Can NASDAQ Create More Interest in Water Investing? (GE, MMM, AWK, NLC, ECL, ITT, INSU, TTEK, PHO, PIO, FIW, CGW)July 26, 2011 by Jon C. Ogg
There is a paradox when it comes to investing… All long-term portfolios need to have exposure to water investments, yet the reality is that investing in water is just not very simple when it comes to a wide range of diverse stock picks. NASDAQ OMX plans to list four more water indexes this week. There are already water-tracking ETF products and this launch may create even more avenues for investors who want to profit from the future trends of water (and its scarcity). 24/7 Wall St. has even gone as far as calling water investing a theme for futurists.
The new index barometers will join the NASDAQ Water Index and the NASDAQ Water Total Return Index. Whether this is green or sensible is up to you, but there is a fair question to ask here: How many water indexes are needed? The new indexes are as follows: OMX Global Water Index, NASDAQ OMX Global Water Total Return Index, NASDAQ OMX US Water Index, and the NASDAQ OMX US Water Total Return Index.
What is interesting about this and only highlights our key question even more is that NASDAQ is selecting the constituents from the same universe of stock picks as the first two water index readings. The difference is in the component weightings. The total return indexes reinvest dividend payments and the price returns effectively discount the dividends.
Potable water and its future availability remain the key topics of why your investment portfolio should chase this sector. Again, the trick is that it is not easy. It turns out that many “water companies” turned out to be dependent upon the creation of new housing subdivisions over the last fifteen years or that they are tied heavily to government contracts. General Electric Co. (NYSE: GE) and 3M Co. (NYSE: MMM) are two key holders of water investing, but these water operations are mixed with fluids in these conglomerates and investing in any conglomerate because of one aspect of their business just misses the point of investing.
Along with the theme of water investing for the long-term, we did create a list of Stocks to Own for the Next Decade and that included American Water Works Company, Inc. (NYSE: AWK).
What makes water difficult to invest in is that fluid and hydraulic outfits keep looking to consolidate via mergers and acquisitions. This fresh Nalco Holding Company (NYSE: NLC) merger with Ecolab Inc. (NYSE: ECL) has the goal of adding $5.4 billion in a combination of cleaning, sanitizing and water management.
We now have ITT Corporation (NYSE: ITT) breaking itself up and one of the 3 surviving companies, its water company, will be called Xylem under the “XYL” ticker on the New York Exchange.
We recently featured some of our top water investments out to 2012 and beyond, including American Water Works Company, Inc. (NYSE: AWK), Insituform Technologies Inc. (NASDAQ: INSU), Tetra Tech Inc. (NASDAQ: TTEK), and others. This was an expanded and updated module for our Top Water Pick for 2011.
What we do expect as one possible outcome from more index launches is the creation of more exchange-traded funds which track water investing. There are already ETF products around the Palisades Water Index and Standard & Poor’s indexes. ETFs do not currently track the NASDAQ indexes in water per our most recent screens.
PowerShares Water Resources Portfolio (NYSE: PHO) has more than five years of history and it has well almost $1.2 billion in assets inside the ETF. Its international equivalent that includes the U.S. but is more globally focused is the PowerShares Global Water Portfolio (NYSE: PIO) but that one is only about one-third of the size in assets and only about one-fourth as liquid when measuring shares per day.
And then come the less liquid water ETFs, no pun intended… There is also the Guggenheim S&P Global Water Index (NYSE: CGW) ETF, which carries about $250 million in assets and trades about 50,000 shares a day. The even smaller First Trust ISE Water Index Fund (NYSE: FIW) has about $69 million in assets but trades an average of under 20,000 shares per day.
There are many more ways to invest in water, but you have probably gathered that we maintain it is not an easy sector to invest in. Many pure-play water companies trade at significant premiums to the broader market. Even when you go through the individual stock holdings that these water ETFs hold, you will suddenly realize that the term “Water Investing” really translates to “companies which also have water operations.”
JON C. OGG