Water ETFs To Quench A Summer Drought

One of the most abundant and precious commodities on earth is water.  

Despite its ubiquity in the United States, many third world countries and dry climates continually struggle to protect this life-sustaining asset.  In the summer months, when drought conditions worsen, water infrastructure becomes a top priority that must be kept flowing.  

Fortunately, many publicly traded companies are involved in the service, distribution, engineering, and general utility infrastructure of the water industry.  These stocks are easily accessible in several diversified exchange-traded funds that offer investors both domestic and global exposure.

The PowerShares Water Resources Portfolio (PHO) is the largest ETF in this space, with more than $1 billion in assets under management.  PHO invests in 29 individual water companies across a variety of industry sub-specialties.

Despite its dominant size, PHO has struggled to make significant headway in 2014.  So far this year, this ETF has only gained 1.66 percent and struggled to maintain an upward bias.  However, several competing funds with more diversified portfolios have seen much stronger returns.  

The Guggenheim S&P Global Water ETF (CGW) and PowerShares Global Water Portfolio (PIO) have notched gains of 9.22 and 7.73 percent, respectively this year.  

CGW invests in 50 companies selected by the S&P Global Water Index according to industry classification, while PIO own 37 stocks in the NASDAQ OMX Global Water Index.  

The United States is the top country weighting in both global ETF portfolios.  However, overseas exposure to companies in France, Switzerland, and the United Kingdom has been a key contributor to this recent outperformance.  

In addition, both of these ETFs carry more direct exposure to the utility sector, which has been the top performing area of the market this year.  

The biggest risk to this upward momentum is a slowdown in global growth that could cap expansion of water assets in hard to reach areas of the world.  However, these water ETFs may ultimately continue to strengthen based on the fundamental demand story and a strong equity market tailwind pushing prices higher.  

For now, the rally is flowing in earnest.