New ETF Makes a Big Splash in Water

According to the World Resources Institute, global water consumption grew at twice the rate of the population during the 20th century.

Hydrogen Ventures estimates that $660 billion will be needed for water infrastructure in the next 20 years.

There's a variety of companies seeking to capitalize on this potentially lucrative water theme, from $376 billion market-cap behemoths like General Electric(GE) to $290 million micro-caps like Layne Christensen(LAYN). The challenge for investors is that GE's water business is a long way from having a meaningful impact on the entire company, and one little misstep from a micro-cap like Layne could result in a major blowup.

Seeing the potential for the water sector, PowerShares has contracted to create the PowerShares Water Resources Portfolio(PHO), a new exchange-traded fund that is based on the Palisades Water Index (ZWI). PHO is scheduled to list and begin trading on the American Stock Exchange on Dec. 6 (today).

To evaluate this ETF, I plugged its components into Morningstar's portfolio tracker. PHO has a median market cap of $1.6 billion, which isn't that surprising given that 40% of the fund is small-cap growth and 24% is small-cap value. Earnings for the inaugural version of the portfolio are expected to grow 12% faster than the S&P 500.

PHO does have a few mega-cap conglomerates in the mix, including GE, 3M (MMM) and Siemens (SI), but those three have only 0.80% respective weightings. PHO is heaviest in the industrial sector, 49%, and utilities, 33%.

Morningstar places the portfolio's yield at 1.5%, and PowerShares has capped the expense at 0.60%, which implies a yield of 0.90%. However, this is my calculation only, and PowerShares has not announced a dividend.

Palisades Water Index (ZWI) and iShares Russell 2000 (IWM) Tight correlation

Source: Your Source Financial

The above chart goes as far back I could find. It's no surprise that the underlying Palisades Water Index (ZWI) has a tight correlation to the small-cap sector as measured by iShares Russell 2000 Index Fund (IWM). But what might be surprising, according to the PowerShares literature, is that ZWI's beta (a measure of volatility in which 1.0 equals the S&P 500) is 0.68, comparing favorably to IWM's beta of 1.29.