PHO: An ETF for H2O

06/13/2016 9:00 am EST

Focus: ETFs

Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

The world’s population recently hit 7.2 billion and access to clean plentiful water is a challenge in many parts of the world, cautions Kuen Chan, editor of The Complete Investor.

As such, we are adding a water sector ETF to our core model portfolio -- Powershares Water Resources Portfolio (PHO).

Water scarcity will become an increasingly urgent problem around the globe. PHO, managed by Invesco, seeks to track the performance of the NASDAQ OMX US Water Index, currently made up of 32 companies whose products conserve and purify water for homes, businesses, and industries.

The ETF invests at least 90 percent of its assets in these companies. Invesco rebalances the PHO portfolio every quarter and reconstitutes it annually in April.

Even in the US, where water has long been taken for granted, but developments -- such as high lead levels in the water in Flint, Michigan, drought in parts of the country, and our aging infrastructure -- show it would be a mistake to be complacent about water here, too.

PHO’s largest holding at present is Pentair (PNR), a leading developer and manufacturer of a wide arsenal of water- and fluid-related equipment and systems devoted to promoting efficient water usage through purification, treatment, and recycling.

Sales and profit growth have suffered from the slowdown in the energy sector (which consumes great amounts of water), but the company is still a cash-generating machine, with a trailing 12-month free-cash-flow yield of 6.9 percent.

We think the current lull is temporary. Pentair has been around a long time and should remain a key water player for years to come.

PHO’s second and third largest holdings are American Water Works (AWK) and Ecolab (ECL); both stocks are in our model growth portfolio.

American Water Works is America’s largest public water utility with more than a century’s experience in the water business.

But it’s not just a ho-hum utility: through its non-regulated operations, it provides various water and wastewater services to municipalities and other entities.

Ecolab’s water operations include technologies that treat wastewater from fracking and that provide ultraclean water to the food and pharmaceutical industries.

PHO’s remaining holdings offer similar sorts of products and services devoted to making sure the world will have enough of this most essential resource.

While they are US companies, their operations span the globe, including emerging markets whose developing infrastructure offers intriguing growth opportunities.

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By Kuen Chan, Editor of The Complete Investor

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