PowerShares Water Resources: Capitalize on the Clean Water Trend

Investors often look for promising future trends and investment instruments that capture these trends. Nanotechnology, robotics and commodities are likely to be some of the biggest trends of the coming decades. Commodities like oil, metals and to some extents water have already rewarded investors handsomely over the last few years. However timing your entry into these trends usually proves to be very tricky. Get in too early and you may invest in innovative companies that do not know how to turn a profit. Get in too late and you miss some of the explosive early gains. For an example of the pitfalls of attempting to capture a future trend through a single company, check out the steep 57.83% loss I incurred in Airspan Networks (AIRN) while attempting to capture the emerging WiMax trend in 2005. Thankfully I later decided to hedge by WiMax bet with an investment in competitor Alvarion (ALVR) resulting in a 83.11% return year-to-date. Given the proliferation of Exchange Traded Funds or ETFs in recent months, it may be possible to capture most current trends and future trends through ETFs, thereby allowing us to spread our bets across multiple companies.

Clean water for domestic consumption as well as industrial use is not only going to be an important trend of this decade but explosive population growth combined with higher standards of living could make it the biggest trend of this century. Most of you have probably heard about the tremendous growth and transformation occurring in Dubai, UAE. This city in the desert and many others in the Middle East including those in Jordan and Saudi Arabia depend on desalination of ocean water. UAE obtains almost 70% of its water from desalination and Dubai alone has an installed desalination capacity of 188 million gallons per day. The situation is a little different in India where water has always been a scarce commodity. With its recent growth that scarcity has become even worse, leading to a bunch of businesses that are attempting to provide inexpensive and effect water purification options.

Whether it is desalination in the middle east, water purification in India, the supply of water to your home through a local utility or the increased use of bottled water, you can capture this trend of clean water through the PowerShares Water Resources ETF (PHO). This ETF, which is based on the Palisades Water Index, is not totally passive as this index of 25 stocks is rebalanced on a quarterly basis. While its expense ratio of 0.60% is well below most mutual funds, it is higher than many ETFs. PHO has a yield 0.68% based on the distributions paid out in 2006. If you are interested in checking out the current holding of this ETF, you can find them here.

I have been following PHO since its inception in December 2005 and have mentioned it numerous times to subscribers in emails, the SINLetter blog and forums. With its slow and steady upward climb, this ETF has appreciated more than 40% since inception and has outperformed both the Dow Jones Industrial Average as well as the other water ETF iShares Dow Jones US Utilities (IDU). While it is entirely possible that this ETF may lose ground if the markets were to head south, I believe this could be a great long-term holding.

Comments

[granger]

Breat article. I have been investing in water for the last few year and belive in its future. So far, I have primarily used ETF's.

Is there any stocks, companies or funds, that actually specialize in water rights?

[granger]

Is there any way to invest in water rights?

[Asif]

Mike, look into companies like Pico Holdings (PICO), which holds water rights in Arizona and Nevada and JB Boswell (BWEL.PK), which had a lot of land over a water acquifer in California.

[seattle_seven]

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[Brian Powers]

Good post.

I find PHO a little more diversified than CGW and PIO in holdings, but a little less geographically. That said, many of the US based companies that are held in PHO have strong international sales.

I have written a comprehensive post on my blog about water which also compares the four water ETF's if you want to check it out at:

cavemanus.com

Long PHO

[silver-bullet]

I think Hyflux (at hyflux.com) is a great microcap play on both water and China. It is a very well run company headquartered in Singapore, and has won bids by big boys in USA and Spain. This little company sure packs a solid punch in growth and earnings.