Another large materials ETF, the $1.4 billion SPDR Metals & Mining (XME), is based on an equal-weighted index consisting mainly of steel, coal and consumable fuels and diversified metals. The volatile ETF fell nearly 60% in 2008 as demand for materials plummeted. But it shot up 88% in 2009 and has beaten the S&P 500 index by a substantial margin since then.
Exchange-traded notes that follow the price of industrial materials are another way to play the theme. Two that fit the bill include iPath Dow Jones Industrial Materials (JJM) and iPath Dow-Jones-UBS Copper (JJC).
Water. The scarcity of water, a resource with a declining supply and rising demand, is a growing concern, not only in China and India, and also in some parts of the Western United States. At $1.3 billion in assets, the PowerShares Water Resources fund (PHO) is the largest ETF aimed at capitalizing on the growing demand for this precious resource.
Since many of the companies in the component index are also involved in other industries besides water treatment and distribution, the ETF's relationship to water demand seems a little soggy to Morningstar analyst Abraham Bailin. "The holdings come from a hodgepodge of industries with vastly different exposures to the water theme," he observes. "You can get similar exposure by putting about 85% of your money in an industrials sector fund and the remainder in a utilities sector fund."
Clean energy. Alternative energy stocks plunged more than the overall market in 2008 and have lagged for most of the last three years. But they have picked up in recent months, in part because their valuations are so low. The oldest and largest alternative energy ETF, the PowerShares Wilderhill Clean Energy fund (PBW) invests heavily in solar and wind stocks but also has assets in other sectors such as information technology and materials.
Two more narrowly focused clean energy ETFs, First Trust Global Wind (FAN) and Guggenheim Solar (TAN), fell 31% and 28%, respectively, in 2010 amid concerns about decreasing government support in Europe and competition from cheap natural gas. But high oil prices and prospects for increased demand for electricity with an economic recovery have given the stocks a lift this year.