Pollution, Aged Pipes Pump Up Water ETFs

October 18, 2013

Increasingly scarce clean water is translating into gains for water-related ETFs.

Rising domestic and global demand for clean water is putting into motion infrastructure improvements both at home and abroad, and ETFs currently betting on water-related companies are getting a nice lift in their portfolios.

Two U.S.-focused water ETFs—the $158.1 million First Trust ISE Water Index Fund (FIW | B-46) and the $926.21 million PowerShares Water Resource Portfolio (PHO | B-50)—are up 21.03 percent and 15.34 percent year-to-date, respectively, according to data compiled by IndexUniverse.


Only 3 percent of all water on Earth is fresh, and most of that is locked away in the form of ice caps and glaciers located in the polar regions, according to the World Wildlife Fund. The increasing need for fresh water is forcing government agencies such as the U.S. Environmental Protection Agency to call for major upgrades in the nation’s water infrastructure.

In June, the EPA released results of a survey showing that $384 billion in improvements are needed for the nation’s drinking water infrastructure through 2030 for systems to continue providing safe drinking water to 297 million Americans.

“The survey EPA released today shows that the nation’s water systems have entered a rehabilitation and replacement era in which much of the existing infrastructure has reached or is approaching the end of its useful life,” said EPA Acting Administrator Bob Perciasepe in a press release.

FIW and PHO, the two water-focused funds, have exposure to companies that make pumps and water filters such as the Gorman-Rupp Company, Watts Water Technology and Flowserve Corp.

Polluted China

On the international front, the Chinese demand for clean water and the opportunities that presents for companies with global reach continues to play itself out.

That’s because as much as 70 percent of Chinese rivers and lakes are polluted from industrial facilities like chemical and textile plants, according to a report published in March in the South China Morning Post.

The report also said that 90 percent of Chinese cities are connected to polluted groundwater supplies. Additionally, groundwater in two-thirds of those cities is considered “severely polluted,” according to the report, which cited recent findings by the China Geological Survey.

A few globally focused ETFs targeting water exist to give investors a chance to play the cleaning up of water in China and elsewhere around the planet.

They are the Guggenheim S&P Global Water ETF (CGW | B-100) and the PowerShares Global Water Portfolio (PIO | B-75), which are up 15.94 percent and 19.96 percent, respectively, year-to-date.


Both funds have exposure to Veolia Environnement, an international water, waste and energy management concern based in France. The company’s operations extend to China, where it has long-term contracts spanning 20-50 years to produce and maintain clean water for Shanghai’s Pudong business district and other provincial capitals such as Kunming, Lanzhou and Haikou, according to its website.

Veolia’s American depositary receipts are up 51.71 percent year-to-date on the New York Stock Exchange.

“China is going to be spending a ton of money upgrading its water infrastructure,” said Dennis Hudachek, an analyst at IndexUniverse. “The Chinese government is using a hodgepodge of multinational companies, so it’s not only Chinese companies.”

Charts courtesy of StockCharts.com


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