danno

Diving Into the Water ETF

Hmm, this just goes to show that even a cursory review of the water ETFs quickly casts doubts on their value as in investment.

Let's look at the fundamentals.

1) many of these companies have minimal exposure to the water business and therefore it's not going to be a key driver of their stock prices.

2) the water sector is phenomenally difficult place to make money or earn a return above the cost of capital.
- it's tough to raise prices as a utility.
- you can't cut people's water service off when they don't pay without getting lynched.
- the companies that have low-tech products like pipe and valve makers typically get much of their revenue from oil and chemical plants.
- pipe and valve makers are screwed because these are commodity products get killed by high energy and materials prices buy they sell mostly to cash-strapped municipalities that buy via an RFP process which 90% determined by how low the price is. "My valve is better than yours"? Gimme a break.

Even when you look at Layne Christiansen or Flowserve, you'd really struggle to find much exposure to water either.

- Water utility companies have a disastrous history in developing countries (see Suez, Vivendi, Veolia) and get their systems nationalized, etc.

- Calgon Carbon is subject to intense competition from China and has management NOT "smarter than your average bear."

- Desalinization is running into big problems because it uses a ton of energy (costly) and creates some significant environmental hazards. It's good for places that have cheap energy (Libya, Persian Gulf) but otherwise it's a long way from being a good long-term solution. It just sounds sexy to investors.

- Millipore has almost zero exposure to water.
- Water utilities tend to never earn their cost of capital

- At the end of the day, I doubt you really could make an investment worthy water index because there are so few quality companies that can can grow and have high exposure to the sector or to some macro trend like increasingly scarce water. It's a nice idea in concept, but very, very tough to achieve an investment fund worthy of the theme. That said it's an easy way to market a "theme" that will grab unsophisticated investors' attention and money. I'm sure the product providers are laughing all the way to the bank.

FYI Water companies worth a look are Biotreat in Singapore or Eurodrip in Europe - but those are very speculative.