Water-related ETFs and Mutual Funds

We identified four ETFs and two actively managed mutual funds with water-related investing themes.

PowerShares’ Water Resource Portfolio (PHO) is the largest of the four ETFs, with a $2.3 billion market value, and tracks the Palisades Water Index, “a group of companies that focus on the provision of potable water, the treatment of water, and the technology and services that are directly related to water consumption.”  About three-quarters of the fund is invested in industrial stocks related to the water industry, and the fund is classified by Morningstar as mid-cap growth.   It has an expense ratio of 0.64%.  PHO is the only water-related fund with significant holdings among the Most Popular Funds in the Advisor Perspectives universe.  It is held in 45 accounts by 26 advisors and ranks 383rd among US equity funds, and 36th among mid-cap blend funds. 

First Trust’s ISE Water Index (FIW) has a $43 million market value and tracks the ISE Water Index, a “modified market capitalization-weighted index comprised of exchange-listed companies that derive a substantial portion of their revenues from the potable and wastewater industry.”  About 63% of the fund is in industrials and 23% in utilities.  It is classified by Morningstar as small cap growth.  Claymore S&P’s Global Water Index (CGW) has a $358 million market value, and tracks the S&P Global Water Index.  It has a 42% exposure to industrials and 34% to utilities.  It is classified by Morningstar as mid-cap blend and has an expense ratio of 0.72%.

PowererShares has a new water-related ETF, the PowerShares Global Water (PIO), which has a market value of $382 million and an expense ratio of 0.75%.  It is based on the Palisades Global Water Index.

The Kinetics Water Infrastructure fund (KWINX) is a small cap blend actively managed mutual fund with a $26 million market value, currently holding 22.5% in cash, and approximately 40% of the invested portfolio in industrial materials and 33% in utilities.  It has an expense ratio of 1.74%.  Its charter is to invest in securities in the water infrastructure and natural resource sector globally, and it is sub-advised by Aqua Terra Asset Management, a three year old firm specializing in water-related investing.

The PFW Water fund (PFWAX) is an $18 million mid-cap growth actively managed mutual fund targeting water-related infrastructure.  It has 48% of the portfolio invested in industrial materials, 20% in utilities, and 12% in healthcare.  It has an expense ratio of 1.51%.  This fund has a track record of nearly 10 years, but for most of its history it was a traditional growth fund.  It was restructured in June of 2008 as a water-based fund.

Advisors considering these funds face one common issue.  Most companies focused on water-related technologies are small-cap companies.  Large and mid-cap companies, and even many small cap companies, may operate water-related businesses and qualify for investment in these funds, but these businesses are a relatively small part of their portfolio.  For example, ITT is a large holding in a number of these funds’ portfolios, yet water-related businesses account for only 39% of the ITT’s revenues.  As a result, these funds must either be positioned as small cap (to be purely focused on water) or be positioned as mid cap and be exposed to non-water-related industries.

Another consideration is the portfolio’s exposure to industrials versus utilities.  Water utilities may offer a direct exposure to water as a commodity, but these are often regulated industries and offer very different risk/return profiles than private industries.  Industries that are developing new technologies for water purification and delivery, especially those targeted to large infrastructure projects, are at the other extreme of the risk/return tradeoff.

Despite the substantial investment required for water-related infrastructure in the coming years, advisors must determine whether the risk and return characteristics of this sector are appealing, relative to other alternatives.  It is likely that this investment will be independent of business cycles (water infrastructure will be needed regardless of the stage of the business cycle).  However, the absolute size of water infrastructure projects does not constitute a sufficient reason for investment.  Many of these projects will be controlled by public utilities and may face significant regulatory hurdles.

The lack of at least three years of historical returns is insufficient to gauge the track record of these funds.  Advisors considering these funds will need to perform a level of diligence that will extend to understanding the major constituents of the fund and the manner and extent to which each company derives revenues from water-related opportunities.  In the case of the ETFs, advisors will need to understand how the underlying index is constituted and rebalanced, and the criteria for inclusion in the index.

Katie Southwick is an intern working for Advisor Perspectives this summer.

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