water Resources ETF (PHO), which tracks Palisades Water Index [ZWI], a “modified equal-dollar weighted index comprised of U.S. exchange-traded companies engaged in the global water industry.” The index includes companies that are in business of potable water provision, water treatment, and technologies and services that are directly related to water consumption. The five-year performance of the index as compared against S&P 500 index (.pdf) is shown in the following chart. The index itself has more than doubled after touching a low in early 2003.

ZWI has 40 components and its top 10 holdings are

Calgon Carbon (CCC): filtration

Synagro Tech (SYGR): water management

Itron Inc (ITRI): water meter

Layne Christensen Co. (LAYN): drilling

Nalco Holding Co. (NLC): water treatment

Pall Corp (PLL): filtration

Millipore Corp (MIL): filtration

ITT Industries (ITT): pumps

Insituform Technol (INSU): pipeline installation and repair

Franklin Electric (FELE): pumps and motors

The PowerShare ETF PHO was incepted on December 6, 2005 and it invests at least 80% of its total assets in the American Depository Receipts (ADRs) and common stocks of the companies in the water industry. Though PHO tracks ZWI, the correction between the fund and the index is not perfect. According to the fund’s prospectus, the fund’s correction with ZWI is at least 95%. PHO has an expense ratio of 0.67% and yield 0.82%. As of February 28, 2007, the top 10 holdings of PHO are:

Itron Inc.

Nalco Holding Company

Insituform Technologies

Mueller Water Products Inc

Millipore Corp

Franklin Electric Co

Danaher Corporation

ITT Industries, Inc

Layne Christensen Co

Valmont Industries Inc

Since inception, PHO has provided superior return for investors by outperforming S&P 500 index 6.5% in 2006.

In addition to ZWI, there are three other water related indices, according to Investopedia:

ISE-B&S Water Index [HHO]: HHO was introduced in January 2006 and currently contains 20 stocks, including companies engaged in water distribution, water filtration, flow technology, and other water solutions.

Dow Jones US Water Index [DJUSWU]: The index contains about 23 stocks.

S&P 1500 Water Utilities Index: Its a sub-sector of the S&P 1500 Utilities Index and has only two companies, American States Water (AWR) and Aqua America (WTR).

Alternatively, there are some water utilities companies that are worth a look. Top players in this area include:

Aqua America (WTR)

Southwest Water (SWWC)

California Water Service Group (CWT)

American States Water (AWR)

The 5-year relative performances of these stocks are shown in the following chart.

click to enlarge

Among them, Aqua America is available at ComputerShare for direct purchase with a minimum initial purchase of $500 and no setup fee. Additional purchases have a minimum of $50 and are also free of charge. The stock currently has a dividend yield of 2.0%.

Comments

[joshua_young]

Millipore does not do any business in industrial water filtration. The company provides small scale water purification products for use in the laboratory and scientifc research, but does not belong in the ZWI index given its business focus. Its lab water focus is signficantly different than what the ZWI Index is intended to represent.

Sincerely,

Joshua Young
Director, Investor Relations
Millipore Corporation