Water: Huge Potential Over the Next 10 Years

Roger Nusbaum submits: A reader left a comment over the weekend asking for my opinion about the Barron's article on investing in the water theme. Long time readers know I believe in the concept. I have owned the PowerShares Water ETF (PHO) personally and for clients since a day or two after it listed last year.

As a top down investor I think the important decision is whether to invest in a theme at all. PHO may be the best way to invest, or it may lag many individual stocks that are related, but directionally they should be very similar. I think the theme could be huge over the next ten years -- so taking single stock risk seems unnecessary to me if I turn out to be right. If the theme is huge then even the index would go up a lot, again if I am right.

For people needing or wanting to make 50% this year on a water play I would say to try to pick a stock they think can deliver, because I doubt the ETF will go up that much over the next year.

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Comments

[WC Whiner]

Man, you write a lot.

Try to learn the word "fees" before your next post.

PHO's: 70 bps.

[RogerNusbaum]

By virtue of its make up PHO can also be thought of as a proxy of sorts for the industrial sector. Since inception PHO is up about 15% net of fees. In that same time XLI is up what looks to be 9%. Even if XLI was free PHO looks compelling. If there were another water ETF that were cheaper I would devote more to the fee issue but for now easy access to the theme over-rides concern about the fee.

[JonD]

this month's New Yorker has an interesting take on water demand - not necessarily from an investor's perspective (which is good, IMHO). the message was that yes, there is need for water infrastructure in developing countries, but in *developed* countries (US, Japan, etc.) water consumption, on a per capita basis AND on an absolute basis, is going down --- due to better conservation efforts and more efficient economies.

it's easy to make the bull water case but, like many macro themes, it's a bit too simplistic to say "look at the population growth and how many people don't have water" and jump into PHO.

[RogerNusbaum]

i did not see the article but my thought is that the world has something like 6 billion people. about 1/3 of the world's total is in China and India which both need water modernization badly. There are also a few countries like Pakistan and Vietnam in the neighborhood of 100 million people (140 million in Pakistan I believe and 70 million in Vietnam I believe) that also need water advancement. The numbers of US, Japan and so on, I think, pale in comparison.

[JonD]

great point. I don't disagree with you there, Roger. but I'm not convinced that the components of PHO are leveraged as much as you (or I) would like them to be to emerging markets. many of the components are domestic and european utilities. the US-based equipment suppliers certainly have the opp'ty to go after emerging mkts but i just don't know how much of their business is international today.

[JonD]

i should add that the New Yorker article (on newsstands now - the Oct 23rd issue) spent most of its space illustrating just the issues Roger raised - that being the desperate need for water infrastructure in developing countries.