Water ETFs: Night and Day Differences in the Investment Returns

By Gary Gordon | August 20, 2008 | 3:25 PM | 1 Comment

I've been a big time advocate for infrastructure, and water has been one of my preferred avenues. In particular, I've been discussing the merits of the PowerShares Water Resources Portfolio (NYSE: PHO) for quite some time.

(See my earlier commentary on the this water ETF as an infrastructure investment.)

Yet Trang Ho's recent "water ETF" feature for Investor's Business Daily confirmed what I'd been tracking for quite some time; that is, there are 2 popular water ETFs and each has traveled very different roads.

Different investments, different roads... what's the problem? The problem is that each has a name that is designed to capture a sub-segment of the utility/infrastructure sector, yet one is gaining handsomely and one is floundering. In contrast, whether you get the Vanguard Large Cap ETF (NYSE: VV) or the S&P 500 Trust (NYSE: SPY), you get nearly identical price patterns.

Until May of this year, the Claymore S&P Global Water Index (NYSE: CGW) could have served as a proxy for the more popular PowerShares Water Resources Portfolio (PHO). Then... something changed.

What changed? More than anything else, the U.S. dollar began to strengthen against foreign currencies and international stocks fell harder than domestic stocks. Even as U.S. stocks have had a bit of a late-July/early August rally, international stocks have not been as fortunate.

And herein lies the first explanation for the woes of Claymore's S&P Global Water Index (CGW). Simply stated, CGW has a more global presence than the PowerShares Water Resources Portfolio (PHO). The Claymore S&P Global Water Index (CGW) has roughly a 1/3 weighting to U.S. companies and a 2/3 weighting to foreign companies. Meanwhile, the PowerShares Water Resources Portfolio (PHO) certainly has a number of foreign companies in the mix, but PHO may be 70%+ concentrated in the U.S.

There's still one more reason for the PowerShares Water Resources Portfolio (PHO) dominance. This water ETF tracks an equal-weighted index. This gives small- and mid-sized companies a larger effect on the investment outcome... and small has been beautiful lately. In contrast, the S&P Global Water Index (CGW) follows the more traditional market-cap weighted approach such that... larger companies are going to make the bigger splash.

Long-term, many observers believe that the S&P Global Water Index (CGW) is a better vehicle for capturing water trends. Others simply feel that a greater international presence makes more sense.

However, at least in the short term, PowerShares Water Resources Portfolio (PHO) has a distinct edge. It's got more than that, in fact. It's got gains in 2008.

 

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