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2012-11-23 14:20:28
July 17 2011| Filed Under 401K, ETFs, Mutual Funds, Portfolio Management
The Palisades Water Index is an unmanaged benchmark that many water indexes and
ETFs track. Why the interest in water? Like gold and oil, water is a commodity
- and it happens to be rather scarce.
Tutorial: Commodity Investing 101
Global Water Resources
About 70% of the earth's surface is covered in water, but 97% of it is
saltwater, which is unfit for human use. Saltwater cannot be used for drinking,
crop irrigation or most industrial uses. Of the remaining 3% of the world's
water resources, only about 1% is readily available for human consumption.
Global Shortage
Rapid industrialization and increasing agricultural use have contributed to
worldwide water shortages. Areas that have experienced water shortages include
China, Egypt, India, Israel, Pakistan, Mexico, parts of Africa and the United
States (Colorado, California, Las Vegas and the East Coast), to name but a few.
Pollution also highlights the need for clean water. In the U.S., the dead zone
off the Gulf Coast highlights the impact of fertilizer runoff, and methyl
tertiary butyl ether (MTBE), an additive in unleaded gasoline, can be found in
well water from California to Maryland. Overseas, highly publicized incidents
in Russia, China and elsewhere demonstrate that pollution isn't limited to the
West. Of course, fouled water supplies further limit the amount of fresh water
available for human use.
Indexes
Like any other scarcity, the water shortage creates investment opportunities.
Here are some of the more popular indexes designed to track various
water-related investment opportunities:
Palisades Water Index - This index was designed to track the performance of
companies involved in the global water industry, including pump and filter
manufacturers, water utilities and irrigation equipment manufacturers. The
index was set at 1000 as of December 31, 2003 and not even 10 years later is
has fluctuated around the 2,000 mark.
Dow Jones U.S. Water Index - Composed of approximately 29 stocks, this
barometer is comprised of a large number of international and domestic
companies which are affiliated with the water business and have a minimum
market capitalization of $150 million.
ISE-B&S Water Index - Launched in January 2006, this index represents water
distribution, water filtration, flow technology and other companies that
specialize in water-related solutions. It contains over 35 stocks.
S&P 1500 Water Utilities Index - A sub-sector of the Standard & Poor's 1500
Utilities Index, this index is composed of just two companies, American States
Water (NYSE:AWR) and Aqua America (NYSE: WTR) .
The Bloomberg World Water Index and the MSCI World Water Index provide a look
at the water industry from an international perspective, although it can be
rather difficult to find current information about either index. There are also
a variety of utility indexes that include some water stocks. (For further
reading, see Indexes: The Good, The Bad And The Ugly.)
Investment Opportunities
A look at the holdings of any of the water indexes provides an easy way to
begin your search for suitable investments. Companies from blue chip stalwart
General Electric to small cap Layne Christensen are all seeking a piece of the
water market. In addition to direct stock purchases, some of the larger firms
offer dividend reinvestment plans. Firms seeking to profit from water-related
businesses include beverage providers, utilities, water treatment/purification
firms and equipment makers, such as those that provide pumps, valves and
desalination units.
When it comes to bottled water, the market is growing internationally. Demand
is on the rise from China to Mexico, following in the footsteps of the spike in
U.S. consumer demand. Estimates suggest that within the last ten years American
per-capita consumption of bottled water has doubled - the average American
drinks approximately 200 bottles of water a years. On the desalination front,
some 100 countries currently rely on desalination for at least part of their
freshwater consumption needs.
If stock picking doesn't interest you, ETFs, mutual funds and unit investment
trusts (UITs) also provide plenty of opportunities to invest in water. The
PowerShares Water Resource ETF, mentioned earlier, tracks the Palisades Water
Index, and the iShares Dow Jones U.S. Utilities Index ETF (ARCA:IDU) provides
some exposure to water-related stocks. The largest water ETF is currently
PowerShares Water Resources Portfolio (NYSE:PHO) but other new alternatives
such as the PowerShares Global Water Portfolio ETF (NYSE:PIO) and the First
Trust ISE Water Index Fund (NYSE:FIW) are also available. Based on popularity,
new alternatives are slowly emerging.(To learn more, see Introduction To
Exchange-Traded Funds.)
Additionally, two unit investment trusts that specialize in water-related
investments are the Claymore-Boenning & Scattergood Global Water Equities UIT
and the Claymore-Boenning & Scattergood U.S. Water Equities portfolio.
Conclusion
Recent years have seen an upswing in the demand for investments that seek to
profit from the need for fresh, clean water. If the trend continues, and by all
indications it will, investors can expect to see a host of new investments that
provide exposure to this precious commodity and to the firms that deliver it to
the marketplace. There are currently numerous ways to add water exposure to
your portfolio - most simply require a bit of research.
Just as with any other investment in commodities or sector funds, wise
investors should limit their exposure to water. Generally speaking, highly
concentrated investments such as these should not represent more than 10% of
the assets in a well-diversified portfolio. Limiting exposure to concentrated
positions provides some opportunity to capture positive returns while limiting
overall portfolio volatility.
by James E. McWhinney
James McWhinney has been a professional writer for nearly two decades. He has
worked for many of the nation's top mutual fund providers and banks in addition
to numerous magazines, websites and other publications. He specializes in
financial services and travel.