PowerShares Water Resources ETF: Designed For Traders, NOT Investors - Update
- An update of the PowerShares Water Resources ETF, a daily dollar trading value based passive ETF.
- A look at the changes in the portfolio since our initial article.
- A look at the fund's performance since our initial article and fund's inception.
"When the well's dry, we know the worth of water."
- Benjamin Franklin
By now you may realize that we are in the middle of updating our water and water infrastructure investments which we first discussed in our series last year. Over the previous few articles we have performed an update on both the Tortoise Water Fund (TBLU) in the article "Tortoise Water Fund: The 'Purest' Water ETF - Update" and the First Trust Water ETF (FIW) in the article "First Trust Water ETF - Water For Traditional Indexers - Update."
The next fund in our series is the PowerShares Water Resources Portfolio (NASDAQ:PHO) which we first discussed in the article "PHO: No Wonder Why It Underperformed."
In the previous article, I noted that PHO would be one of the last funds I would choose for my water exposure. The reason for this is the fund's index methodology. If you have not done so already, please take a look at my initial article where we discuss it in depth.
In this article, let's take a look at what's new and what has changed in the past 14 months.
At the time of our previous article on 2/13/2017, (PHO) had $775 million in net assets and distributed a .45% dividend. Today the ETF manages $831 million and distributes 0.34%. The main source of growth has been capital appreciation.
The portfolio is now comprised of 35 securities and is quite concentrated as the top 10 holdings make up just over 60% of the fund. While this is slightly less concentrated than the fundamentally focused (TBLU), it is significantly more concentrated than the modified capitalization weighted (FIW) which we looked at yesterday.
This is as a result of what I believe is the wrong index methodology to implement for this water theme. For full details of this methodology, please take a look at my initial article on the fund, "PHO: No Wonder Why It Underperformed." I believe it is critical for any (PHO) or (PIO) investor to understand the methodology and what makes the fund different.
Since our article last year, the makeup of the top 25 securities is largely the same. The most notable change is that Energy Recovery, Inc. (ERII) is no longer in the top 25 and was replaced by California Water Service Group (CWT). The First Trust Water ETF (FIW) on the other hand had more changes.
Looking at the portfolio breakdown we can see that the fund is fairly well diversified. It does only have 20% in water utilities and as such why the distribution is so low.
Source: PowerShares PHO Website
The fund, due to its index methodology which focuses on average daily trading volume, thus by nature also focuses and overweights large cap stocks. PHO has nearly 1/4 of the portfolio allocated to large caps, more than what we found in other ETFs which we looked at.
This fund, based on the index it follows is predominantly a domestic fund. It does have a 1.79% allocation to global companies. Once again, Cia de Saneamento Basico (SBS) which we found in (TBLU) with a 6.52% allocation and (FIW) with a 1.74%, makes up 1.79% in (PHO).
One thing we did not do last year but have started doing over the previous few months is looking at the risk data.
Over the previous 5 years, the fund has managed to establish a 1.061 beta to the S&P 500. This implies a slightly higher volatility to the S&P 500 (SPY) and other water ETFs which we recently looked at.
The fund also has a higher maximum draw-down over its lifetime, 55.45%, than the other funds we looked at so far. Once again... methodology.
The fund's strategy has managed a .3338 Sharpe ratio and a .4504 Sortino ratio. While the fund's strategy did generate extra return, the numbers are nothing too great and once again, lower than its peers.
One area of concern which I previously discussed is the outflows from the fund due to redemptions after 4 or 5 years of mediocre performance.
As we can find, money has been consistently flowing out of the fund over every measured time period by YCharts. While the outflows have slowed, it is not a good sign to see any outflows during a time when the fund is returning positive numbers and the stock market is in a bull market.
Year to date, the fund is essentially flat for the year, achieving a .20% total return. There were no dividends paid out so far in 2018.
Over the previous year, the fund is up 16.37% on a total return basis and up 15.94% on its price per share.
Since our last article on February 13th, 2017, the fund has done quite well, achieving an 18.08% total return while the price per share increased 17.65%.
If we go back 3 years we can find that the fund has achieved far less flattering numbers, achieving a 23% total return and a 21.13% increase in the price per share, after suffering major losses in 2015.
So how did the fund's trade volume focused index strategy perform against its peers?
We will take a look at how PHO performed against its global and domestic, ETF and mutual fund competition, the very same funds we looked at in the series and in our previous article. The fund has two domestic focused ETF competitors, the Tortoise Water Fund (TBLU) and the First Trust Water Fund (FIW). From the global peers we have the sister-fund, the PowerShares Global Water ETF (PIO), the Guggenheim/PowerShares S&P Global Water ETF (CGW) and the two open end mutual funds, the AllianzGI Global Water (AWTAX) (AWTIX) (AWTCX) and Calvert Global Water Index Fund. (CFWAX) (CFWIX).
As previously stated and confirmed by the sponsor, the Summit Water Infrastructure Multifactor ETF (WTRX) closed down and was liquidated as of April 2nd, 2018.
So far in 2018, all of the funds were down with the exception of our PowerShares Water Resources ETF.
Over the previous year, once again the PowerShares fund has been the top performer, primarily as a result of this year's performance.
It is a similar story since our previous update.
Taking out the Tortoise Water Fund, we can get a 3 year number over which we can find that the standout has been the First Trust fund we covered yesterday. It all stems back to the fund taking on the lowest hit in 2015.
The further out we go the worse the numbers look.
Over a 5 year period PHO comes in near the bottom of the pack, outperformed by all of the funds except the Calvert Global Water Fund. Interestingly both have a "green" component as part of their methodology.
The same holds true if we look over at the previous 10 years. In this case, PHO is outperformed by FIW, its global focused PIO sister fund and the two actively managed mutual funds.
As I stated in my initial article on this fund, I don't believe this ETF is for investors, or for anyone looking for long term exposure to water.
The fund follows a methodology where the highest traded companies get the highest weightings. The entire purpose behind the index was to bring additional liquidity to those names.
Secondly, the fund has a "green" component which is tough to verify and there is zero evidence that it generates any alpha.
On one hand, it is the largest water ETF in terms of assets, on the other hand, it has been poor performing over the long term.
What is going to be interesting to see is what happens with PHO in the future.
What we now have to consider is that Invesco/PowerShares recently acquired Guggenheim's ETFs, including the once competing Guggenheim Global Water ETF (CGW) with over $600 million in assets.
Will PHO survive? Will Invesco keep all three? We will have to see.
Bottom line, if you are a trader, this is a great fund to target water. If you are an investor however, you NEED TO understand the pitfalls of this fund's index methodology and read my initial article on it here.
More information on this ETF is available at the fund's website.
If you have not done so already, please take a look at my previous articles on this space.
Investing in Water Series
- Summit Water Infrastructure ETF: The X is For Alpha
- Allianz Global Water Fund: 2017 Update
- FIW: The Water Infrastructure Fund For Traditionalists
- PHO: No Wonder Why It Underperformed
- PowerShares Global Water Portfolio: The Global Version of Mediocrity
- Guggenheim Global Water ETF for Global Water Investing
- CFWAX: An Index Fund With A Conscience
- Investing In Water: Putting It All Together
- Tortoise Water Fund: The 'Purest' Water ETF
Income Idea subscribers do have full access to all of my previous work as part of their subscription along with the additional Distribution Quality and Implementation Ideas sections. Test Drive Income Idea for Free in a 14-Day Trial!
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