Water ETFs Staying Afloat

October 03, 2008

 

Sector Differences Impacting Returns

Still, breaking down water ETFs by domestic and international weightings isn't always enough. For example, CGW's index has roughly a third of the emerging markets exposure as PIO's does.

Srikant Dash, who heads global research and design at S&P Index Services, points out that water firms in developing countries tend to be represented by utilities. As such, CGW's underlying index—which was created by S&P—avoids "loading up on emerging markets," he said.

The best-performing sectors in water recently have been treatment companies and resource managers. Not surprisingly, all of the water ETFs have double-digit exposures to those sectors. But FIW, in particular, had an oversized weighting with more than half its assets resource management heading into the second half of the year. 

Utilities is the biggest sector in the industry in terms of pure market-cap size, says Hoffman. But as long as utilities remain regulated, he doesn't see utilities as realizing their true market potential. As a result, utilities comprise about 10% in both PHO and PIO.

"Especially in the U.S., utilities face huge regulatory costs and don't get fully compensated. That's why infrastructure improvements are so needed and in demand. The rates haven't kept up with the replacement costs," Hoffmann said.

In PIO, treatment gets a weighting of 36% in its underlying benchmark; resource management is 26%; infrastructure is 13%. With PHO, treatment is about 20%, resource management is 25% and infrastructure is about 22%. 

FIW's outperformance this year has been even better than PHO's since it has more in the two areas doing the best. In treatment, it has about 20%, and in resource management, FIW holds roughly 54%. It has another 7% in infrastructure and 20% in utilities.

Utilities are more defensive investments by nature, notes Mark Abssy, a product development specialist at ISE, which created the index used by FIW. "Utilities typically are seen as producers of steady streams of income rather than huge growth rates," he said.

The ETF has about twice as much in utilities as PIO or PHO. On the other hand, the First Trust Water ETF invests less in big projects that could take more years to pay off than its competitors. 

Infrastructure includes very large projects that can take years to bring financial returns. "Infrastructure as a part of the water industry is a segment where you're looking for longer-term growth prospects," Abssy said.

 

Filtering Through Water ETFs (Key Sector Breakdowns In Underlying Indexes)*

ETF Symbol

Utilities

Treatment

Infrastructure

Resource Mgt.

Foreign

FIW

20%

20%

7%

54%

9.7%

PHO

10%

20%

22%

25%

8.9%

PIO

10%

36%

13%

26%

75.0%

CGW

19.13%

53.98%

16.1

10.7%

61.7%

Source: Companies                                                                                                                     *Through June 2008

 

This report was submitted by Murray Coleman of IndexUniverse.com.

 

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