China is building a massive pipeline to ship water from the country’s humid south to the arid cities in the north, some 1,000 miles away. And China isn’t alone. From the Middle East to the Mediterranean to the U.S. West, supplies of fresh water are dwindling and governments are scrambling to control the situation before water skirmishes break out. That means heavy investments in water treatment plants, desalination complexes, and more efficient irrigation systems.
For investors, a quartet of ETFs focus squarely on the problem. And perhaps due to recent headlines about the ongoing U.S. drought, they’ve been attracting a rising tide of investors. Each of these ETFs is up roughly 20% to 25% over the past 12 months, and as water quality and availability concerns continue to build in coming years, these ETFs should continue to trade higher.
The stocks in these ETFs tend to move up ahead of an improving economy––thanks to their industrial focus––and in eras of rising infrastructure spending,” says Todd Rosenbluth, an ETF analyst at S&P Capital IQ.
The water ETFs aim to own a broad spectrum of water-related companies such as makers of pumps, valves, filters, and such, making this more of an industrial angle than a utility angle. That focus has paid off: “The drought has certainly sparked interest in these types of companies,” Rosenbluth says.
Rosenbluth is partial to the Guggenheim S&P Global Water Index (CGW), noting that it has a consistent track record in terms of earnings and dividends, and also has the lowest volatility of the group.
The top holdings of the fund, which carries a 0.65% expense ratio, include Pentair (PNR), which sells a range of components used in water treatment systems, London-listed United Utilities, one of the U.K.’s largest water utilities, and American Water Works (AWK), which owns more than 1,000 water treatment, storage and wastewater management facilities across the U.S.
The Guggenheim fund launched in May 2007 and plunged 40% in 2008, highlighting the downside risk for these industrial-focused funds in choppy economic times. Since then, however, shares have traded higher and have risen an average 8% over the past three years and roughly 20% over the past 12 months.
Invesco PowerShares sponsors two funds in this category––PowerShares Global Water ETF (PIO) and Power Shares Water Resources ETF (PHO). The former has more than half its asset base tied up in foreign companies and sports an expense ratio of 0.75%. The latter is domestically-focused and has a lower expense ratio of 0.62%.
The PHO fund is the granddaddy of the category, having launched in December 2005.
“There’s no question the drought and other water themes have helped investor sentiment towards these funds lately,” says John Feyerer, PowerShares’ head of product strategy and research.
Indeed, PHO has risen roughly 22% this year versus the S&P 500’s 16% gain. Yet Feyerer cautions that these ETFs shouldn’t be seen as trendy trading vehicles. “They’re generally viewed as a long term investment theme.”