Water ETFs: The Next Commodity?
March 19th at 9:50am by Tom Lydon
The long term outlook for potable water remains uncertain, but the prospects for water becoming a valued commodity is not a matter of if, just a matter of when as the global population rises.
“The increasing need for fresh water has emerged in recent years as a potentially lucrative long-term investment theme. The investment thesis is based on the fact that demand for clean water increases along with the global population. PowerShares Water Resources (NYSEArca: PHO) aims to provide exposure to this theme by tracking an index of firms that have business lines focused on water treatment services and infrastructure,” John Gabriel wrote for Morningstar. [Climate Change, Rising populations Put Water ETFs in Focus]
Every company involved with water stands to benefit if water ever becomes a “blue gold,” reports Brian Shaw for The Motley Fool. According to a study by the World Water Assessment Programmer Study, 70% of fresh water is used for irrigation, while 22% is used in industry and 8% is used in domestic households. [The Case for Water ETFs]
Companies that are represented in PHO include industrial firms that have operations in water treatment equipment and/or pipe and pump manufacturing. Another big chunk of the fund is composed of water utilities, which make up about 24% of assets, reports Gabriel. However, many of the water-focused firms that are currently operating earn regulated returns and many of the diversified industrial firms generate significant business from industries outside the investable water complex.
Interestingly, water has been 90% correlated to the industrial sector. Since water is a niche investment, there are risks represented not only by the water industry, but by other industry- and firm-specific factors.
The water investment theme is supported by the population growth in emerging markets, as well as the global population. The need for more potable water for irrigation in emerging economies is also present, as more people need to eat, drink and use this element. [Best ETFs for Water]
PHO is a mix of small- and mid-cap companies that focus on the industrial and utilitarian aspect of water. PHO costs 0.6% and has $924 million in assets.
Other water-focused ETFs:
PowerShares Water Resources
Tisha Guerrero contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.