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Although commodity investing has remained popular despite sluggish prices, many focus on only a handful of products like gold, silver, or oil. However, there is definitely an overlooked but indispensable resource, fresh water, which can be an interesting commodity play.
This is especially true given that water is the most important commodity of all, and that fresh water supplies are actually quite scarce. In fact, fresh water accounts for only 3% of all the water on earth while surface water makes up just 0.3% of that figure (read: Bet on an Oil Surge with these 3 ETFs).
Thanks to this limited supply, the ever-expanding world population, as well as growing demand for consumption, water scarcity can be felt in many parts of the world. About 70% of the commodity’s total demand comes from irrigation whereas demand from industrial applications and domestic households account for about 22% and 8%, respectively.
The increasing need for fresh water is forcing companies and governments to come up with new ways to recycle, manage and desalinate water resources in order to prevent a catastrophe in the future. The utility operators have already started to invest in their aging infrastructure, suggesting that water investing could be an important growth industry.
Spending on the Horizon
According to the Environmental Protection Agency (EPA), the U.S. water infrastructure needs nearly $400 billion over the next two decades to ensure safe drinking water for all Americans. Further, about $384 billion is needed for upgrading the treatment of plants’ storage tanks and water distribution systems by 2030.
As the U.S. overhauls its infrastructure, the water industry is expected to get a nice boost in the coming years (read: The Best ETFs in the Market's Top Sector). For investors looking to play this trend globally, there are currently four water ETFs available in the market.
While the funds might appear similar at first glance, investors should note some of their key differences in this emerging space, which we have highlighted below:
PowerShares Water Resources Portfolio (PHO - ETF report)
This fund provides domestic exposure to the water utility segment and those that perform treatments on water supplies. It tracks the Nasdaq OMX US Water Index and holds a little less than 30 securities in the basket.
The product is concentrated across its top 10 holdings at 61% of the total assets. American Water Works, Pentair and Waters Corp occupy the top three positions in the basket with at least 8% each. From a sector look, investors should note that industrials comprise about 60% of the fund while utilities take up another 24% (read: 3 Industrial ETFs to Buy After Solid GE Earnings).
The fund has amassed over $900 million in AUM and is considered liquid when compared to other choices in the space. It charges investors 62 basis points a year in fees. PHO added nearly 9.3% year-to-date and over 23% in the trailing one-year period.
Guggenheim S&P Global Water Fund (CGW - ETF report)
This ETF tracks the S&P Global Water Index, holding 52 securities in total. The fund has managed assets of nearly $258 million and trades in volume of just 42,000 shares per day on average. It charges 70 bps in fees and expenses from investors each year.
This product also has heavy global exposure to its top 10 holdings with Pentair at the top with 7.36% of assets. Geberit and American Water occupy the next two spots with 6% share each. In terms of country exposure, American stocks make up nearly 39% of assets closely followed by the United Kingdom with nearly 17% share (see more in the Zacks ETF Center).
CGW returned over 10% so far this year and nearly 18.7% in the trailing one year.
PowerShares Global Water Portfolio (PIO - ETF report)
This product follows the Nasdaq OMX US Global Water Index and has amassed nearly $205 million since inception. The fund is less liquid, suggesting additional cost beyond the expense ratio of 0.75% a year.
In total, the product holds 37 securities and is skewed towards the top 10 holdings. The top three firms- Veolia Environment, Pentair and Roper Industries- make up for at least 8% of total assets each. From a sector perspective, industrials and utilities provide a nice balance in the portfolio with 47% and 44%, respectively.
The ETF is heavily concentrated in American equities as these securities make up about half of the total portfolio. The fund gained nearly 10% year-to-date while it is up about 20% over the trailing one-year period.
First Trust ISE Water ETF (FIW - ETF report)
This ETF tracks the ISE Water Index, which is a benchmark of firms that derive a substantial portion of their revenues from the potable and wastewater industries. With holdings of 36 stocks, the fund has amassed $131.6 million in its asset base while charging 60 bps in annual fees. Volume is light though.
Unlike its counterparts, the portfolio is well spread out across securities. Top holdings include Badger Meter, California Water Service and Watts Water Technologies comprising a combined 4% of FIW. In terms of sectors, industrial companies make up about two-thirds of the total, while utilities comprise roughly 24% of the fund.
The fund has delivered an impressive performance, gaining more than 11.1% so far this year and over 27% in the trailing one year (read: 6 ETFs Beating the Market Over the Past Year).
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