St. LOUIS () -- PowerShares Capital Management launched its second water exchange traded fund (ETF) on AMEX yesterday, PowerShares Global Water Portfolio, adding a global focus alongside its original domestic index. Although "blue gold" might not be as sexy as yellow gold, the fundamentals show the potential for very promising returns.
Different from PowerShares Water Resource ETF [AMEX:PHO], which launched in December 2005, PowerShares new global ETF Global Water Portfolio [AMEX:PIO] was developed to capitalize on the global market (see prospectus).
PIO tracks the Palisades Global Water Index [^PIIWI], a modified equal-dollar weighted index comprised of publicly traded global water companies listed on a major international stock exchange positioned to profit from the accelerating demand of growing world economies.
With 52 securities, the fund is heaviest in U.S. utilities at 35.90%, with Japan at 10.64%, the United Kingdom at 7.9%, Singapore at 6.19%, Canada at 4.91%, China at 4.47%, Austria at 3.97%, Germany at 3.88%, France at 3.20% and Finland at 3.05%.
The average stock price to earnings ratio is 21.89 with the average stock price to book value ratio at 3.75. Average market capitalization is about $9.1 billion.
Alternatively, PHO tracks the Palisades Water Index [^ZWI], a modified equal-dollar weighted stock market index that tracks the performance of companies listed in the U.S.
A spokesperson for PowerShares told RI that the main difference is that PIO has many components on foreign exchanges and will be driven much more by the industrialization of emerging global economies like China and India.
Bullish Fundamentals
Less than 2% of the world's water store is fresh water to quench the thirst of 6 billion people, and fewer than 10 countries possess 60% of the world's available fresh water supply.
Currently, 20% of the world's population - approximately 1.1 billion people - does not have access to an adequate supply of drinking water, and some 2.6 billion do not have access to basic sanitation.
Furthermore, water is the single-largest health problem in the entire world. According to the Stockholm International Water Institute, 90% of the 5,000 daily child deaths are related to some sort of diarrhea-related disease. Water-borne diseases kill one child every 8 seconds.
By 2025 it is estimated that one-third of the world's population will not have access to adequate drinking water. By 2050, more than 4 billion people - nearly half the world's total population - are expected to live in countries that are chronically short of water. Among them: China and India.
The U.N. has identified China as one of the 13 countries with the lowest water per capita in the world, with a good chunk of China's population in the dry northern regions.
China makes up 21% of the world's population, but possesses only 7% of the renewable water resources. China's per capita water reserves are only about a forth of the global average. Of China's 669 cities, 440 suffer water shortages, and 110 of these cities are considered to have reached the critical level.
Most of China's cities have no centralized sewage treatment facilities, and half of the rivers and lakes and one-third of the aquifers are classified as polluted. The Yangtze River absorbs nearly half of the country's untreated waste water.
India is in no better shape. The World Bank has warned that conflicts caused by severe water shortages could plague India in the coming decades as rivers dry up, groundwater is depleted and canals are polluted.
Demand for water is increasing rapidly because of India's growing population - already above 1 billion. The report predicted that availability of surface and ground water would decline to less than 80 cubic kilometres in 2050, from about 500 cubic kilometres now.
About 15% of the country's aquifers are already in critical condition, a number that could increase to 60% by 2030, according to the World Bank.
Water Stock Performance
According to Thomas C. Bell, President and Publisher of the Water Investment Newsletter, an investment of $1,000 in water utility stocks at the end of 1981 became $39,980 at the end of 2001. This is the result of returns of 20.25% compounded for 20 years.
During the same time period, $1,000 invested in the S&P 500 grew to $17,004. Likewise, $1,000 invested in gold after the 1980 sell-off gave no return with the price fluctuating in a range of $200-$300 for 20 years.
"Despite this history, [water] stocks remain unrecognized by most investors and water utilities continue to sell at moderate valuations. Stock prices remain generally below the average price that consolidators have been willing to pay for water utility assets in recent years," said Bell.
PHO had a 34% gain last year, and is so far up 10% this year. Last year, the S&P gained 15.8% while gold gained 24%. The table below shows how water utility stocks have clearly outperformed the major indices over the past 5 and 10 year periods.
Source: Summit Global Management, Inc.
In a report by Summit Global Management, Inc., manager of the Summit Water Equity Fund, authors John Dickerson and Rob Anfuso note that U.S. water utilities have generally been the largest core investment group for most water investment portfolios "for the simple reason that they have been a leading stock market performer for many years."
However, the authors chart the performance of the U.S. water utilities as compared with there international peers. Foreign companies easily beat their U.S. counterparts by a wide margin on total returns and stock appreciation over the three year period ending December 31, 2006.
Source: Summit Global Management, Inc.
"The global water industry combines the best underlying business model with the most inexorable demand future of any existent industry, and this fundamental fact is not likely to change. Choosing the best stocks from within this select universe further enhances return potential," wrote Dickerson and Anfuso.
Another option could be the Claymore S&P Global Water Index ETF [AMEX:CGW], which launched in mid-May as the world's first global water ETF. This ETF tracks an index that is distributed equally between water utilities and infrastructure, and water equipment and materials.
Share Price Info
After opening at $20.43 yesterday, PIO gained 27 cents. Today, shares have gained another 50 cents to close at $25.20. PHO closed up 36 cents at $20.55.
CGW is up 42 cents at $25.24 since its launch one month ago.
