Should Water Find a Place in Your Portfolio?

I came across an article on MarketWatch today, which named CIBC Water Growth Deposit Notes the Stupid Investment of the Week. While the article’s main focus is on the CIBC notes, which are issued in the form of principal-protected certificates and the money raised will be invested in water companies, it does make me think whether water, as a natural resource, should be part of an investment portfolio.

Back in August, I read another article about global water shortage on BBC News. The main message of that article was that water shortage, which is usually seen as a developing country problem, now posses a threat to both rich and poor countries alike. Early this year another article on MarketWatch talked about how water as a precious commodity is compared to oil, which everybody believes we will run out of someday. Water, on the other hand, seems to be every where and easy to get. To get an idea of how water as an investment choice may be more appealing than it looks, the article presented some interesting numbers. For example,

  • Only about 1% of the water on earth is suitable for consumption.
  • U.S. consumed about 408 billion gallons of water per day in 2000. In April 2006, the daily demand of gallons is about 382.2 million gallons.

However, despite its precious status, water won’t be treated as preciously as oil. When you have a truck load of oil, it represents wealth to you. On the other hand, a tank of water isn’t likely to bring you much profit, if any at all. A worldwide shortage of water doesn’t necessarily mean that we will run out of water before we run out of oil. At present time, water isn’t traded as a commodity as oil. To change that, according to the MarketWatch article, we need to see some sort of crisis like the oil embargo in the 70s.

Currently, my water play is the Powershares Water Resources ETF (PHO), which tracks the Palisades Water Index. Year-to-date, PHO has a return of 17.10%, compared to S&P’s 12.2%. PHO, despite its performance, has an expense ratio of 0.67% on top of the commission you pay for trading it through brokers.

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