Invest in Water ETFs

Back in November, I had a post on why water could find a place in your portfolio. The main point of the article is as we face a global shortage of drinking water, investing in water makes a sound choice for long term investment. If you are also interested in investing in water, the most convenient choice so far is the Powershares Water Resources ETF (PHO), which tracks Palisades Water Index (ZWI), a “modified equal-dollar weighted index comprised of U.S. exchange-traded companies engaged in the global water industry.” The index includes companies that are in business of potable water provision, water treatment, and technologies and services that are directly related to water consumption. The five-year performance of the index as compared against S&P 500 index is shown in the following chart. The index itself has more than doubled after touching a low in early 2003.

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ZWI has 40 components and its top 10 holdings are

  • Tetra Tech (TTEK)
  • Valmont Industries Inc. (VMI)
  • Veolia Environnement (VE)
  • Urs Corp (URS)
  • Itron Inc (ITRI)
  • Lindsay Manufacturing Co. (LNN)
  • Gorman-Rupp (GRC)
  • Mueller Water Products Inc (MWA )
  • Badger Meter (BMI)
  • Idex Corp (IEX)

The PowerShare ETF PHO was incepted on December 6, 2005 and it invests at least 80% of its total assets in the American Depository Receipts (ADRs) and common stocks of the companies in the water industry. Though PHO tracks ZWI, the correction between the fund and the index is not perfect. According to the fund’s prospectus, the fund’s correction with ZWI is at least 95%. PHO has an expense ratio of 0.67% and yield 0.82%. As of February 28, 2007, the top 10 holdings of PHO are:

  • Itron Inc.
  • Nalco Holding Company
  • Insituform Technologies
  • Mueller Water Products Inc
  • Millipore Corp
  • Franklin Electric Co
  • Danaher Corporation
  • ITT Industries, Inc
  • Layne Christensen Co
  • Valmont Industries Inc

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Since inception, PHO has provided superior return for investors by outperforming S&P 500 index 6.5% in 2006.

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In addition to ZWI, there are three other water related indices, according to Investopedia:

  • ISE-B&S Water Index (HHO): HHO was introduced in January 2006 and currrently contains 20 stocks, including companies engaged in water distribution, water filtration, flow technology, and other water solutions.
  • Dow Jones US Water Index (DJUSWU): The index contains about 23 stocks.
  • S&P 1500 Water Utilities Index: Its a sub-sector of the S&P 1500 Utilities Index and has only two companies, American States Water (AWR) and Aqua America (WTR).

Alternatively, there are some water utilities companies that are worth a look. Top players in this area include:

  • Aqua America (WTR)
  • Southwest Water (SWWC)
  • California Water Service Group (CWT)
  • American States Water (AWR)

The 5-year relative performances of these stocks are shown in the following chart.

watercmp.png

Among them, Aqua America is available at ComputerShare for direct purchase with a minimum initial purchase of $500 and no setup fee. Additional purchases have a minimum of $50 and are also free of charge. The stock currently has a dividend yield of 2.0%.

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