Published April 12, 2012
Water makes up approximately 70% of an adult’s body and covers nearly three-fourths of the earth’s surface, yet there’s fear of a worldwide shortage.
Water may be everywhere you turn, but only 3% of the Earth’s water is fresh, and the fact of the matter is, the world’s supply of fresh water is running out.
Much of the increase in demand is due to rapid global population growth. Approximately 1.1 billion people lack access to safe drinking water, and according to the International Water Management Institute, withdraws are predicted to increase by 50% by 2025 in developing countries and 18% in developed countries.
As the global population grows and emerging markets thrive, fund managers are turning the potential water crisis into investment opportunities.
Perhaps the “easiest” way to invest in water is through exchange-traded funds. And since getting pure exposure to water is difficult, fund managers are buying into firms focused on the infrastructure, filtration, desalinization and consumption of water.
Currently there are four water-based U.S.-listed exchange-traded funds, accounting for more than $1.3 billion in total assets, according to Morningstar. The four ETFs can be divided into U.S. and global focused options, aimed at capitalizing on the growing supply gap for the valuable resource.
The category’s international plays are PowerShares Global Water (PIO) and Guggenheim S&P Global Water (CGW), both containing less than 40% of their portfolios in U.S.-listed companies. PIO, the most expensive of the four water-focused ETFs, is the stronger performer of the two funds, up 10.39% since January 1st. But CGW is not far behind, up 8.64%.
PIO has a 39% weighting in industrials and a 35% weighting in utilities, while CGW has a 42% weighting in industrials and a 35% weighting in utilities.
The U.S. focused options are First Trust ISE Water Index (FIW) and PowerShares Water Resources (PHO), with more than 90% of both portfolios comprised of U.S. stock. FIW, the smallest of the four water-related funds, is up 10.09% so far this year. PHO is up 9.14% and by far the largest of the funds, accounting for more than 60% of total assets.
FIW and PHO both have an expense ratio of 60 basis points and heavy weightings in industrials and utilities.
As fear over the scarcity of water grows, prices will likely rise, and it’s providing investors the opportunity to profit from a resource we cannot live without.