CapitalCube | Aug 24, 2014 01:57AM ET
It's quite the strange duality when you think about it. Undoubtedly, water is the single most important thing on earth.
Ok, so maybe it's the second most important thing (sorry, oxygen) – but you get the idea.
If I go to the store and there's no bread, I would be shocked, and certainly annoyed, and that'd be about it. But, if I turn on my faucet and nothing comes out, I'm about 15 hours away from turning into Mad Max – and so are you.
So, why is water so underappreciated? Why, when I live in a state that's experiencing a state of our infrastructure too poor, and the potential profits too murky to justify the capital outlay.
So What's the Answer?
I won't bury the lead here.
I don't know what the answers are. I don't know what the technological answers are, I don't know where the money is supposed to come from, and I would never be so masochistic as to try to understand the local politics involved.
But, I know that we need fresh water for quenching the thirst and irrigating the crops for an ever-growing population, and since less than 1% of our planet's water is fresh water, desalinization sure seems like a no-brainer. Yes, it's horribly energy-inefficient right now, but if history is any guide at all, we can innovate that imbalance away. My cell phone today has 10 times the RAM that my desktop had 18 years ago. All we need is the will and we can figure out most anything. So far, the will hasn't been there, but I'm convinced we'll see it soon, either by choice or necessity. Unfortunately, it will probably be the latter.
ETF Plays in the Water Space
All the murkiness in the future of water makes it ideal to approach with ETFs rather than trying to pick individual stocks. There are four main ETFs that focus on water utilities, infrastructure suppliers, and related services.
I want to find the best single name in this group of four ETFs, so I've loaded up a custom peer group in Capital Cube to review their most important metrics side-by-side. As a basis for comparison, I've also loaded up the largest sector ETFs for utilities and industrial stocks (XLU and XLI), as well as the SPY to represent the broad market:
The NYSE Arca:PowerShares Water Resource Port (NYSE:PHO) is the largest of the bunch, with just under $1 billion in assets under management. It's a rather focused ETF, having only 29 holdings in companies that “create products designed to conserve and purify water for homes, businesses, and industries”. The underlying index is focused on U.S.-based companies, as we can see from the Capital Cube breakdown:
There is a also a first cousin fund to the PHO in the PowerShares Global Water (ARCA:PIO), a $284 million AUM fund that contains 38 holdings and is free to invest via non-U.S. stock exchanges. As a result, only 47% of the assets are in U.S. – domiciled companies, although many of the same top 10 holdings show up in both funds, specifically “picks & shovels” plays like Flowserve Corporation (NYSE:FLS) and Waters Corporation (NYSE:WAT).
Rounding out the four is the FFirstTrust ISE Water (NYSE:FIW) and the Guggenheim S&P Global Water (NYSE:CGW). The FIW is a bit illiquid for my taste, at just $190 million in assets, but it has notably outperformed its peers over the past three and five years. Both the FIW and the Guggenheim offering are heavily invested in the water utility companies, parking over 25% of assets there. And it makes me wary of choosing either fund.
Not Keen on the Water Utilities Angle
I try to always find the big, secular trends first, then go find the companies poised to benefit the most. In the case of water, I'm not sure that the utilities – the folks that actually deliver the water to your tap – are poised to benefit. They are very restricted in the prices they can charge, and the water utility industry is highly fragmented, so the few publicly-traded stocks that we do have are pitifully small (the top 5 amount to less than $14 billion in combined market cap). And lest we forget — these utilities operate within a crumbling infrastructure that will require actual movement in state & federal legislatures; in other words, I'm not holding my breath for change.
h3 Investor Takeaways/h3Disclaimer: The views and opinions expressed above are those of the author and do not necessarily reflect the views of CapitalCube.com, AnalytixInsight, Inc., its affiliates, or its employees.
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