Water ETFs: Commodity or Infrastructure Investments?

Ever since Powershares first introduced the PowerShares Water Resources Portfolio (PHO), other sponsors have endeavored to capitalize on investor interest. Claymore served up the Claymore S&P Global Water Index Fund (CGW) in an effort to capture the demand for water services worldwide. Meanwhile, First Trust staked out territory with the First Trust ISE Water Index Fund (FIW), attempting to further the idea that drinking water and waste services are growing rapidly.

Yet the more that you read about H-2-O, the more that you hear different reasons for investing in it. One argument is that water may be the most precious of all commodities on the international stage. People need to drink clean fluids. And, all food products that come from agricultural activity require irrigation as well as drinking water for the livestock.

Still, if water demand acted like the commodity, you might have expected PHO or CGW or FIW to be running high in 2008. Instead, the Dow Jones AIG Total Commodity Index Fund (DJP) garnered 15% in 2008, while PHO has struggled to break even. (And that's after falling 10% in January alone!)

Perhaps pundits would better serve their readers by examining what the various water investments really represent. Specifically, PHO represents an investment in infrastructure.

What is infrastructure exactly? It incorporates everything a society may do to turn on electricity, build roads, establish communication networks, potable water delivery and yes... the creation/maintenance of sewage systems.

We can see from the graph below that the iShares Infrastructure Fund (IGF), the iShares Global Utilities Fund (JXI) and the PowerShares Water Resources Portfolio (PHO) are following a very similar path in the last 3 months. Indeed, this supports the notion that, while companies that deal in H-2-O may not chart an identical path to the diversified world of infrastructure and utilities, the similarities are there.

Normally, I might favor the diversification that comes with broader ETFs. Yet the volume on the IGF is painfully low and JXI has a more traditional market-cap (larger company) weighting.

If you accept the notion that there's an ongoing need for water services...
If you believe that the need is expanding overseas rapidly...
If you think that Jim Cramer has it right on his long-term bull markets, one of which is infrastructure...

Then the equal-weighting structure of PHO across company size makes sense. Small- and mid-sized companies in the PowerShares Water Resources Portfolio (PHO) give it an edge when it comes to rapid-fire growth.

Comments

[RogerNusbaum]

i think you are getting to this with the infra comments but if it is not clear PHO is 66% industrials

[SavCD]

Gary,

I still like the grains play,since it is an indirect water play.

[GeoffreyLordi]

...And a smidgen more than 8% international...

[Gary B]

Does anyone have any insight per water investment vehicles in regards to Chinas clean potable water delima ?

[sirsam]

How about PIO, the int'l version of PHO. I has co's from all over including one in Hong Kong.

[EnergyDiversification]

There is a big difference between a water utility, and an equipment or chemicals company that sells to utilities. GE may be the largest water sector player, but water is a miniscule portion of its value.

ETFs seem to be a marketing-driven product, tapping investor interest in water while avoiding the discussion of key issues.

Higher infrastructure spending may negatively impact utilities, who are unable to pass higher costs on to customers.

From an environmental standpoint, these funds can be misleading. Utilities are huge users of groundwater. PICO is actually a water hoarding play in the Nevada desert.

Lumping all these companies together in an ETF shows a lack of focus.