Water Industry ETFs Should Continue to Perform

I feel like Jack Nicholson in Chinatown: everywhere I turn, water issues arise. So, like a good grownup who grew up on Peter Lynch, my automated response is, “Which companies are succeeding in the water industry?”

Last April I started a position in an ETF called PowerShares Water Resources (AMEX: PHO). This water ETF corresponds generally to the Palisades Water Index, an index that is designed to track the performance of companies engaged in the global water industry such as pump and filter manufacturers, water utilities, and irrigation equipment manufacturers.

I decided to invest in the ETF rather than individual companies in the water industry because I do not follow the industry close enough to safely say I am investing (as opposed to gambling). In addition, I subscribed to the ETF first because awareness of water industry equities has pushed up multiples and some of the best stocks are beyond my value target.

Like other water investors, I believe the industry will outperform because:

Water is a necessity which has become increasingly scarce in the face of growing demand.

Water will demand government spending and private investment no matter the status of the economy.

Water will fetch steadily increasing prices as supply remains limited while demand rises.

Water companies have virtual monopolies once they sign long-term contracts with government entities.

Water, like oil and other natural resources, is an excellent way to invest in globalization.

Another play is the ETF called PowerShares Global Water (AMEX: PIO). This ETF corresponds generally to the Palisades Global Water Index. As the name implies, this ETF has more exposure to the international market.

In my opinion, both ETFs are excellent long-term investments. A nice aspect of PIO is the ability to own companies that are not traded in U.S. markets and, therefore, are not accessible as individual investments. I recommend purchasing a mix of both for a nice spectrum of exposure to an industry with earnings that will flow for a lifetime to come.

The top holdings in PHO are:

Valmont Industries Inc. (NYSE: VMI)
Veolia Environnement SA (NYSE: VE)
Tetra Tech Inc. (NasdaqGS: TTEK)
URS Corp. (NYSE: URS)
Itron Inc. (NasdaqGS: ITRI)
Layne Christensen Co. (NasdaqGS: LAYN)
IDEX Corp. (NYSE: IEX)
Roper Industries Inc. (NYSE: ROP)
Franklin Electric Co. Inc. (NasdaqGS: FELE)

The top U.S. holdings in PIO are:

Valmont Industries Inc. (NYSE: VMI)
Tetra Tech Inc. (NasdaqGS: TTEK)
ITT Corporation (NYSE: ITT)
Watts Water Technologies, Inc. (NYSE: WTS)
Pentair Inc. (NYSE: PNR)
Danaher Corp. (NYSE: DHR)
General Electric Co. (NYSE: GE)

Buy PHO around 20.5, and PIO around 25.5.

Disclosure: The SmartGuyDH is long PHO.

PHO vs PIO chart:

Comments

[Steve Day]

You know I really appreciate that. I have been looking at PHO at $20.50, but I missed PIO.
I like the International exposure, I had just assumed that PHO had that on it's own merit.
Thanks for pointing it out.
--Steve