Water ETFs: A Rising Tide

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China's Water Pollution Problem

The water situation in emerging markets, where infrastructure needs are enormous, is particularly dire. For example, Brennan cites China, which has more than a fifth of the world's population, but only 7% of its fresh water supply. China's water is so polluted that less than 15% of the nation's population has access to safe drinking water. The Chinese government has committed more than $128 billion to water infrastructure spending over the next five years, but that may not be nearly enough.

As far as investors are concerned, water-related stocks are typically companies that are engaged in either the provision or treatment of potable water, or those companies involved in technology and services related to water consumption. The sector is somewhat loosely defined, but encompasses far more than just the water utilities that investors are already familiar with.

The Claymore water ETF tracks the S&P Global Water index, which is invested equally between two separate types of water-related businesses: water utilities and infrastructure, and water equipment and materials. The ETF has high geographic diversity—as of Apr. 30, it had 28% of its assets invested in U.S. stocks, 19.6% in France, 16.4% in Japan, and 14.2% in Britain.

An International Issue

PowerShares Capital Management recently introduced the PowerShares Global Water Portfolio (PIO), which complements its existing PowerShares Water Resources Portfolio (PHO). PHO, which has amassed more than $1.8 billion in assets since its December, 2005, launch, is based on the Palisades Water index. Almost 85% of its holdings are U.S.-based companies. As of June 15, PHO's top holdings included such names as Valmont Industries (VMI), which makes metal products used in irrigation; Tetra Tech (TTEK), an engineering consultant; and Veolia Environnement (VE), the French energy and water conglomerate.

PIO serves as an international variant of the PHO product—it has 35.9% exposure in the U.S., 10.6% in Japan, and 7.9% in Britain. "Water supply/scarcity is a much greater issue in other parts of the world," says Bruce Bond, president of PowerShares. "So we decided to broaden our exposure by entering international water companies."

Srikant Dash, S&P index strategist, expects to see more interest from investors for vehicles such as water ETFs. "As we look beyond traditional sector and regional boundaries to global investment themes, we see a lot of interest in such products," he says. "We recently launched the S&P Global Thematic Index Series based on such themes as clean energy, water, infrastructure, nuclear energy, etc. The S&P Global Water index is part of the series."

Ghosh is a reporter for Standard & Poor's Fund Advisor.