More Precious Than Gold: How to Invest in Water

07/09/2014 12:00 am EST

Focus: COMMODITIES

An even more precious resource than oil is pure water and the world is running out of it. Jason Hamlin at CountingPips.com shares some ETFs for greater exposure to this undervalued commodity.

The world is running out of its most precious resource…not oil, but water. I am feeling this acutely in my home state of California. Technology is helping, but desalination remains very expensive. More than a billion people across the globe don’t have access to safe water. The situation can only get worse as water gets evermore scarce.

Are we approaching Peak Water or have we already passed it? If the idea of Peak Oil is scary to you, Peak Water would be many times worse. While oil plays an indispensable role in modern life, humans can only survive for three to five days without water. Simply put, life depends upon water and there is no substitute.

As fresh water supplies decline and demand increases via a growing population, water prices are going to rocket significantly higher. The water sector has beat the S&P 500 (SPX) by 11% annually since 2001 as the global water industry is expected to hit $1 trillion by 2020.

Forecasts show global demand outstripping supply by a widening gap and this trend will only accelerate as drought conditions worsen.

Agriculture is the source of most of the water demand and food prices are rising. As China, India, and other developing nations continue to industrialize, they will require more food and thus higher demand for water.

In addition, the fracking revolution demands huge amounts of water in order to blast the oil out of rocks deep in the earth. Each fracked horizontal well uses millions of gallons of water to extract the oil from the ground. Fracking is exploding all over the United States and moving overseas as well. As this trend accelerates, demand for water will rise as well.

So, we have a clear picture of the investment case for water stocks. Demand is climbing higher and supplies are dropping sharply. Anyone that has taken Economics 101 knows the impact this will have on the price of water going forward.

Water is an undervalued commodity. I’ve been bullish on water for some time now, but there are only a limited number of pure-play water stocks.

Some traders and investors get exposure via ETFs such as:

Guggenheim S&P Global Water (CGW)
First Trust ISE Water (FIW)
PowerShares Global Water Portfolio (PIO)
Powershares Water Resource Portfolio (PHO).

The largest of those funds is up an average of 16% per year over the past five years, but it is up only 1.8% YTD. I think investors can achieve better gains by selecting a few of the best managed water stocks. There are a number of ways to play increasing water prices, including drip irrigation, water efficiency technology for farms, companies that own desalination plants, water utilities, and more.

By Jason Hamlin, Contributor, CountingPips.com

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