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Water Funds Are Surging

Growing demand has helped water stocks lately. During the past 12 months, PowerShares Water Resources returned 16.5%, compared to 13% for the S&P 500. The revival of U.S. housing markets has provided a special boost. With construction starts increasing, there are more customers for water utilities as well as increasing demand for pipes and pumps.

The water ETFs track a variety of different benchmarks. Some funds only hold companies that derive most revenues from water industries, while other portfolios include companies that obtain a minority of their revenue from the water business.

PowerShares Water Resources tracks the Nasdaq OMX U.S. Water Index, which only includes 28 companies that derive most of their revenue from water. The fund has about 20% of assets in utilities and most of the rest in machinery makers and other industrial companies.

A steady utility holding is American Water Works (AWK), which supplies water and wastewater treatment in 16 states. An industrial holding is Pentair (PNR), which makes pumps and valves.

While it also owns American Water Works, First Trust ISE holds some industrial companies that only derive part of their revenues from water. A top holding is Emerson Electric (EMR), a blue-chip industrial company that serves a variety of industries. Emerson has a long history of annual dividend increases and fat profit margins. Such reliable performers have enabled First Trust to prove relatively steady in downturns.

Guggenheim S&P Global Water has 37% of assets in the U.S. and the rest in overseas markets, including big stakes in the UK, Switzerland, and Brazil. The fund has 50 stocks, with half the holdings in utilities, and the rest in industrials. The fund holds some stocks that only get a minority of their revenue from water. A holding is Danaher (DHR), which makes systems for analyzing water quality.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.
Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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