The securities industry has created several interesting water ETFs for green investors, who are convinced that water will be one of the most important resources in the 21st century. People living in the developed countries too easily forget the fact that fresh water is a scarce resource that is needed for both agriculture and industrial processes. As the world’s population grows, the use of water is bound to grow even more.
Water differs from other commodities in an important aspect: water is a commodity that is not bought and sold in commodity exchanges, nor are there any derivatives for water. Thus it is impossible to invest directly in water – the green investors must invest in the companies building the infrastructure for fresh water or involved in the different chemical processes. As the water sector has few global players, often investing in exchange traded funds replicating a water index is the most cost-effective way to invest in water sector.
The water ETFs differ from each other in the expense ratio and the index the ETF seeks to replicate. There are several different indices for the stocks in water sector, slightly differing from each other. In the following, I’ll shortly introduce the water indices commonly used.
Janney Water Index (^JGI) is a composite index that embraces water companies from all over the world. As a result of this, it reflects not only the industry in the more mature economies, but includes development initiatives in emerging markets, as well. The composite index is divided into Janney Water Works (^JWW) and Janney Water Technology and Infrastructure (^JWT) indices. Both sub-indices embrace 30 companies. To be included in the index, at least one fourth of a company’s revenues must come from water-related activities. Overall, more than half of the total revenues of the companies included in the composite index are generated from water-related activities.
S&P Global Water Index is comprised of fifty largest companies in water-related businesses. The constituents are distributed equally between water utilities & infrastructure and water equipment & materials. Constituent weights are driven by size. Maximum weight for a stock is 10%. In order to be included in the index, the stock must have a total market capitalization above US $250 million, three-month average daily trading volume must be over 10,000 shares and the stock must be quoted on a developed market exchange.
The index is rebalanced after the closing of the last trading day of March and September of each year. No companies are added to the index between rebalancing. The index base date is November 16th, 2001, and the base value is 1000.
Palisades Water Indices are modified equal-dollar weighted indices that embrace companies worldwide that are engaged in the water industry. Palisades has developed two separate water indices, a Global Water Index (^PIIWI) and US Water Index (^ZVI). The Indexes are comprised of six sectors, each of which is assigned a weight based upon relative fundamentals. The Global Water Index embraces 55 companies and the US Water Index includes 32 companies.
Société Générale’s World Water Indices embraces fewer companies than Janney Water Index or S&P Global Water Index do. The WOWAX indices embrace twenty largest companies in the fields of water utilities, water infrastructure and water treatment. It is an equally weighted index, which means that the weight of each company is set at 5% on quarterly basis. WOWAXcw is, on the other hand, a market-cap weighted benchmark, with a cap at 10%. Both indices are rebalanced quarterly and reviewed twice every year.