Media headlines concerning climate change and the declining supplies of the world’s clean water have spawned an investment euphoria into water companies, utilities and the mutual funds that invest in them. Investment analysts have been forecasting that opportunities related to water in the 21st century could rival the same opportunities oil offered in the 20th century.
While researching data for this post, I compiled various statistics that make a compelling case for why the world’s thirst for water will generate a global call to invest and develop various systems and technologies to safeguard the availability of this precious resource.
There are a multitude of ways for long-term investors to participate in this industry. A simple conservative and diversified way to approach this sector is through three exchange traded funds (ETFs) that track the performance of the three major water sector indexes. These funds are a convenient way to invest for the long term while maintaining a mix among water companies that operate as utilities, manufacture pumps, plumbing, filters, irrigation systems, water treatment chemicals, or companies that develop desalination technology.
The three major water indexes and the ETFs that track them are:
Index – S&P Global Water Index
ETF – Claymore S&P Global Water Index, (CGW-AMEX) Price as of close 6/1/2007, $25.67
Performance & Fund Data
Index – Palisades Water Index
ETF – Powershares Water Resources Portfolio (PHO-AMEX) Price as of close 6/1/2007, $20.60
Performance & Fund Data
Index –ISE Water Index
ETF – First Trust ISE Water (FIW-AMEX) Price as of close 6/1/2007, $21.18
Performance & Fund Data
Investors should be aware that the statistics measuring the historical performance of these funds are limited, mainly because the Claymore and First Trust ETFs have just recently started trading. The first ETF of this group, the Powershares ETF, has been trading for more than a year and has had an impressive 18-month return of roughly 17.5% since the fund's inception date of 12/06/2005.
The Palisades Water Index, which the Powershares ETF tracks, has had an annualized 5-year return of over 15%, outperforming both the S&P500, which was up a little over 6% annually, and the Dow Jones Utility Average, which was up a little over 10% annually over the same period.
The three major water indexes all had 3-year annualized percentage returns in the mid 20 percent range. Not bad for investing in water.
Consolidation and M&A activity is picking up in this sector around the world. In the UK, for example, recent water company acquisitions and privatization of companies within this group has spurred a flurry of activity and has inflated stock prices in that market. It is only a matter of time before we see the same type of activity in this market and in water-rich nations such as Canada, Brazil, Russia and China.
For the more risk tolerant investor, there are many great individual stock stories in this group and it is my intention to keep readers up to date with follow up highlights of the best growth opportunities and trading strategies available in the group. For now though, if you are looking for goods reasons, here are some facts gathered from various sources:
In 2002 the World Health Organization reported that 1.1 billion people lacked access to improved water sources, which represented 17% of the global population.
Of the 1.1 billion without improved water sources, nearly two thirds live in Asia.
In sub-Saharan Africa, 42% of the population is still without improved water.
Between 2002 and 2015, the world’s population is expected to increase every year by 74.8 million people.
According to www.water.org:
• Of all water on earth, 97.5% is salt water, and of the remaining 2.5% fresh water, some 70% is frozen in the polar icecaps. The other 30% is mostly present as soil moisture or lies in underground aquifers. In the end, less than 1% of the world's fresh water (or about 0.007% of all water on earth) is readily accessible for direct human uses. It is found in lakes, rivers, reservoirs and in underground sources shallow enough to be tapped at affordable cost.
• If all the earth's water fit in a gallon jug, available fresh water would equal just over a tablespoon.
• A person can live about a month without food, but only about a week without water.
• The average American individual uses 100 to 176 gallons of water at home each day.
• The average African family uses about 5 gallons of water each day.
• More than 200 million hours are spent each day by women and female children to collect water from distant, often polluted sources.
• Approximately 60 to 70% of the rural population in the developing world have neither access to a safe and convenient source of water nor a satisfactory means of waste disposal.
• Water systems fail at a rate of 50% or higher.
• According to the UN, 20% of the world's population in 30 countries face water shortages. This number is expected to rise to 30% of the world's population in 50 countries in 2025.
• Some of the world's largest cities, including Beijing, Buenos Aires, Dhaka, Lima, and Mexico City, depend heavily on groundwater for their water supply. It is unlikely that dependence on aquifers, which take many years to recharge, will be sustainable.
• Every $1 invested in children, including money to improve access to clean water and sanitation, saved $7 in the cost of long-term public services.
The United Nations Educational, Scientific and Cultural Organization (UNESCO) World Water Development Report (WWDR, 2003) from its World Water Assessment Program indicates that, in the next 20 years, the quantity of water available to everyone is predicted to decrease by 30%. 40% of the world's inhabitants currently have insufficient fresh water for minimal hygiene.
Ref links:
World Health Org Info
http://www.water.org/resources/waterfacts.htm
http://en.wikipedia.org/wiki/Water
Disclosures and Confessions: I invest and trade all of the items mentioned in this post. Investors should consult their investment professional to determine if these items are suitable for their risk and investment objective profile.