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TheStreet Open House

Water Funds Are Surging

Stocks in this article: XLI XLU CGW AWK JXI EMR PHO DHR CFWAX

NEW YORK ( TheStreet ) -- Wall Street periodically develops funds that target hot investment themes. In the 1950s, a television fund appeared. During the technology bubble of the 1990s, Internet funds were the rage. Most of the theme funds have vanished quickly. But a few have lasted for longer periods. Among the survivors are water ETFs, and they could prove to be winners.

The funds have been delivering solid results by investing in water utilities as well as producers of pumps, filters and wastewater treatments. During the past five years, First Trust ISE Water Index (FIW) returned 6.4% annually, compared to 5.0% for the S&P 500, according to Morningstar.

Critics scoff that the water funds are really mixes of utilities and industrial stocks, sectors that have performed well lately. That is true enough, but during the past five years, First Trust Water outdid both Industrial Select Sector SPDR (XLI) and Utilities Select Sector SPDR (XLU) by more than two percentage points.

Global water funds have also outperformed. During the past five years Guggenheim S&P Global Water (CGW) returned 2.9% annually, compared to 1.6% for the MSCI World benchmark and -3.6% for iShares S&P Global Utilities (JXI).



Managers of winning funds say the group has thrived because water companies have been growing faster than the overall economy. The portfolio companies of PowerShares Water Resources (PHO) have been increasing earnings at a 12. 1% annual rate. Managers say that the growth is poised to continue.

"Our companies should have earnings growth in the mid teens for the next two years," says Matt Sheldon, portfolio manager of Calvert Global Water (CFWAX), a mutual fund.

The earnings are likely to continue climbing in the U.S. because demand for water grows every year. Since many pipelines and pumping stations are ancient, municipalities and corporations must invest in new equipment. The U.S. Environmental Protection Agency estimates that the country will have to spend more than $300 billion on infrastructure in the next three decades to maintain the flow of water.

In many developing markets, the problems of water shortages are already acute. Countries such as China are spending heavily to support growing industrial and agricultural water uses. All that spells continuing demand for companies that provide equipment for desalination and filtration.

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