Investing in Water ETFs

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Investing in Water ETFs

Investing in the Scarcity of Water, it Turns out, Means Buying Industrial Companies that Conserve, Purify and Treat Water, as well as those that Make Equipment and Deliver New Technologies to the Water Industry

The strategy has performed well recently. Water ETFs returned more than 4.8 percent in August, besting the S&P 500's 4.3 percent, and have attracted just shy of $2 billion in assets since their inception in the mid-2000s, a lot for a niche category. Their long-term record isn't great: All have underperformed the S&P 500 for 1-, 3- and 5-year periods. That said, in terms of investing logic, water may be the ultimate long-term play -- until an air ETF crops up.

Here's a look at what the three largest water ETFs offer investors. All have a majority of their holdings in industrials, with a smaller chunk in utilities, and charge over 0.60 percent in fees. That's pricey for an ETF but common in areas where Vanguard Group or Charles Schwab Corp. don't compete.

PowerShares Water Resources Portfolio (PHO)

The largest of the lot is PHO, at $980 million in assets. It holds U.S. companies making products designed to conserve and purify water for homes, business and industries. The ETF has 66 percent in industrial stocks, 17 percent in utilities and a smattering in health care, technology and materials companies. Its portfolio is weighted by the market capitalization of its stocks, and the top 10 holdings make up 60 percent of the portfolio. The top three stocks are Roper Industries Inc. (ROP), Waters Corp. (WAT), and Flowserve Corp. (FLS). PHO charges 0.62 percent in annual fees.

First Trust ISE Water Index Fund (FIW)

FIW tracks the 36 largest U.S. companies in the potable and wastewater industry. While it has a similar sector allocation to PHO, the stocks are weighted differently. The top stock gets at most a 4 percent weighting, a method known as "modified-equal weighted." FIW will likely have higher highs and lower lows because of its exposure to more volatile, smaller-cap stocks. It has $200 million in assets and charges 0.61 percent.

Source: Bloomberg

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