Claymore's New Water ETF: More of a Pure Play Than Powershares'

Includes: CGW, PHO
by: Richard Kang

Just a quick comment on the new global water ETF from Claymore (NYSEARCA:CGW) that should provide some competition for PowerShares (NASDAQ:PHO). I commented on this topic back in December with a post on a new global water index but instead of that leading to a follow up offering for PowerShares (the index in that case was developed by Palisades Indexes who was behind the work on PHO), we have Claymore working with S&P on this competing fund (ticker symbol CGW traded on the AMEX).

More news on yesterday’s launch here and here.

For specific news related to water specific equities, take a look here.

But more on this new offering from Claymore:

It’s an incredibly sad fact that globally there are more than one billion people who simply do not have access to safe water. Shocking numbers but when you consider that roughly double that number lacks adequate sanitation, you begin to understand the rationale and necessity for infrastructure investments. It’s not just about uncorrelated returns but providing the basics of life to the world. If it is indeed true that about three million people die annually simply because of inadequate access to safe water supplies, then this type of infrastructure is not a “nice to have” but a certain “must have”.

From a business sense, it’s self evident that as developing countries become wealthier they will first look to bring these “must have” necessities to their populations which makes water the world’s most significant untapped commodity. Where there is demand, global companies will capitalize. Today, companies have the capability to derive new sources of water and deliver it to those places that will pay for it. The size of this market must simply be enormous, especially when considering that despite the earth’s surface being 75% water, only about 3% of the world’s supply is drinkable, let alone available for modern irrigation.

Although this isn’t the first water ETF, one of the major points of differentiation between this new ETF and that from PowerShares is its global exposure. For the Claymore offering, its underlying index, the S&P Global Water Index ETF, has the following properties as cited from the BusinessWire press release linked above:

The index is comprised of 50 equity securities selected from a universe of companies listed on global developed market exchanges and based on the relative importance of the global water industry within those companies’ business models. The index is designed to have a balanced representation from different segments of the water industry consisting of the following two clusters: 25 Water Utilities and Infrastructure companies (water supply, water utilities, waste water treatment, water, sewer and pipeline construction, water purification, water well drilling and water testing) and 25 Water Equipment and Materials companies (water treatment chemicals, water treatment appliances, pumps and pumping equipment, fluid power pumps and motors, plumbing equipment, totalizing fluid meters and counting devices) based upon Standard & Poor’s Capital IQ (”CIQ”) industry classification.

Companies included in the Index have market capitalizations ranging from US$250 million to US$25 billion and the Fund will normally invest at least 90% of its total assets in common stocks and ADRs that comprise the Index. The Index is rebalanced annually.

Recent product offerings which could loosely be defined as thematic sector funds (infrastructure, real estate and now water) have been globally oriented ETFs and it just makes sense – for the broad spectrum of investors, why focus these themes on just the US market? If it’s all about diversification, then that should be geographically as well as based on sector/themes. Furthermore, regarding the global exposures:

  • CGW’s regional breakdown: 28% US, 20% France, 16% Japan, 14% Britain (PowerShares is 84% US). However, it’s important to note that many of the positions in the PowerShares offering, although primarily but not exclusively consisting of US domiciled securities, have significant operations (and revenues) generated internationally.
  • CGW invests in sixteen countries (versus six for PowerShares).
  • CGW is the first Global Water Index ETF to invest in foreign ordinaries (PowerShares and provides some of their international exposures through ADRs).
  • My comments here have been limited to comparisons with PHO. However, Roger Nusbaum has recently discussed another ETF offering from First Trust that is to provide water exposure. From his posting here as well as from other sources, my understanding is that this ETF (not available yet) is quite similar to PHO in that it more domestically focused. The chart Roger has provided on that posting , comparing PHO and the underlying index for the First Trust offering, seems to confirm this. If, for whatever reason, you want to focus more on domestic markets, than the PowerShares or First Trust offerings may be better suited for you.

    And having held PHO since its inception would have not been a bad call as here’s its chart since inception versus the S&P 500:


    Looks a bit like a high beta stock compared to the S&P 500. But after having glanced at the portfolio holdings of PHO, I decided to try this graph again but against the Nasdaq:

    PHO nasdaq

    No surprise, they track quite well. Looks like PHO is more of a bet than a diversifier, especially for investors heavily weighted in US equities. I look at thematic sector plays as diversifiers. And I would look to the global water ETF to provide better diversification properties than PHO (not difficult based on these charts).

    Another important factor when looking at this new Claymore offering is its strict focus (pure play) on water. On the PowerShares website, for example, you’ll see the list of holdings for PHO here. I’m not entirely sure how health care fits into water exposure but a more important point is that conglomerates like General Electric can not be considered a pure play on water. Frankly, GE should already be well exposed in core equity holdings. It’s a minor point, my focus on GE which is less than 2% of PHO, but the point is valid … when you want a water ETF, you want a water ETF.

    This is the same point with the recent global infrastructure ETF from SSGA. It’s as much a utility ETF as it is an infrastructure ETF. With all the slicing and dicing of the capital markets based on sectors, it gets a bit “dicey” with these thematic offerings. Understanding the list of ingredients as well as the recipe helps in can often be helpful in avoiding an upset stomach.

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