One ETF for Life

August 7th, 2008

If you’re someone who doesn’t enjoy analyzing securities in your spare time, Exchange Traded Funds, or ETF for short, offers a terrific way to put your stock market investments on autopilot. ETF is a security that tracks an index, a commodity or a blend of assets like an index fund, but trades like a stock on an exchange. By owning an ETF, you get the diversification of an index fund but under much lower expenses than those of the average mutual fund.

These days, the variety of ETFs is so wide that there are more than 60 companies offering hundreds of ETFs in the U.S.; there are ETFs that invest in commodities, technology, health care, real estate and even in currencies. The variety is so huge that it can be confusing even for the experienced investor. However, there is one ETF that invests in one specific sector that I think has very promising long term prospects – the PHO ETF, which concentrates on the water industry.

Unlike oil, water will not run out, as it covers 70% of our planet. However, 97% of this water is saltwater and not drinkable. The tiny fraction of potable water is decreasing every day and will run out in the not too distant future. Therefore, companies are developing technologies to purify the unlimited amounts of saltwater, which can then be bottled and sold at prices much higher than the price of the tap water we drink. Drinking water won’t run out tomorrow, however, a long-sighted investor sees this supply shortage and the growing purified and bottled water industry as an interesting investment opportunity. Many investors have already identified this opportunity and the stocks of the water industry companies have risen sharply in the past few years.

Obviously, it is hard to guess which company from this sector will become the next Starbucks of the industry; thus, the PowerShares Water Resources (PHO) ETF holds a combination of leading and promising companies from the water industry, giving you the opportunity to benefit from the growing water industry, while holding a diversified non-risky portfolio of water-related companies. The PHO tracks the Palisades Water Index, which beats the S&P500 index dramatically, as can be seen in the figure below.

Economists estimate $500 billion will be spent in the next 25 years on research and infrastructure related to clean water initiatives and an additional $100 billion for researching health concerns regarding water pollution. In addition, the recent bearish market had substantially lowered the prices of most over-valued water stocks. Combining all these considerations, I feel confident saying that the current (long-term) buyer of the water PHO ETF will beat the market in the long run.

Last 5 posts by Yinon Arieli

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Entry Filed under: Stock Investing Ideas