PHO’s New Competitors: Claymore S&P Global Water ETF and First Trust ISE Water ETF

[This article also appears on Seeking Alpha, Claymore, First Trust: Investing in Water Just Got Easier]

Not long ago, investors who are looking for investment opportunities in blue gold, water that is, could find themselves facing very limited choices other than individual stocks as there are only a couple of water related indexes and the only practical choice seems to be the only water related ETF, PowerShares Water Resources ETF (PHO), which was launched in December 2005.

Now the landscape of investing in water has just changed with the introduction of two new water ETFs early this week: Claymore Securities’ S&P Global Water Index ETF (CGW) and First Trust Advisors’ ISE Water Index ETF (FIW).

Here I am going to take a look at the two new ETF offerings and compare them with PHO, the leader so far in water investment. Details about PHO, however, won’t be repeated here because it has been covered in a previous post.

Key data

First are some key data of the three funds. Note that there’s no performance data from both CGW and FIW yet as they just started trading. The inception price of CGW was $25.00 and the inception price of FIW was $20.00.

From the above table, we see that CGW is the most expensive one among the three funds to own. Assuming a $10,000 investment and a 5% annual return, the costs for these funds are:

• PHO — one-year: $69, three-year: $222
• CGW — one-year: $76, three-year: $237
• FIW — one-year: $61, three-year: $225

Another difference between these three funds is that both PHO and FIW invest heavily in US stocks or ADRs, while CGW holds equities that are not accessible to US investors. Thus, CGW is more diversified. Currently, CGW has 38% of its asset invested in companies in US, 20% in France, 16% in Japan, 14% in UK, and 22% in other countries.

Underlying indexes

• Palisades Water Index (ZWI)
  • Index components: 40
  • Industries: pump and filter manufacturers, water utilities, and irrigation equipment manufacturers
  • Rebalancing frequency: quarter
  • Weighting: Modified equal weight
  • 3-year annual return: 27.4%
• S&P Global Water Index (SPGTAQUA)
  • Index components: 50
  • Industries: water treatment chemicals, pump equipment, motors, plumbing equipment and fluid meters
  • Rebalancing frequency: annual
  • Weighting: Modified market cap
  • 3-year annual return: 29.5%
• ISE Water Index (HHO)
  • Index components: 36
  • Industries: water distribution, water filtration, flow technology, and water solutions
  • Rebalancing frequency: quarter
  • Weighting: Modified market cap
  • 3-year annual return: 24.2%

The following are the investment objectives and top 10 holdings of both CGW and FIW. For CGW, since it holds stocks that are not listed on US markets, some ticker symbols are not available.

CGW investment objective

From the fund’s prospectus, CGW seeks “investment results that correspond generally to the performance, before the Fund’s fees and expenses, of an equity index called the S&P Global Water Index. The Investment Adviser seeks a correlation over time of 0.95 or better between the Fund’s performance and the performance of the Index.”

CGW top 10 holdings:

1. Veolia Environnement (VE)
2. Suez Eur2
3. Mitsubishi Heavy Inds Ltd
4. United Utilities Plc (UU)
5. ITT Industries Inc (ITT)
6. Danaher Corp (DHR)
7. Kubota Corp (KUB)
8. Nalco Holding Co (NLC)
9. Pentair Inc (PNR)
10. Kurita Water Industries Ltd

FIW investment objective

From the fund’s prospectus, FIW seeks “investment results that correspond generally to the price and yield of an equity index called the ISE Water Index. The Fund, using an “indexing�? investment approach, attempts to replicate, before expenses, the performance of the Index. First Trust seeks a correlation of 0.95 or better between the Fund’s performance and the performance of the Index.”

FIW top 10 holdings

1. Itron Inc (ITRI)
2. Calgon Carbon Corp (CCC)
3. Flowserve Corp (FLS)
4. ITT Corp (ITT)
5. Pall Corp (PLL)
6. Nalco Holding Co (NLC)
7. Fluor Corp (FLR)
8. Crane Co (CR)
9. Tetra Tech Inc (TTEK)
10. IDEX Corp (IDXX)

What’s common

Looking at the complete components of the indexes (ZWI, HHO, SPGTAQUA) these three ETFs are tracking, it’s quite clear that there quite some overlaps among them. In fact, according to this Investor’s Business Daily article, “PowerShares and First Trust have a 75% overlap with each other, while about half of Claymore’s holdings overlap with the other two.” The following chart shows almost identical 1-year performance of ZWI and HHO.

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