Water ETFs To Play Infrastructure Needs

Includes: CGW, FIW, PHO
by: Tom Lydon

Water is reaching super-commodity status as it is always in demand and we rely upon a constant supply. As water infrastructure systems continue to age, the case for a water-focused exchange traded fund gets stronger, within a properly diversified portfolio.

"There are estimated to be between 700,000 and 800,000 miles of public sewer mains in the U.S., and over one million miles of drinking water systems, with pipes over 100 years old, meaning they are either past or nearing the end of their useful life, according to a ASCE report. Pipes represent the largest capital investment, accounting for 80%-85% of all wastewater systems investment requirements in the U.S.," S&P Capital wrote in a recent note.

A lack of adequate public funding has been in focus as the demand for fresh drinking water rises, populations grow and water systems age and need repair. World Water Day on March 22 was observed and 2013 is marked as the International Water Cooperation year.

A recent report card from the American Society of Civil Engineers revealed the U.S. water systems earned a D on the "Report Card for America's Infrastructure" , a slight improvement from a previous D-. Currently, the estimated costs to repair America's water systems is estimated at $126 billion by 2020. Funding is at $42 billion, leaving an $84 billion hole.

Industry is one of the largest users of water, followed by agriculture and residential. The cost of water is also rising alongside the costs of upgrades, while cities struggle to maintain budgets.

Water ETFs give exposure to the actual potable water, as well as treatment plants, filtration systems, equipment and water technologies. The First Trust ISE Water Index Fund (NYSEARCA:FIW) is rated "Marketweight" by S&P Capital and focuses in on the industrial machinery sub-industry. PowerShares Water Resources (NASDAQ:PHO) allocates about 40% of the portfolio to industrial water machinery. Water technologies make up the top holdings.

The Guggenheim Investments S&P Global Water Index (NYSE:CGW) is a global play on industrial machinery, with water utilities rounding out the rest of the holdings. S&P Capital rated CGW "Underweight", and the ETF has returned 17.2% over the past 12 months.

The ratings company believes that long-term prospects are favorable for water ETFs, as flow control and water treatment companies become more cost efficient through advanced technology.

First Trust ISE Water Index Fund

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.