By Christian Magoon
CEO, Magoon Capital
"No one likes to take a cold shower in the dark," is a saying that has been used to illustrate the appeal of the business model behind utility stocks. It also is a saying that rings true if you have ever had the misfortune of taking an ice cold shower in the dark. The thought behind this adage is that some industries will have a consistent level of demand, despite economic conditions. Consequently these industries stand out as investments that can weather tough market conditions.
There are many ETFs that focus on industries indispensable to mankind - telecommunications, technology, agriculture, for example. An additional area is the water industry. No, we are not talking about bottled water companies, instead the focus is the businesses behind the treatment and delivery of clean water. This under-followed industry may be one of the most storm-proof market segments in the world.
WATER: IT CAN'T BE REPLACED
The only commodity there is no replacement for is water. The combination of being irreplaceable and essential to life may be why some refer to water as "blue gold." Yet water is something most residents in the United States take for granted. Globally however, water is a strained resource as world population growth continues, standards of living increase, and more people migrate to cities and stress water infrastructure. And while most of the U.S. may seem comfortable with its water supply, much of its underlying water infrastructure is in need of repair due to age. Thus several ETFs have been created to invest in the companies that provide the equipment, chemicals, infrastructure and technology to treat and deliver clean water. They include two groups of ETFs that differ primarily in their geographic focus. They are:
U.S. Focused Water ETFs
- First Trust ISE Water Index Fund (FIW)
- PowerShares Water Resources ETF (PHO)
Global Water ETFs
- PowerShares Global Water ETF (PIO)
- Guggenheim Water ETF (CGW)
The NASDAQ interactive chart below displays how these water ETFs have performed versus each other over the last two years and in relation to the SPDR Utilities ETF (XLU), which is a some what relevant benchmark.
So stepping back, has a water ETF been a good investment over the last two years compared to broad-based equities like the S&P 500 ETF (SPY) or the MSCI Emerging Markets ETF (EEM)? Let's take a look using, the two middle-performing water ETFs from above, PHO and CGW.
What we find is that the SPY ETF has been the best performing ETF of the group but the water ETFs - one domestic and one global - have delivered double digit returns too. This is opposed to EEM losing money over the last two years.
Water is becoming a commodity that is more strained everyday. Just 10 years ago many would never have believed that two bottles of water at a gas station could be more expensive than a gallon of gas. Water demand, delivery and treatment needs will only continue to escalate going forward. Thus water companies are well positioned for continued growth and appear to be a worthwhile compliment to an allocation designed to defend against market storms.