FIW: The Water Infrastructure Fund For Traditionalists

| About: First Trust (FIW)

Summary

Continued discussion of water as an investment theme.

Deep look at the First Trust Water ETF and its investment methodology.

Discussion of FIW's methodology in relationship to its closest peers.

No matter what anyone may think of President Trump, no one can reasonably deny that one of his key campaign promises was to rebuild America, starting with infrastructure.

Just yesterday President Trump met with the CEOs of transportation companies where the big point of agreement was the infrastructure investments to come. Without a doubt, the aging water infrastructure system is a point of focus. For more information about President Trump's intentions and the effects on the water industry please read this article by the "Environmental Leader".

In our last two articles we discussed the newly launched Summit Water Infrastructure Multifactor ETF (NYSEARCA:WTRX) and an 18 month update of the AllianzGI Global Water Mutual Fund (MUTF:AWTAX) (MUTF:AWTIX). In both of those articles, one fund that we mentioned however have not yet dove deeply into is the First Trust Water ETF (NYSEARCA:FIW). Let's take a look!

Fund Basics

  • Sponsor: First Trust
  • Index: ISE Water Index
  • AUM: Approximately $244 Million
  • Historical Style : Midcap
  • Investment Objectives: Seeks long term capital appreciation by investing in water related investments
  • Number of Holdings: 38
  • Current Yield: 0.49%
  • Inception Date: 05-08-2007
  • Fees: .57%

Source: YCharts & FirstTrust ETF fact sheet

Why This Fund?

We have already determined that this fund is for getting exposure to water infrastructure and technologies. Back in 2007 at the fund's inception there were only a handful of investment options for getting this exposure, mainly the PowerShares Water ETF (NASDAQ:PHO) and the soon to be launched AllianzGI Global Water Mutual Fund. The primary way of getting exposure to water was through the various unit investment trusts offered by First Trust Portfolios and Claymore UITs (now Guggenheim).

Today however we have two mutual funds and four ETFs, plus the continually offered unit investment trusts.

While I personally seek out active management that works, be it closed end funds trading at a discount, open end mutual funds or the new "Smart Beta" ETFs, I realize that there is an enormous group of investors who prefer passive investments. If you are one of those people, this water ETF just may be your flavor of water.

The Index & The Fund

Starting with First Trust's website we have the following:

Investment Objective/Strategy - The First Trust Water ETF is an exchange-traded fund. The investment objective of the Fund is to seek investment results that correspond generally to the price and yield, before fees and expenses, of an equity index called the ISE Water™ Index.

  • The ISE WaterTM Index is a modified market capitalization-weighted index comprised of exchange-listed companies that derive a substantial portion of their revenues from the potable and wastewater industry.
  • The Index begins by establishing the total population of stocks in the potable and wastewater industry and eliminates stocks which do not meet the Index's baseline eligibility requirements.
  • To meet Index eligibility, a stock must satisfy market capitalization, liquidity and weighting concentration requirements.
  • The Index selects the top 36 stocks in the industry by market capitalization.
  • The Index is rebalanced on the application of the above model on a semi-annual basis.

Source: First Trust Website

Looking over the description it is fairly clear that this is a straight forward ETF seeking out water related investments and selects the portfolio based on market capitalization once it screens out for "baseline eligibility requirements."

For my loyal readers it is no surprise that I am not a fan of ETFs that have a proprietary index that does not give you enough information to independently reproduce and validate the portfolio. While the description by First Trust was fairly straight forward, I could not find anything from the sponsor outlining what those "baseline eligibility requirements" are.

Looking in the summary prospectus there was no help. What we did find however is the information on how the fund weighs the individual names.

Source: FIW Summary Prospectus

At this point I had to do more digging and after some time on Google I was able to find the information we are looking for from the index creator and owner, ISE.

Source: ISE Index Methodology

Now knowing the complete methodology we can take a look at the portfolio itself. Below are the top 25 names in the portfolio.

Source: YCharts

As we can see, the majority of the names are US domiciled companies with the exception of one ADR. One thing to keep in mind is that even though they are US domiciled companies, many of them conduct business globally.

When we take a look at how the portfolio compares to its peers we have the following.

Source: Morningstar Tools

As we can see, FIW, from an asset allocation standpoint resembles PHO far more closely than the newly launched "smart beta" Summit ETF or the actively managed Allianz mutual fund.

So how has the fund performed?

Performance

The fund initially caught my attention because of its generally terrific performance. Let's take a look at the performance in more detail. We will examine FIW in comparison with the PowerShares Water ETF, the Guggenheim Global Water ETF (NYSEARCA:CGW) and the Allianz Global Water Mutual Fund.

Year To Date the fund is right in line with its competition.

Looking back over the trailing 12 months we see the fund separating from the pack.

Over the last 12 months both the First Trust and the PowerShares ETFs significantly outperformed their peers. This can be attributed to being domestic based, compared to the two other funds which are global.

Looking back over the last 3 years, we can see the First Trust ETF significantly ahead of the pack. Interestingly through January 2016 the fund lagged, however the strong domestic focus and the Trump rally have catapulted FIW ahead since then.

Looking at the 5 year numbers, the above holds true.

Finally looking at since inception numbers... we can see the First Trust ETF has performed near the top of the pack for the most part and took the large lead over the last 12 months.

There are two things of note here. First, the actively managed mutual fund has outperformed 2 major ETFs. Secondly, market cap weighed passive investing works (in one out of three examples). =)

Our Take & Bottom Line

I am quite glad to see this fund perform well. Even though this fund is not my cup of tea, I am a fan of First Trust for their closed end funds and unit investment trusts.

While I have not personally invested in this ETF, we have invested in First Trust's water themed Unit Investment Trusts that have also performed quite well.

I am curious to see how the fund holds up during a broad selloff, where the largest market cap funds may be the first to get hurt. For the foreseeable future though, I would not be surprised to see FIW continue to outperform as water infrastructure investing takes center stage with a President Trump focused on rebuilding America's infrastructure.

One thing to note for potential investors is that there is perhaps a bit of performance chasing with this fund. Over the last few years we have had money flowing out of the PowerShares water ETFs, both PHO and the PowerShares Global Water Portfolio ETF (NASDAQ:PIO), and we can assume at least some of that went into the First Trust and Guggenheim water ETFs. Any significant capital flowing in would keep on driving the purchases of the existing names in the portfolio. How significant a force that is needs a lot more analysis to quantify.

In the near future we will definitely take a deep look at the PowerShares water ETFs and the Guggenheim Global Water ETF. For now, my own money is in the few water themed UITs and the Summit water ETF on the short list.

What do you think?

I hope you found this of value and looking forward to continuing the conversation.

More information on this ETF is available at the fund's website. For more information on the index, please visit ISE.

I believe in active management that works, and I am here to help you find those opportunities. Please follow me here on Seeking Alpha as we look for those opportunities and sort out the good managers from the mediocre. Simply click the "Follow" button next to my name at the top of the article or on my profile page.

Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Maks Financial Services is a registered investment advisor and our Form ADV Part 2 is available upon request. We certify that the opinions and predictions in these articles are our professional beliefs at the time of publication and should not be construed as personal investment advice. Please consult your financial professional to see how anything discussed here applies to you. Furthermore this is not a solicitation to buy or sell any securities. This is not Tax Advice. Please consult your tax professional.

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