How To Play The Coming Water Boom

November 09, 2010

The four water ETFs may all look the same from the outside—but which one makes the most sense for your portfolio right now?


Water: It's the most precious commodity on Earth, without which we or any other species couldn't survive. Yet as the human population expands, safe, accessible sources of potable water have become increasingly difficult to find. So it doesn't take a market whiz to realize that "blue gold" could become the world's next great commodity market.

While we're still a long way from water futures, water sector equities are freely available, and these days investors have more options than ever to play the space. For my money, however, exchange-traded funds are my investment of choice, as they offer access to a range of (pardon the pun) liquid water stocks all at once.

There are currently four water-related equities ETFs that trade on U.S.-based exchanges. From an outsider's view, it would be natural to assume all four ETFs are similar and that choosing the right one is not that important. In reality, however, the four ETFs are very different from each other, making it critical to analyze each fund thoroughly.


Wading Through The Water ETFs

The original water ETF is the PowerShares Water Resources ETF (NYSEArca: PHO), which began trading in late 2005. The ETF is composed of 32 water-related stocks, all of which trade in the U.S.  The fund's allocation is overwhelmingly in the industrial sector, at 78 percent, with a specific focus on water infrastructure stocks, like water treatment plants and irrigation pump manufacturers.

Even though PHO only invests in stocks that trade in the U.S., it does possess small exposure to companies based overseas. For example, the No. 2 holding, Veolia Environnement (NYSE: VE), the world's largest water utility, is based in France.

PHO's expense ratio is 0.60 percent and it has a 12-month yield of 0.56 percent.  Over the past year, the fund is up 11.72 percent.

Launched in 2007, the PowerShares Global Water ETF (NYSEArca: PIO) takes a similar approach as PHO, except it broadens its reach to a global scale. With 29 stocks in its portfolio, PIO allocates 29 percent to the U.S., followed by Japan and the U.K., at 11 percent each.

At 35 percent, PIO also offers a larger focus on water utilities than PHO (of which utilities make up a mere 12 percent). At the same time, industrials only comprise 49 percent—which is less than PHO, but still a significant portion.

PIO carries a 12-month yield of 1.32 percent. The expense ratio is slightly higher than PHO's, at 0.75 percent, while its one-year returns are slightly lower, at 10.69 percent.

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