A Surprise Among Utilities ETFs

After spending a good part of this year as the best performing sector, utilities have been sapped by concerns that the Federal Reserve is finally nearing its first interest rate hike of 2016 and that defensive stocks are richly valued.

Many good things come to an end, and while it is still in the speculative stages, there are signs investors are tiring of the low beta love affair. That could also mean equity markets are pricing in an interest rate hike the Treasury market is not yet acknowledging.

In fact, the Utilities SPDR (ETF) XLU is no longer this year's best performing utilities exchange-traded fund. The same can be said of XLU's nearest rivals. This year's top utilities ETF is the First Trust ISE Water Index Fund (ETF) FIW, one of several dedicated water ETFs on the market today.

Making A Splash

Escalating water needs in the United States and throughout the world could spell opportunities in this sub-sector for investors.

"Meanwhile, the cost of water continues to rise, as budget-strapped municipalities pass the costs for upgrades and repairs on to consumers," according to S&P Capital IQ.

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"However, water reuse is growing in popularity for irrigation and other uses that don't really require the same costly treatment as for potable water. More municipalities are seeking reuse and desalination projects, as technology continues to become more cost efficient. Thus, we think long-term prospects are very favorable for flow control and filtration related water treatment companies."

Diving Into FIW

FIW tracks the ISE Water Index, which “begins by establishing the total population of stocks in the potable and wastewater industry and eliminates stocks which do not meet the Index’s baseline eligibility requirements,” according to Illinois-based First Trust.

Year-to-date, FIW is up 21.9 percent, an advantage of 700 basis points over XLU. FIW is home to 35 stocks, none of which exceeds an allocation of 4.8 percent.

“Water/wastewater infrastructure needs are estimated at $126 billion by 2020, but funding is projected at only $42 billion, leaving a gap of $84 billion," according to S&P Capital IQ. "There are estimated to be between 700,000 and 800,000 miles of public sewer mains in the U.S., and over one million miles of drinking water systems, with many of these pipes well over 100 years old, meaning they are either past or nearing the end of their useful life,” added S&P Capital IQ.

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