Blue Gold: Comparing the Water ETFs

Includes: CGW, FIW, PHO
by: IndexUniverse

Water has emerged as the new “new” thing in investing. People gaze out at a growing global population and envision the Kevin Costner flop WaterWorld come-to-life. They do the math on limited water resources and creeping pollution and they see dollar signs. There’s even a new name for the stuff: blue gold.

Exchange-traded fund developers are always eager to hop on the latest investing trend, and they’ve jumped on this one enthusiastically. Developers rolled out two new water funds this week, with the First Trust ISE Water Index Fund (NYSEARCA:FIW) and Claymore S&P Global Water Index ETF (NYSEARCA:CGW) both coming to market. Those new funds join the PowerShares Water Resources Portfolio (NASDAQ:PHO), which launched in December 2005 and has been a runaway hit, pulling in over $1.6 billion in assets.

Which Water Is Best?
All three funds provide diversified exposure to the water industry, but with important differences. The most obvious is geography: the First Trust (FIW) and PowerShares (PHO) funds are U.S.-focused funds, while the Claymore (CGW) fund has a major global tilt: the U.S. may have the largest single country weight in the index (28%), but it’s followed closely by France (20%), Japan (16%) and the UK (14%). The rest of the fund is divided among 11 other countries.

That global exposure may make sense for investors who consider water a global issue, and using partially backtested data, it has also paid off on the performance front: the underlying index, the S&P Global Water Index, has the best 1-, 3- and 5-year performance of the three indexes driving these ETFs. It may come as no surprise that international indexes have similary outperformed U.S. benchmarks over the same time periods. CGW charges 0.65 percent in annual expenses.

The differences between the First Trust (FIW) and PowerShares (PHO) funds are more subtle. In fact, they have a good deal of overlap: 29 of the 36 components in the PowerShares fund also appear in the First Trust fund.

The primary difference between the funds lies in the weighting methodology: PHO tracks a modified, equal-weighted index, while FIW fund tracks a modified, market-cap weighted index. As a result, PHO has more exposure to small-cap names, while FIW tilts slightly towards large-caps. That tilt is amplified by the fact that FIW holds a few large conglomerates, such as General Electric, while PHO focuses on purer plays in the water business.

Curiously, the ISE Index that the large-cap-focused First Trust fund tracks claims stronger backtested performance than the index underlying the PowerShares fund.

The table below compares and contrasts key statistics on the three water ETFs as well as the MSCI EAFE and S&P 500 indexes.

click to enlarge
water etf comparison

See also: Claymore's New Water ETF: More of a Pure Play Than Powershares'

The prospectus for the Claymore fund is available here.

The prospectus for the First Trust fund is available here.

The prospectus for the PowerShares fund is available here.