Water ETFs

Water resources ETFs have rallied over 20% the past year to outperform the S&P 500 and are breaking out to multiyear highs.

For example, PowerShares Water Resources (NYSEArca: PHO) is up 23% for the trailing 12 months. It is the largest ETF in the category with assets of $847 million and an expense ratio of 0.62%.

“This exchange traded fund tracks an index of industrial firms dealing primarily in the water space: water treatment, water utilities, pipe and pump manufacturing, and so on. Most of these companies are either utilities that earn regulated returns or diverse industrial firms that have significant revenues generated from businesses other than water,” according to a Morningstar analyst report on PHO. [Climate Change, Rising Populations Put Water ETFs in Focus]

“We must admit that this fund does a better job of capturing an investable water theme than any other in the ETF market, but PHO’s problem is that too few companies focus solely on water-related equipment to produce a high-quality index,” the investment research firm adds. “Any commonalities among this fund’s holdings based on the water theme are likely to be overshadowed by firm- and industry-specific factors.”

In other words, the water ETF has exhibited a very high correlation with the industrials sector.