Market Overview

Say 'Happy World Water Day' With These ETFs

World Water Day was actually celebrated last Friday, but 2013 is, in some circles, being dubbed the year of international water cooperation. It is not surprising that more attention is being paid to water infrastructure and the water investment thesis.

Last week, the American Society of Civil Engineers released a report in which graded the U.S. water infrastructure system "D," up only slightly from the "D-" the organization levied a few years ago.

"The ASCE's Failure to Act series (2011-2013), water/wastewater infrastructure needs are estimated at $126 billion by 2020, but funding is projected at only $42 billion, leaving a gap of $84 billion," according to S&P Capital IQ. "There are estimated to be between 700,000 and 800,000 miles of public sewer mains in the U.S., and over one million miles of drinking water systems, with many of these pipes well over 100 years old, meaning they are either past or nearing the end of their useful life."

Escalating water needs in the U.S. and throughout the world could spell opportunities in this sub-sector for investors, and there are several ETFs with which to play that trend. However, S&P Capital IQ is tepid on these funds.

The research firm has an Underweight rating on the Guggenheim S&P Global Water Index Fund (NYSE: CGW). CGW carries an overall Underweight ETF ranking, largely reflecting an Underweight ranking for performance analytics, said S&P.

CGW is home to 51 stocks and $228.6 million in assets under management. The ETF does make good on the implication that it is a global fund as U.S.-based companies represent just 37.5 percent of the ETF's weight. The U.K. accounts for 19 percent of CGW's country weight with Switzerland garnering an allocation of just over eight percent. CGW is up about seven percent year-to-date and carries a beta of 0.89 against the S&P 500, according to Guggenheim data.

S&P Capital IQ is a bit more enthusiastic about the First Trust ISE Water Index Fund (NYSE: FIW), which it rates Marketweight. The $108 million ETF is home to 37 stocks with top holdings including Flowserve (NYSE: FLS) and Pall (NYSE: PLL).

FIW's median market cap is just over $2.2 billion, implying a bit of a small-cap bias, but that has worked in favor of the ETF this year as it is up more than 10 percent. The rub is that FIW has a beta of 1.12 and a three-year standard deviation that is nearly 300 basis points higher than that of the Russell 3000 Index, according to First Trust data.

S&P also has a Marketweight rating on the PowerShares Water Resources Portfolio (NYSE: PHO), by far the largest water ETF with nearly $925 million in assets. Only 3.6 percent of PHO's lineup is devoted to large-caps with small-caps accounting for over 43 percent. PHO, which celebrate its eighth birthday later this year, is up about 11 percent year-to-date.

While the ratings on these ETFs are not jaw-dropping, S&P does point out some favorable long-term trends.

"Meanwhile, the cost of water continues to rise, as budget-strapped municipalities pass the costs for upgrades and repairs on to consumers," said the research firm. "However, water reuse is growing in popularity for irrigation and other uses that don't really require the same costly treatment as for potable water. More municipalities are seeking reuse and desalination projects, as technology continues to become more cost efficient. Thus, we think long-term prospects are very favorable for flow control and filtration related water treatment companies."

The $210 million The PowerShares Global Water Portfolio (NYSE: PIO) was not mentioned in the S&P note. At the country level, PIO is somewhat comparable to CGW, the aforementioned Guggenheim ETF. PIO allocates a little more than 40 percent of its weight to U.S. stocks with the U.K. and France combining for more than 31 percent of the fund's weight.

PIO was up 6.6 percent year-to-date heading into Monday's session. The ETF is more expensive than its domestic counterpart with annual fees of 0.75 percent compared to 0.62 percent for PHO.

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