Claymore's S&P Global Water Index: BRICs, Water and You

By now many of you have read or heard of the 2003 research paper from Goldman Sachs that presented a strong case for investing in the BRIC countries: Brazil, Russia, India and China. The most compelling argument stated their belief in the BRIC countries having the potential to exceed the G6 in dollar terms by 2050. Some analyst believe that investing in the BRIC countries today is equivalent to having had the opportunity to invest in the US economy in the early forties.

Whether you believe in Goldman’s thesis or not, you can’t argue the benefit from having allocated a percentage of your portfolio to these countries since the release of that paper in 2003. Had you invested in the iShares Emerging market ETF (EEM) from the onset in April of 2003, you would have seen your shares surge from $34.70 to $157.90 on December10^th 2007. That is a whopping 355% in a little over four years.

This tremendous appreciation has had investors and money managers (myself included) nervous about adding new positions to their portfolios. While I still firmly believe in the long term opportunities of allocating a percentage of your portfolio to emerging markets I feel it is necessary to become a little more creative in this sector. We have recently reduced our clients' position in the EEM from 7% down to 4% and have added the new ETF from Claymore the Claymore S&P Global Water Index (CGW) to replace the reduction in our allocation. This new ETF tracks a basket of 50 global equity securities from developed markets that are involved in water, waste, and infrastructure related businesses.

The case for investing in water/ waste companies doing business with the BRIC countries is extremely compelling.

According to the World Bank, today an estimated 1.2 billion people drink unclean water and about 2.5 billion (1.3 billion in China alone) lack proper sewage systems. More than five million die each year from water related diseases such as cholera and dysentery. With relentless economic growth across the globe farmers and municipalities are pumping water out of the ground faster than it can be replenished.

China has a distinct disadvantage to the United States in that it has a smaller water supply yet almost five times the population. China’s Ministry of Water Resources has been quoted to say:

The decline in clean water supply is very clear. We will run out of groundwater if our current rate continues.

In Brazil’s two largest metropolitan areas, roughly 30 million people are affected by water contamination. In San Paolo this means severe water shortages and in Rio de Janeiro, the water supply is adequate but pollution threatens to make it useless for human consumption.

In Russia, 75 percent of surface water is now polluted, 50 percent of all water is not potable according to quality standards established in 1992, and an estimated 30 percent of groundwater available for use is highly polluted.

India, the world’s largest democracy with about 16% of the world’s population, grows by about 17 million people each year which means there population will double in the next 35 years. Companies operating there such as Coca Cola (KO) have already been forced to close certain plants due to a lack of license renewal by the Indian Government. Farmers in India have blamed Coca Cola for siphoning off badly needed water which has created political turmoil in the area.

With companies such as Coca Cola already facing roadblocks to profitability in one of the world’s fastest growing economies it is just a matter of time before we see a significant increase in corporate investment in water and infrastructure. This, on top of continued government spending, provides a very compelling reason to invest in CGW.

The Claymore S&P Global Water Index ETF’s top holdings, Veolia (VE) and Suez (SZEZY.PK), have already been very successful in securing billions of dollars in long term contracts in these emerging markets. These two top holdings have a weighting of nearly 20% in this ETF which gives you great exposure but is also supported through 48 other holdings. The ETF carries a reasonable 0.65% expense ratio and while it does invest in US based companies, it diversifies nearly 70% of the portfolio to international companies, 20% of which goes to France, which domiciles my two favorite picks in this sector, Veolia and Suez.

Here are some ETF facts from the fund's website for your information:

This is not a recommendation to buy or sell any specific security. Please consult your personal advisor for suitability recommendations.

Comments

[nk001]

Thanks for the insights Robert. So which is a better long term buy among CGW, PIO and KWICX. Will appreciate your perspective. Thank you!

[User 133894]

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