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Investing in Water and Water ETFs

Nov. 26, 2007 10:10 AM ETPHO, PIO, CGW, FIW15 Comments
Brian Powers profile picture
Brian Powers

To start with, I want to say that I own the PowerShares Water Resources Portfolio ETF (PHO). In this post I will explain why I invest in water and why PHO is my security of choice. The links for all sources noted are at the bottom of this post and should provide a bit of a linkfest for those looking to do further research.

Water is, of course, a necessity. It is a fundamental need to sustain all life on this planet. The earth is 70.8% covered by water on its surface. Only about 2.5% of that is fresh water, 68.7% of which is currently in the form of ice (source: Wikipedia).

I grew up and live in New York State where I have enjoyed excellent water quality and sanitation services throughout my life for all of my daily needs. I am lucky and I do not take it for granted.
I have been researching the state of global fresh water for many years and been fascinated by many of the numbers. The need for adequate water supply is not just a concern for the future, but for this very day in many parts of the world:

  • 1 billion people do not have access to safe drinking water
  • 2.6 billion people lack basic sanitation
  • 2.2 million people a year die from illness caused by contaminated water
  • 5,000 children a day die from diarrhea
  • water use will increase by about 50 percent in the next 30 years
  • an estimated 4 billion people - one half of the world’s population - will live under conditions of severe water stress in 2025

(sources: OECD, UNICEF, World Bank, WHO, WWC)

Many developing countries have grown quickly in the past few years and are emerging into world powers right now.

  • developing economies grew 7.3%, or

This article was written by

Brian Powers profile picture
Brian Powers is an independent investor. His writing generally focuses on thoughts related to investing in his Roth IRA account. Brian started investing in 1998. He is basically a value investor in that he generally invests for the long term. That does not mean he does not like so-called growth stocks. He loves growth stocks when he can buy them at a reasonable price. Additionally, there are sometimes reasons other than value that make a security attractive. Brian uses a bottoms up approach which starts with fundamental analysis. He has traditionally looked for small caps, but in the Roth IRA, he balanced his portfolio with large and mid cap exposure. Core positions are generally for the long term, but may be rebalanced as conditions warrant. Visit his blog:www.cavemanus.com (http://www.cavemanus.com/)

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Comments (15)

Joe Shareholder profile picture
I admit I haven't done a whole lot of research, but after typing in PHO and CGW, it looks like these mirror the Dow. Beta must be 1 exactly, and with the Dow prospects being what they are, I don't see a huge upside to purchasing these ETF's right now. Suppose we do have a water shortage/crisis, drought, etc sometime in the future, which is highly possible, would these ETF's separate themselves from the Dow should the dow crash? I don't know. Would investors simply purchase them because they list water in the title, or would they actually look at the companies purchased in the fund. Who knows. I think I'll keep my eye on these, but not interested right now.
Thanks for the excellent summary! I currently am holding pio, looking to increase my position. After reading your excellent summary of the 4 water stocks (and the informed comments!) I think I will continue to build my pio position over time, liking its international exposure. I may add pho or fiw for their water holdings. Living in Utah, one of our dryest states, I can appreciate future "water bidding (shooting) wars". Also, the infrastructure play can be likened to bridges. However, as polution increases and water sources decrease, reverse osmosis may come more into play.
Thanks again
27 Nov. 2007
I own a PHO. I am satisfied of this ETF, because all the companies are related to water. It is one that I will keep for a long time.
I would like your input on my next water ETF, this one I would like it to be more international. which one is better the CGW, FIW ot PIO. I did my homework, but I am a rookie!.
Danno is right on target. All these stats about how many billion of people are lacking this or that has next to nothing to do with the companies owned by PHO. GE or some local US water company does not stand to benefit from water shortages in Africa. Not unless Bushie decides to "liberate" Africa and give water contracts and rights to GE.
Brian Powers profile picture

If you are looking for a desalination company, check out Consolidated Water (CWCO). They are based in the Cayman Islands and use reverse osmosis to desalinate water. They develop and operate water systems primarily in the Caribbean.

It is a small company with a market cap of $450 million. Their P/E has been between 30 and 60 for almost 3 years. P/Sales was between roughly 8 and 12 for the same time period. Short interest has exploded since August with the ratio now over 22. Insiders own about 10% of the shares outstanding and institutions about 55%.

Of course, do your own research.

I do not own CWCO, but it is held in PHO which I own.
Brian Powers profile picture
Dano, I replied to your comment on my blog and will add it here as well. You make some good points. I agree that there is not a pure water fund that exists right now. It would be hard to do. It is difficult when many of the companies making the biggest profits from water are large conglomerates.

In my article I wanted to look at the global water situation and then compare the ETF's that were available in that industry right now. I do not claim they are perfect, but I am satisfied so far with my holding in PHO. I feel that in and of themselves, most of the companies are solid despite their importance as a pure play on water. Honestly, I think it is a good fund despite the fact that it is called a water ETF.

GE has 3% of its business in water. This is small. However, they are one of the most important companies in the water industry. It would be hard to ignore them completely in a water fund despite the dilemma. As I stated above though, I am comfortable with how this position is treated. In addition, I will say that GE, or Siemens are still excellent companies. I have no problem with exposure to them.

Franklin Electric? They design and build water well pumping systems. They had two acquisitions this year to pump up that division - Pump Brands, Ltd. (South Africa), completed in June 2007, and the pump division of Monarch Industries (Canada), completed in September 2007. Water sales were down in the most recent quarter.

Millipore cites strong demand for laboratory water products and higher sales in growing Asia/Pacific markets. It is not 100% of their business, but it is large and growing.

Agilent also noted strong growth in water and waste testing despite the size of that business.

Yes, some water utilities are in a tough spot, but in the long run, they will need to raise prices to deliver water. There is simply no way around it if the world wants water delivered to their homes. It will not happen overnight, but this is a long term investment for me, so I can be patient.

In truth, I look at these ETF's more broadly than just pure water plays. I look at PHO as an industrial ETF with exposure to utilities and tech. It is a focused fund and I like the companies. Perhaps I should have spent more time addressing this point.

Are these four specific water ETFs a gimmick? You may be able to make that point, but I do not think the need for water is a gimmick. Water is a fundamental need for all life and is not like "alternative energy" and "nanotech" which are emerging, untested industries.

The truth is this that these ETFs are not "right" or "wrong" investment vehicles. Your research may show you they are not for you. That is fine. If we all had the same strategy, no one would make money. I have done the research and am satisfied to have the 3/4 sized position I hold in my Roth IRA.

One other point, the alternative to holding a water ETF is to hold several individual companies. My account targets 12-15 security positions, so for me, this is the best way to play the industry despite its imperfections.

Thanks for your comments. They really made me think.

Good luck.
27 Nov. 2007
Well, again what is the Index trying to reflect. If it's the global demand for more water and clean water, then you're not really getting that much exposure, but it's a nice marketing theme.

The phenomenon which the index is trying to reflect is poorly captured. In other words, the index performance will have a sub-par correlation with what it's 'trying' to track.

In addition this ETF grew so fast (nice idea in theory and easily marketable) that its huge growth in in assets drove up many stock prices that invested in. A self-fulfilling prophecy not unlike some of the wilderhill funds (much worse than this one)

Millipore? if you really look close at it's business, it's mostly in filtration for biomed/pharma/semicond... And a lot of what it's filtering isn't water.

Agilent, Emerson? water's a tiny percentage of their businesses. Roper? Maybe one third. Pall? Maybe 20%. Siemens and GE? Tiny.

The Index is nice in theory, but runs out of steam pretty quick.

Moreover, what the heck kind of weighting strategy is being used here? Look at the percentage of the float of some of these companies. Good luck at rebalancing time when Index Advisor has to annouce 5 days in advance what the rebalanced holdings will be. It's a field day for hedge funds and arbs at shareholder expense.
Good piece. Are any of these companies involved in desalination? It seems if we can get desalination of ocean water at a decent price, there will be plenty of water for everyone.
26 Nov. 2007
John: many are including GE, Veolia, Siemens, etc. but desal requires a lot of energy - which isn't exactly getting cheaper. That's why the much of desal system sales goes to countries where energy is cheap like North Africa and the middle east.
granger profile picture
Question: Does anyone have any idea of how to get pure exposure to water rights? Are they traded anywhere in the world? Any companies that provide exposure? Any help would be greatly appreciated.
Your name sounds so German, so, if you speakt German:




I hope it`s good for starting!
granger profile picture
Great info, keep it coming. I enjoyed this article. I previously held PHO and made the switch to CGW in the summer.
25 Nov. 2007
With all due respect, I would recommend that the author spend some time kicking the tires on these ETFs, learning about ETF mechanics, the companies in these ETFs, and in particular, the Index advisors. An investor who has really done his/her homework would never go near PHO (for example). Many of the companies in PHO have little significant business in water (Millipore? Franklin Electric? Agilent? Give me a break). This is no way to play the global thirst for more fresh water and cleaner water.

And water utilities? Good luck for them trying to raise water prices (even when rate increases are sorely needed) - that's been a disaster worldwide with terrible returns on capital. Some of the other companies are just 3rd-rate manufacturers with no pricing power whatsoever getting killed by high metal prices.

And even many of those in the water biz are highly suspect. How much earnings/revenues does GE get from its water biz - 10% max? Why would anyone think that the performance of the GE's water biz be a significant driver of GE's stock price –same for many others like Siemens.

ETFs like PHO are just gimmick products thrown together with to make money, but don’t really follow the purported investment theme. Apparently the $2.1 billion in PHO suggest that the average small investor or retail investment advisor haven’t done enough homework to know that the index manager has little idea what he/she is doing. Many ETFs such as those supposedly investing in “alternative energy’, ‘nanotech’, and ‘water’ sounds good in theory, but a little homework shows that index quality varies wildly. If you want to invest in water - this is not the way to do it.

The latter two ETFs on the list look a better –but I haven’t done enough due diligence on them. Remember: the water sector is a tough one in which to invest (most of the best companies are buried inside big conglomerates. As such the remaining pure-play water companies are typically pretty lousy while the water utilities typically struggle to earn their cost of capital.

granger profile picture
FELE is one of the largest makers of water pumps in the world.
26 Nov. 2007
my bad, somehow that got mixed up with Franklin Electronic Publishing (FEP), still there are plenty of other questionable stocks in that index.
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