"Water, water everywhere, nor any drop to drink."Samuel Taylor Coleridge's famous phrase describes life on the high seas 200 years ago. But it also applies to modern-day India and other places with regular shortages of water for drinking or agriculture. Even in the U.S., a safe, reliable water supply is not a given. Many of the water-treatment plants built in the 1970s are nearing the last days of their usefulness just as contaminants in water that were unknown 30 years ago become more prevalent. Over the past two months, three new exchange-traded funds focused on the water industry have hit the market, following on the success of the PowerShares Water Resources Portfolio ( PHO) 20 months ago. Water Resources, which holds only stocks that trade in the U.S., has over $2 billion in assets and is up 41% since its debut in December 2005. The fund is also fairly liquid, with average daily volume of about 683,000 shares. All three new funds focus on companies that provide potable water, water treatment and other technologies and services related to water consumption. Their returns have been promising during their short lives. "They've had stellar performances, and that has been getting people's attention," says Ron DeLegge, editor and publisher of ETFguide.com, a San Diego-based Web site focused on ETFs. "It fits into the whole discussion on alternative energy and environmental issues." The First Trust ISE Water Index Fund ( FIW) tracks a portfolio of domestic stocks similar to that of Water Resources. It's up 10% since it launched May 7 but hasn't gotten nearly as much traction as the original, with just $7.8 million in assets and an average daily volume of 17,000 shares. The Claymore S&P Global Water Index ( CGW) has returned 4% since its launch on May 14. It has $245 million in assets under management and average daily volume of 258,000. The ETF now allocates about two-thirds of assets to foreign companies, holding stocks from 16 countries. At the time of its launch, however, 78% of the portfolio was held in just four countries: the U.S., France (19.6%), Japan (16.4%) and the U.K. (14.2%). It tracks an S&P index of 50 stocks that ranks constituents according to their market capitalization as well as the percentage of revenue they derive from water.
The PowerShares Global Water Portfolio ( PIO) is up 9% since it debuted on June 13. With a month's less lead time, it has attracted just $85.5 million in assets, and average daily trading volume is about 194,000 shares. Of the 18 non-U.S. markets represented in the PowerShares ETF, Japan has the largest allocation at 11%. Nine of the other countries are in Western Europe, and after Canada a group of emerging markets such as South Korea, Brazil, Malaysia and Chile rounding out the list. The ETF tracks an index of 37 stocks that weights constituents more or less equally and is rebalanced quarterly. PowerShares Global Water and Claymore S&P Global Water both are made up companies from six sectors: water utilities, which provide water to end users; water-treatment companies; infrastructure companies, which make pipes, pumps and valves and build distribution systems for transporting water; analytical companies, which measure and monitor water conditions; resource-management companies, such as engineering and construction firms, which work with municipalities for the comprehensive management of water resources; and businesses that receive less than 50% of their revenue from water. While there is some crossover between their individual holdings, Claymore focuses on bigger companies, with 44% of its portfolio in large-capitalization stocks, 45% in mid-caps and just 11% in small-caps. The ratio is almost the reverse for PowerShares, with 48.6% in small-caps, 41% in mid-caps and 10% in large-cap. The expenses of the two funds are not far apart, with PowerShares charging 0.75% of assets and Claymore charging 0.65%. Both funds hold many of the same stocks, even if Claymore's holdings are more concentrated. French water utility Veolia Environnement ( VE) is the biggest holding of the Claymore ETF, accounting for 9.7% of assets; it also accounts for 3.8% of the PowerShares portfolio. Claymore's second-biggest holding is another French utility, Suez ( SZE), which comprises 9.3% of assets; it accounts for 1% of the PowerShares fund. PowerShares biggest holding is Valmont Industries ( VMI), at 4.4% of assets. Other stocks held by both funds include ITT ( ITT), an engineering firm based in White Plains, N.Y.; Danaher ( DHR) a Washington, D.C., maker of tools for analysis and other materials for the water industry; and Nalco Holdings, ( NLC), a provider of water-treatment services based in Naperville, Ill.