Commodity ETFs That May Float Your Boat

06/06/2012 9:00 am EST

Focus: ETFs

Moby Waller

Editor, Wyatt Research

The world’s up-and-coming commodity isn’t gold or oil, writes Moby Waller, it’s water, and these four ETFs and their largest holdings offer traders and investors the best ways to target this emerging growth story.

For those of you who can and will short stocks or buy put options (both of which increase in value as stocks lose their value), you don’t have to really care which way the market goes—you can make money in either direction. 

For those “long-only” investors who only buy and then sell stocks, though, your choices may feel limited right now. Don’t throw in the towel too quickly, however, as there are some areas with stocks that are going higher.

The Select Sector SPDR - Utilities (XLU) has been one of the safer plays whenever the market or economy faces real trouble because it offers relatively stable dividends and revenues. In particular, water is one that many are focusing on as a "hot commodity" of the future. Many are anticipating that as the global population grows, technologies for clean water and water rights/costs will become more and more important (and potentially profitable) over time.

We have identified an interesting bullishness from water utilities. It wasn’t last week’s hottest industry—that honor belongs to gold—but water utility stocks were right up there and have been for a while. 

In fact, the S&P 1500 Water Utilities Index has been one of the leading indices for any time frame since March. Better still, the chart looks like it’s forming a nice rally as it comes out of a U-shaped reversal effort, which tend to have longevity. The sector may be one worth looking at, even though it’s a lesser-considered arena.

According to our data, the S&P 1500 water sub-sector may only contain two of the bigger names in the industry, American States Water (AWR) and Aqua America (WTR). 

First, a quick snapshot on the fundamentals for these two stocks: 

AWR is trading at a forward 15x P/E ratio, and revenues grew nicely at 13% last quarter. It has a fairly high amount of debt and a forward dividend yield of around 3%.

WTR has a P/E ratio of about 20x, and revenues grew 4% last quarter. Profit margins and return on equity (ROE), etc. are a bit higher than AWR. It looks like a bit less debt heavy than AWR when compared as a ratio as well. The forward dividend yield for WTR is 2.8%.

On the ETF side, which is a different animal than the utilities, there aren’t many active water ETFs currently, and all had a rough May. That is likely to change this summer, however, as the dry summer months bring water to forefront of investors’ and traders’ minds.

Key water ETFs include:

Guggenheim S&P Global Water Index ETF (CGW):

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PowerShares Water Resources Portfolio (PHO):

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PowerShares Global Water Portfolio (PIO):

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FirstTrust ISE Water Index Fund (FIW):

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PHO and FIW have options available. Be sure to check the liquidity and holdings for any of these ETFs before trading or investing with them.

By Moby Waller of BigTrends.com

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